In many ways, cash ETFs have had a rough 2024.
The year began with stricter liquidity rules from the Office of the Superintendent of Financial Institutions on Jan. 31. And then between June and September, the Bank of Canada shaved 75 basis points off the policy rate.
Consequently, the average gross yield on Canadian-dollar high-interest savings account (HISA) ETFs was 4.26% on Sept. 6, 2024 — a drop of more than 118 basis points since July 31, 2023.
HISA ETFs have also seen $1.6 billion in outflows for the year to Aug. 31, versus $3.1 billion in inflows for money-market ETFs, according to Tiffany Zhang, vice-president, ETFs and financial products research, with National Bank Financial Markets in Toronto.
“Investors are gradually stepping out of the cash comfort zone to take on some duration and credit risk,” she said.
Much of the cash that’s come off the sidelines has gone into fixed income, global equities and even covered-call products, said Geraldo Ferreira, senior vice-president, head of investment products and manager oversight, with CI Investments in Toronto.
“People want more returns; they’re being prudent, though, in terms of the types of investments they’re moving into,” he said.
For the year to Aug. 31, equities ETF inflows ($23 billion) have outpaced those of fixed-income ETFs ($15 billion) “by a wide margin, speaking to the improved risk appetite among ETF investors,” Zhang said.
Nonetheless, providers of HISA ETFs see a bright future.
“Even in a more adverse marketing environment for [HISA ETFs], I think the sheer opportunity to actually get more Canadians accessing this kind of vehicle … is why we are going to see increased penetration and growth of the asset class,” said Vlad Tasevski, head of asset management, institutions and investors with Purpose Investments Inc. in Toronto.
Raj Lala, president and CEO of Evolve ETFs in Toronto, agreed.
“The biggest opportunity with these products is [reaching] the overall deposit base,” Lala said, noting that nearly $2 trillion is held in personal chequing and savings accounts.
Interest rates on traditional savings accounts are often below 50 basis points, with some Big Six banks offering 0.01%. Tasevski and Lala said the spread between HISA ETFs and traditional savings accounts will remain attractive even as yields fall.
And the case for cash ETFs may normalize as interest rates drop.
“I think people will stop seeing this as an asset class and start moving back into bond funds,” said Etienne Bordeleau-Labrecque, vice-president and portfolio manager with Ninepoint Partners LP in Toronto. “They won’t be an investment in themselves. They’ll be a place to park cash.”
Changing flows, changing mandates
Mandates for many HISA ETFs include the flexibility to invest in money-market securities, which some fund managers have taken advantage of as interest rates on HISAs have fallen. Others have chosen to remain pure plays.
The largest HISA ETF, the $7.1-billion CI High Interest Savings ETF (TSX: CSAV), “was designed right from the beginning to have that ability to have other investments to support the yield. And it’s working, which has been great,” Ferreira said. The fund is about 80% HISAs, with the rest in Canadian T-Bills.
Between July 31, 2023, and Sept. 6, 2024, CSAV’s gross yield fell by 1.01 percentage points, the smallest margin among the five Canadian-dollar HISA ETFs, which include two offered by Global X Investments Canada Inc.
Ninepoint Partners went a step further. On Sept. 3, the fund company renamed the $400-million Ninepoint High Interest Savings Fund to the Ninepoint Cash Management Fund (Cboe: NSAV), and changed its mandate to that of a money-market fund.
“NSAV has gradually increased its allocations to short-term corporate bonds in the past year or so,” Zhang said. As of mid-September, those bonds comprise about 48% of the portfolio.
As such, the fund has maintained its yield more easily than HISA funds, with NSAV’s gross yield falling by only 0.44 percentage points between July 31, 2023, and Aug. 31, 2024.
“By virtue of becoming a hybrid fund, we’ve managed to maintain investor interest because we opted for the best of both worlds,” Bordeleau-Labrecque said, adding that NSAV can raise its allocation to HISAs if rates rebound.
Purpose and Evolve, meanwhile, deliberately kept their money-market products separate from their HISA ETFs.
“Clients have been clear: They don’t want to compromise on safety, and they’re willing to take a lower yield,” Tasevski said. “We have seen enough interest in both.”
“Based on conversations we had with a lot of advisors, they really did look at these funds differently than money-market funds,” Lala said, explaining that advisors positioned these funds as ones with virtually no credit or duration risk.
“If we started to add 30-day T-Bills or other money-market instruments to these funds, then it becomes a different conversation that [advisors] need to have with their investors,” Lala said, acknowledging that those instruments have minimal credit and duration risk. “It was important to us to stay true to form.”
Purpose has seen some migration to the $980-million Purpose Cash Management Fund ETF (TSX: MNY) from the $4.7-billion Purpose High Interest Savings ETF (TSX: PSA), Tasevski said.
Excluding a $650-million institutional redemption from PSA in April, which occurred because the client found another way to structure their cash allocation, PSA and MNY have seen collective net growth of about $300 million in assets under management this year.
Lala said Evolve has parlayed its success with the $1.5-billion High Interest Savings Account Fund ETF (Cboe: HISA) into products further along the risk curve.
“The cross-selling opportunity became pretty important,” Lala said. “[You can say to an advisor], ‘You obviously had a great experience with HISA, and it did exactly what it was supposed to do. So, given that experience, perhaps you’re more open to taking a look at some of our other funds.’”
Regardless of the rate environment, Ferreira believes advisors and investors alike will continue to see the merits of HISA ETFs, which have management expense ratios ranging from 0.11% to 0.20%.
“Cash is always going to be an important part of a client’s portfolio, and these vehicles are really attractive with their low fees, the convenience, the liquidity,” he said. “These products are still going to remain viable because there’s always going to be a demand for cash.”