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As some investors sit on the sidelines while they await more clarity on interest rate hikes and the path of inflation, strategists at CIBC Capital Markets say exchange-traded funds that are tied to high interest savings accounts are becoming a popular portfolio option when building up cash allocations.
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“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 Thursday.
“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 old adage that ‘cash is king’ is particularly relevant in this environment, as it is the most liquid and ultimate safe haven asset.”
High interest ETFs essentially make deposits in high-interest savings accounts, allowing the investor to benefit from the return rates on accounts — which have been inching higher alongside bank prime rates.
These investments are becoming more popular for investors looking for different ways to invest the cash portion of their portfolio, according to CIBC.
“High interest ETFs offer attractive yields and liquidity, and can be very competitive with other ‘cash-like’ investments,” the report said.
However, these types of investments are not without their drawbacks.
CIBC said trading fees can eat into returns if the ETFs are bought and sold frequently and they might trade at a slight premium or discount to their net asset value, which can impact returns over the short term. It also pointed out that high interest ETF assets are not insured by the Canada Deposit Insurance Corporation, though that risk is likely minimal since these ETFs stick to investing in accounts with the Big Six banks.
There are currently eight such ETFs on offer, six in Canadian dollars and two in U.S. dollars, with the CI High Interest Savings ETF having the largest asset base at $2.3 billion.