In this column published every two weeks, we give you concrete ideas for investing your money.
With interest rates on the rise, Guaranteed Investment Certificates (GICs) have become popular again. But they are not the only ones riding the wave!
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Investors with a brokerage account have access to another product that has benefited greatly from rising rates: high-interest savings exchange-traded funds (ETFs).
Bank accounts in a fund
These ETFs are composed almost entirely of deposits in high-interest accounts at institutions such as National Bank, CIBC and Scotiabank.
These days, these ETFs offer an annual return of around 5.3%. That’s more than offered by one-year GICs from most major financial institutions, including Desjardins. And, in addition, it is possible to withdraw the money whenever you want. In the case of a GIC, the funds are generally “frozen” for a year or more.
Many Canadians smelled good. By 2022, they have invested up to $9 billion in high-interest ETFs. And they’ve invested another $9 billion since the beginning of the year. Currently, the assets of the nine Canadian high interest ETFs are close to $23 billion. according to CIBC Capital Markets.
Too good to be true!
But then, it was (a little) too good to be true. On Halloween, the Office of the Superintendent of Financial Institutions issued a ruling against high interest ETFs.
Bottom line: The federal regulator will now consider deposits that high-interest ETFs make into bank accounts riskier. for what Because investors can withdraw them whenever they want.
Consequence: Banks will no longer offer such attractive interest rates on these wholesale deposits. Thus, the net return on high-interest ETFs could decline by 0.5% per year, according to TD Securities (from 5.3% to 4.8% if we were to take the current situation).
The revenge of the money market
This expected decline in the yield of high-interest ETFs will be gradually reflected over the next three months, according to CIBC. It will make money market ETFs (and mutual funds), whose net yield currently ranges from 4.98% to 5.1%, more attractive.
High interest and money market ETFs have a “low” level of risk, but it’s worth remembering that the amounts invested in them are in no way protected by deposit insurance.
And even if current rates are attractive, you should always ask yourself how much of your portfolio you want to keep in cash. The ranges that experts usually recommend are between 0 and 10-15%, but it all depends on the forecasts of the stock and bond markets and your personal situation.