Are high-interest savings ETFs a must-have in the advisor toolbox?

Investment advisor weighs in on the products' growing appeal, but sounds a note of caution

Are high-interest savings ETFs a must-have in the advisor toolbox?

As volatility in the markets whet Canadian investors’ appetite for safety, many are choosing to sit in the sidelines and park their assets in cash. It’s because of this increased risk-off mentality that high-interest savings account ETFs (HISA) ETFs are seeing a remarkable acceleration.

According to figures from National Bank of Canada, Canadian cash alternative ETFs saw $860 million in inflows for the month of July. That’s an increase from $559 million in June, and $298 million in May.

“It's not a surprise that they’ve become more popular and there's a lot of people talking about them,” says Grant White, Investment Advisor and Managing Partner at Endeavour Wealth Management, iA Private Wealth. “Just given where interest rates are and where they're likely going, I think that they’ve naturally become a little bit more interesting.”

HISA ETFs have also become more appealing to White and his team, who prefer to use the Purpose High Interest Savings ETF. Thanks to rapidly rising interest rates, the yield on HISA ETFs has become more compelling relative to what’s been the case in recent years. Aside from that, using those products saves investors the trouble of hunting down which product solutions would allow them to maximize rates.

Aside from holding more of a cash position in high-interest savings ETFs, White says he’s using them more for his cash wedge strategies, where sets aside typically at least three years’ worth of income into nearly guaranteed types of investments for clients.

“For advisors, these ETFs are really worth considering for their ease of use, which helps create more efficiency for the portfolio management in their practice, and ease of understanding for their clients,” White says.

Of course, not all advisors have total access to HISA ETFs, as it depends on what’s available in their firm’s product shelf. Which begs the question: would not having access to the full range of high-interest savings ETFs in the market put some advisors at a disadvantage relative to their peers?

For White, it’s a qualified yes. The ability to access and use low-cost HISA ETF options, he says, would create a big advantage; a management fee of even 10 basis points makes a real difference on a product with yields in the neighbourhood of 1.45% to 1.5%.

“I think you’re always disadvantaged by not having any tool in your toolbox,” White says. “This type of product is nice to have because it’s extremely useful for that short-term money that we want for our clients.”

But he also sees a danger of clients falling into a “yield trap”: as a result of the volatility that’s come about this year, he says many clients are reallocating heavily into guaranteed short-term solutions like GICs that offer 3% to 4% returns, or high-interest savings accounts in the range of 1.5%. But by rushing into havens and not riding out the turbulence, they could be missing out on higher returns that stocks have the potential to bring in the long term.

“I would be a little careful right now because I do see people leaning towards GIC options, and if they’re doing that by selling off their equity holdings, they might be crystallizing quite a bit of losses,” White says.

“I think the biggest risk is if you’re locking into something that looks attractive today because it solves your pain point today, but it might not be the best thing to do for your future goals.”

Opinions expressed in this article are those of the [Investment Advisor/Portfolio Manager] only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.