Cash alternative ETFs becoming increasingly popular

Investors looking for ways to put their cash on the sidelines are turning to ETFs linked to high-interest savings accounts

Cash alternative ETFs becoming increasingly popular

While some investors wait for more clarity on interest rate hikes and inflation's future, CIBC Capital Markets strategists say exchange-traded funds linked to high-interest savings accounts are becoming a popular portfolio alternative for building up cash allocations.

“With interest rates on the rise and equity markets volatility heightened, interest-yielding cash instruments are beginning to look more attractive,” said the team of strategists, which included Managing Director and Head of Portfolio Strategy Ian de Verteuil, in a report published Thursday.

As reported by BNN Bloomberg, high-interest ETFs effectively make deposits in high-interest savings accounts. This allows investors to profit from the accounts' return rates, which have been steadily increasing alongside bank prime rates.

According to CIBC, these investments are growing more popular among investors looking for new ways to invest their capital.

“High interest ETFs offer attractive yields and liquidity and can be very competitive with other ‘cash-like’ investments,” according to the report.

Trading fees can cut into returns if ETFs are purchased and sold frequently, according to CIBC. They may trade at a slight premium or discount to their net asset value which can affect short-term results.

It also noted that high-yield ETF assets are not covered by the Canada Deposit Insurance Corporation. However, this is a low risk because these ETFs only invest in accounts with the Big Six banks.

There are now eight such ETFs available, six in Canadian dollars and two in American dollars, with the CI High Interest Savings ETF having the largest asset base ($2.3 billion).

“We expect allocations to cash are currently on the higher end for many and may continue to grow as investors seek safe haven and await clarity on the inflation and rates front,” the CIBC report said. “The old adage that ‘cash is king’ is particularly relevant in this environment, as it is the most liquid and ultimate safe haven assets.

In a recent report, National Bank of Canada said that cash alternative ETF flows totalled $298 million in May, leading net inflows into the fixed income category for ETFs during the month, based on Bloomberg data.