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An Alternative to High-Interest Savings Accounts and GICs

The recent Bank of Canada increases in the policy interest rate have had a greater influence on GIC rates than on high-interest savings account rates. GICs are great except that money is locked in for a certain period of time. Is there a solution that has the high-availability of high-interest savings accounts and the higher interest of GICs?

High-Interest Savings ETFs

With an ETF, you get a bundle of assets that you can buy and sell during market hours, just like an individual stock. ETFs can contain all types of investments, including stocks, commodities, bonds, or in this case, high interest deposit accounts at banks.

The net yields of these ETFs are advertised on their websites. However, you will not receive these rates for two reasons. One, these rates are linked to the Bank of Canada’s overnight rate which changes throughout the year. Two, the published rates don’t take into account the fees incurred when buying and selling ETFs. Nevertheless, even when WhatBank takes these fees into account, these ETFs deliver rates that are often higher than the best high-interest savings rate and a bit lower than the best one year GICs.

Risks and Fees

ETFs have two major differences from high-interest savings accounts and GICs. 1) These investments are not CDIC insured. 2) There are fees for buying and selling ETFs which you should take into account to decide if the rate of return you receive is acceptable.

If you’re new to ETFs the Canadian Securities Administrators site is a good place to start. Next check out the fund’s prospectus, especially the section on risks. For example here is what the Nov. 24, 2022 prospectus for the Purpose High Interest Savings ETF (PSA.TO) says on page 107.

  • The direct and indirect risks of investing in the fund include: (a) interest rate risk; (b) absence of an active market for the ETF units; (c) rebalancing and adjustment risk; (d) deposit risk; (e) trading price of ETF units; and (f) cyber security risk.
  • Investment risk classification: The manager has assigned a risk rating of low to the fund

WhatBank helps you understand the actual yield you receive after fees. These tables show the actual rate of return you receive, what WhatBank calls a Real World Yield, for investments of $500, $5,000 and $50,000 for high-interest savings ETFs in Canadian and US dollars.

These tables are updated monthly based on the most recent distributions of the funds and an average of the bid/ask spread over the previous month. More details about WhatBank’s Real World Yield calculations follow below the tables.

The Best High-Interest Savings ETFs — $CAN

The Best High-Interest Savings ETFs — $US

There isn’t much competition in Canada for $US high-interest savings accounts. The clear leader is EQ Bank’s CDIC insured rate of 3.0%. Although greater, these ETF rates are not CDIC insured.

Table of ETF Symbols, Names, and Currency

Real World Yield

To determine the Real World Yield, WhatBank imagines buying the ETF at the average ask price over the past month. Now that we know the number of shares that we have we can determine the total amount of the most recent distribution. WhatBank assumes you get this exact distribution for the next year. This won’t happen, you may get more or less but it’s the most recent information we have go on. WhatBank then imagines selling the ETF at the average bid price over the past month and subtracts the fee to sell and the ECN fees to arrive at the Real World Yield.

Fund Expenses

All ETFs have expenses including costs to cover the cost of operating the fund (MER) and trading expenses (TER) to cover their portfolio trading costs. WhatBank wants to know the return of an ETF after all fees, visible and hidden, are taken into account. That’s why we look at the monthly distribution, which is what you get deposited into your account after all the fees have been taken out.

Bid/Ask Spread

Every ETF has two prices at every moment of the trading day. If you’re buying, you’ll pay the ask price. If you’re selling, you will receive the bid price. The bid-ask spread is a transaction cost. In calculating the Real World Yield, WhatBank uses the average closing bid/ask price for the month of the distribution. Loosely traded shares may have larger bid/ask spreads which is a larger cost to you. Calculating the Real World Yield this way factors in this hidden cost.

ECN Fees

ECNs are electronic networks that match buyers with sellers. Questrade, a popular self-directed online brokerage, uses ECNs to connect your trades to the wider market. Although ECN fees don’t always apply to every trade, WhatBank assumed that ECN fees did apply to the cost of buying and selling ETFs in the examples in the tables above.

Buy/Sell Fees

Some brokers charge a fee to buy and sell an ETF. Some just to sell an ETF. And some, don’t charge a fee at all. Questrade charges a fee to sell an ETF. Because Questrade seems to be in the middle of the fee structure for Canadian brokers WhatBank assumed their fee for selling an ETF in calculating the high-interest ETF yields in the tables above.

Major Differences Between High-Interest Savings Accounts, GICs, & High-Interest Savings ETFs