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King cash

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Jeremy went into his bank this past week (“the lion one”) and met with a snappy Financial Advisor. Unlike [email protected], the FA had his own office. No window. Nothing on the walls. Our blog dog was shopping for a one-year GIC to house a big pile of money from a recent house sale. Seven figures.

Well, the flip side of falling mortgage rates is eroding GIC returns. What would have been a 5% one-year, non-cashable deal two weeks ago is now 4.45%, and slipping.

“This is a bit weird,” he says. “The bank rate in Ottawa didn’t go down. My bank’s prime rate did not decrease, and mortgage rates being offered by RBC also have not changed. Inflation is still stupid, so why all of a sudden are they carving down the rate on this savings peoduct?”

Because they can. And RBC knows what’s coming. The Bank of Canada pause will probably turn into a cut or two by the end of the year. So just as the real estate market may have bottomed a few weeks ago, so GICs may have crested.

But there is an alternative.

These days a lot of people have decided cash is king. Last year the stock market laid an egg. Now we have teetering US banks to worry about, the threat of a recession in the next few months, nukes in Belarus, Trump resurrected and inflation that won’t go away. Plus Chrystia, of course.

So lot of folks have decided that 5% is good enough, even if it’s less than the current cost-of-living increase. The cash portion of portfolios has crept steadily about the 2% weighting that is normal during years when equity markets are chugging ahead and savers get the short end of the stick.

GICs are okay, but far from perfect. Rates are dropping, as Jeremy discovered. Plus there’s no liquidity if you want the best return – money has to be locked up for a year or more. (The yield drops fast for a cashable product.) Most GICs don’t pay monthly income, either, so you have to wait until maturity day to reap the harvest.

So we told our guy to check out high-interest savings ETFs.

Billions and billions have migrated into these things over the past few months as the Bank of Canada hiked rates eight times, adding 450 basis points of adrenalin. There are now a number of them to choose from, and they all offer 100% liquidity plus a rate of return higher than locked-in GICs. That means you can stay in, preserve capital and collect interest, or bail at any time you screw up enough courage to get back into your comfy B&D portfolio.

A high-interest savings ETF is basically cash. Low-risk. Accessible. Safe as money in the bank, because that’s where it ends up. No CDIC insurance, but Jeremy wouldn’t get that on his million-dollar GIC, either.

“Specifically, when a buy order is placed for the HISA ETF, the funds settle with the ETF’s custodian (e.g., CIBC Melon),” explains my portfolio manager buddy Ryan. “They then wire the funds to some of the major banks including TD, BMO, NA and BNS. The banks take in the cash just a like a normal bank deposit and loan out of these funds or invest the funds in short-term investments like a Banker’s Acceptance. You as the ETF holder receive daily interest, which is paid out once a month.”

What can you expect to earn? Lots.

The ETF pays out the Bank of Canada rate (currently 4.5%) plus a premium, now sitting at just under half a per cent. “Clients are receiving an attractive 4.99%,” says Ryan. “That’s not too shabby especially considering it’s a low risk investment that will not see much (if any) price volatility. And since the funds are invested at the big Canadian banks these ETFs are pretty safe and secure.”

How does the fund actually work?

At the beginning of the month the price is set at fifty bucks a unit. Each day that value rises as interest is accrued. At the end of the month all the interest is paid to the unitholder, and the fund resets to $50.

What can go wrong?

If you think one of the major banks could fail, taking the funds cash deposits with it, then don’t invest. As stated, there is no CDIC coverage. But then again, if RBC or BeeMo crashed there would be no place to hide and you might have to learn bug recipes. More reasonable a threat is a falling rate of return. That 4.99% available now could be closer to 4.25% by the end of the year. Maybe less. It all depends on what the CB decides. There are also trading costs, so if you move in and out of a HISA ETF frequently, that will eat into returns. (If you use a fee-based advisor there are advisor costs but trades are free.)

Also a threat are lost returns by staying in cash too long. A year from now it’s a reasonable assumption interest rates will be taking a dive, inflation corralled, the economy coming out of a recession, equity markets robust and bonds plumping as yields fade. Cash may lose its crown.

About the picture: “Hey Garth, thanks for all you do. We read you daily and appreciate the repetition and reinforcement your writings bring to keep us on a B&D path,” writes Edward. “This is Samara, our ball chasing Lab, last time you saw her she was on a dock in the near north of Ontario, she now resides on the bucolic South Shore of Nova Scotia. Currently she is hanging in coastal Georgia with her snowbird parents. BTW she is too busy with daily beach walks or chasing squirrels to bother with the nonsense of the comments page.”


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