With investors struggling to find satisfying returns in equities and fixed income, an unlikely asset class is on the rise: cash.
Canadian investors are increasingly turning to ultra-secure cash alternatives like high-interest savings accounts (HISA) and HISA ETFs, said Daniel Straus, director of ETFs and financial products research with National Bank of Canada Financial Markets in Toronto.
Since they were introduced in 2013, HISA ETFs have functioned as a kind of economic barometer, reflecting investor sentiment.
“When people want to put cash to work and they’re feeling bullish about the market, we see outflows from cash ETFs,” Straus said. “And when they’re feeling fearful and are moving away from equities and other risk assets, we see inflows.”
Right now, they’re booming.
Cash alternative ETFs have attracted inflows of more than $3 billion so far this year, pushing total assets under management to just shy of $10 billion, according to National Bank Financial. Inflows in September alone totaled $1.7 billion, a record for the category.
With gross yields of about 3.75% — about 3.6% after the average 15-basis-point management fee — they offer investors a convenient and safe place to park their cash while markets stabilize.
“People say, ‘Oh, there’s so much money sitting on the sidelines. It’s eventually going to go back into the equity markets and then we’ll have another big bull run,’” said Andrew Johns, senior investment advisor with CG Wealth Management in Vancouver. “People have said that through many cycles in the last 20 years. And they were right because there was no alternative. But now, there’s an alternative.”
Mark Shimkovitz, Toronto-based senior wealth advisor and portfolio manager with Living Richer Wealth Management at Raymond James, Ltd., said he likes HISA ETFs as a “safe, high-yielding parking place for short-term cash.”
“It’s a great way to dollar-cost average and earn good return,” he said, and the funds adjust immediately with the Bank of Canada’s overnight rate.
For Steve Nyvik, senior portfolio manager and financial planner with Lycos Asset Management in Vancouver, liquidity is the key ingredient.
“Why lock your money into a GIC at 4% or 4.5%?” he said. “If the stock market bottoms out, you want to have some liquidity to be opportunistic.”
The management fees HISA ETFs charge require a bit of a balancing act for advisors, Johns said. If clients start taking larger cash positions, “I don’t know how motivated advisors are going to be by 15 basis points,” he said.
But management fees any higher than that could quickly lead to client resistance, as most investors won’t want to pay a typical management fee of, say, 1.5% on cash, he said.
Nyvik said fees need to stay low on HISA ETFs or clients will be tempted to cut out the middleman by simply putting their money into a few different high-interest savings accounts.
“If it’s going to cost you more than a quarter point, then why bother?” he said. “You could just create your own ETF. You’re earning interest, you have liquidity, you have safety — you even have diversity.”
And low management fees may give advisors the upside of increased customer loyalty.
“If I’m taking a lower payout on my fees because I’ve got clients in cash, in the long run, that’s going to solidify my relationship with clients,” Shimkovitz said. “And I know that I’m doing the right thing for them.”
Advisors at most bank-owned brokerages don’t have that choice, as their institutions have blocked access to high-interest savings account ETFs — a self-interested move that Shimkovitz said is harmful to clients.
Other alternatives to HISA ETFs include high-credit-quality bonds and government bonds — both of which offer competitive returns without high risk.
“Some of the big tech companies have issued massive bond offerings in the United States, and you might see some of the big non-financial companies in Canada that have strong balance sheets also start to cash up,” Johns said. “I think there could be some good value there.”
Similarly, Canadian provinces may be forced to issue more debt in the wake of massive Covid-related spending.
“That debt is going to be issued at five- and 10-year terms with rates that are going to be well over 3%, probably in a 4% range,” Johns said. “You’re going to have some investors going, ‘Wow, B.C. still has a triple-A credit rating. I can put my money with the province of British Columbia for the next 10 years at 5%? I’ll take that trade!’”
He said the growing interest in cash alternatives — particularly bonds —may require some advisors to pivot from their usual investment strategies.
“If you’re 35 years old, working since you were 25, you may never have had a client buy a bond or a GIC or a HISA ETF because the rates were just too low,” he said. “They’re going have to learn quickly how these fit into a portfolio.”