OSFI ruling could impact yields, asset managers and advisors weigh in
The Office of the Superintendent of Financial Institutions (OSFI) announced yesterday they would be upholding a 100% liquidity requirement for high interest savings account (HISA) ETFs. Citing their core liquidity adequacy principles, OSFI will mandate that as of January 31st 2024 all banks and deposit-taking institutions will need to maintain “sufficient high quality liquid assets.”
Banks had largely maintained a 40% runoff rate on HISA assets before this ruling. By mandating a 100% liquidity requirement it is expected that these ETFs will pay a lower yield.
“We’re extremely disappointed by this ruling,” says Vlad Tasevski, Chief Operating Officer and Head of Product at Purpose Investments, which manages the Purpose High Interest Savings Fund at around $5.6 billion in AUM. “At the same time, I think we expect these offerings to still remain the most attractive option for cash investments, they will still offer a lot of value.”
What OSFI’s decision means now
Even though the new liquidity requirements are expected to impact the yield of these ETFs, Tasevski still views these products as competitive against other money market funds, traditional high interest savings accounts, and other forms of cash allocation. He argues that while the delta on yield between HISA ETFs and other money market funds might shrink, they still offer a greater degree of security from a risk standpoint. He believes that while this ruling may make the competitive landscape between HISA ETFs and other money market products more even, he thinks products like his can still attract assets.
The combination of low operating costs, relative stability, and high yields on cash made HISA ETFs very popular in recent years. According to National Bank Financial cash alternative ETFs like HISA ETFs grew their AUM to over $15 billion in 2022 and added another $6.9 billion so far this year.
“About half a million Canadians own these funds, and many of them have been relying on the interest payments from these products to fund their ongoing living expenses. The fact that this yield is going to come down is unfortunately going to hurt Canadians,” says Raj Lala President & CEO of Evolve ETFs — which manages the High Interest Savings Account Fund at around $5.3 billion in AUM.
Lala expects that asset managers will now enter into a transitionary period for these products, determining what their rates will look like between now and the 31st of January, as well as what they will look like after. He says that the major asset managers behind HISA ETFs is Canada are working together in meetings with banks and regulators to secure the best outcome for their funds. Nevertheless, he does predict a drop in yield.
Who benefits from the OSFI decision?
Tasevski acknowledges that this decision from OSFI does benefit alternative cash strategies. Money market funds and bank high interest savings accounts may look more attractive to investors if yields on HISA ETFs do come down significantly. Nevertheless he emphasized that funds like his should remain attractive. At least one advisor agrees.
Evan Riddell, Principal and certified financial planner at Ridell private wealth management, part of IG private wealth management, says the decision actually makes HISA ETFs more attractive in his eyes. He has been using these funds for his clients almost since their inception and the Victoria, B.C., based advisor says that for his purposes a 100% liquidity requirement makes them even more useful.
“It’s making sure that these alternatives [to cash] are apples to apples and safe for clients, because clients aren’t using this as a long-term piece. They’re typically using this as a short-term savings vehicle, so making sure they have that 100% liquidity is absolutely paramount,” Riddell says. “The spread still seems to be pretty large, even if we saw these products coming down in yield a little bit as a result of this ruling, I expect the spread to be fairly substantial and in the interests of the client.”
Are alternative cash allocations more attractive?
Kevin Burkett, portfolio manager at Burkett Asset Management, sees the logic behind OSFI’s ruling given the meteoric rise of HISA ETFs among Canadian investors. He wonders, however, why so many Canadians have flocked to these products and argues that it largely comes down to a lack of easily available alternative options.
While headline interest rates have risen, traditional high interest savings accounts have lacked yields attractive enough to bring in capital. He expects, however, that when banks offer more competitive rates to seek deposits, there could be a structural shift away from these HISA ETFs. For his part, Burkett extolls the virtues of T-bills for his cash-like allocations.
“Why are people having to go to HISA ETFs to replicate returns they would get on T-bills issued by the Canadian government?” Burkett asks. “You don’t have to worry about what the underlying pool is invested in…I think what’s really important is that folks look through the ETF and understand what the holdings are because that’s what you’re really buying.”
Lala argues that from an underlying perspective these products remain viable and alternative. He believes that from a yield to liquidity to credit standpoint HISA ETFs like his remain ahead of other cash and cash alternative products.
What can advisors do now?
As advisors look at their HISA ETF allocations in the wake of this decision, Tasevski and Lala believe they should not make any immediate decisions. They argue for a ‘wait and see’ approach as asset managers work with banks to determine what rates on these products might be in future. The 100% liquidity rule won’t come into effect until January 31st of next year, and in the meantime asset managers are exploring all the options available to them.
“Sit tight,” Lala says when asked what advisors should do. “I feel confident that we’ll have some transitionary period for the next couple months were we expect the yield will be somewhere above overnight. On January 31st or February 1st that’s when you can kind of take a look at the yield on these products and compare them to what you can get elsewhere on the market.”