In this column, which appears every two weeks, we give you concrete ideas for investing.
With rising interest rates, guaranteed investment certificates (GICs) are enjoying great popularity again. But they’re not the only ones riding the wave!
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Investors who have a brokerage account have access to another product that has benefited greatly from the rise in interest rates: high-yield exchange-traded savings funds (ETFs).
Bank accounts in a fund
These ETFs consist almost entirely of deposits in high-yield accounts at institutions such as National Bank, CIBC and Scotiabank.
Today, these ETFs offer an annual return of around 5.3%. That’s more than what the one-year GICs offer from most major financial institutions, including Desjardins. In addition, it is possible to withdraw your money at any time. With a GIC, funds are typically “frozen” for a year or longer.
Many Canadians smelled a good deal. In 2022, they have invested up to $9 billion in high-yield ETFs. And they have invested $9 billion more since the beginning of the year. According to CIBC Capital Markets, assets across Canada’s nine high-interest ETFs currently total nearly $23 billion.
To be too good to be true!
But then it was (a little) too good to be true. On Halloween, the Office of the Superintendent of Financial Institutions issued a ruling against high-yield ETFs.
Conclusion: The federal regulator will now consider deposits of high-yield ETFs in bank accounts to be riskier. For what? Because investors can withdraw them at any time.
The result: The banks will no longer offer such attractive interest rates for these wholesale deposits. According to TD Securities, the net return of high-yield ETFs could therefore decrease by 0.5% per year (in the current situation it would rise from 5.3% to 4.8%).
The revenge of the money market
This expected decline in returns on high-yield ETFs will gradually be reflected over the next three months, according to CIBC. This makes money market ETFs (and mutual funds), whose net yields currently range between 4.98% and 5.1%, more attractive.
High-yield ETFs and money market ETFs have “low” risk, but it is important to remember that the amounts invested in them are in no way protected by deposit insurance.
And while current interest rates are attractive, you always have to ask yourself how much of your portfolio you want to keep in cash. The ranges typically recommended by experts vary between 0 and 10-15%, but it all depends on the stock and bond market forecasts and your personal situation.