How cash ETFs keep your money working

It’s a dilemma for many investors: you want to have cash set aside to hop on investment opportunities that might arise, but you also don’t want the money sitting in your portfolio not collecting any return. Enter cash exchange-traded funds. Experts say there is increasing demand for cash ETFs among investors old and young as they offer the flexibility of having liquid assets coupled with the benefit of a modest return.

Chris Merrick, founder and owner of Merrick Financial, said there are a few different kinds of cash ETFs, but many work by essentially taking positions in high-interest savings accounts at large banks. Others invest in low-risk debt securities like bonds, known as money market ETFs. He highlighted that cash ETFs provide the ability to preserve capital while offering liquidity, unlike guaranteed investment certificates, which lock in the money for a specified period of time. “The liquidity is good. You get the interest income, which is better than a bank savings account. And often they’re kept for short-term goals,” he said.

Merrick said cash ETFs pay monthly interest based on current borrowing rates set by the Bank of Canada. “When the rates go down, unfortunately like now, the interest rates are dropping for cash ETFs,” Merrick said.

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Erika Toth, director and head of ETF and portfolio consulting at BMO Global Asset Management, said that despite the comparatively lower yields, one of BMO’s top-selling ETFs over the past year has been one of its money market ETFs. Toth said they can offer advantages like “the ability to de-risk a portfolio if an investor wants to move out of equities or bonds,” since cash ETFs are a more conservative asset compared with more volatile stocks.

Liquidity and returns without market exposure

Cash ETFs can also help investors navigate times of transition.

As investors age, Toth said the need for cash flow rises, leading some to look for safer assets to put their money into, but young clients find them useful when saving for certain financial goals. “Even younger clients—saving up to buy homes or saving up for renovations or for children’s education, it’s still a good way to make sure you’re getting paid something on your cash and the funds are readily available.” Toth said cash ETFs could help someone who recently got out of the market and wants the cash they have on the sidelines to be productive.

Philip Petursson, chief investment strategist at IG Wealth Management, said cash ETFs can be a good option for any investors looking to earn a yield while maintaining liquidity of their cash holdings. “I think any time an investor has a requirement where they need the cash within 12 months and they don’t want to be subject to any market volatility at all, I think this would be a good place to be putting your money,” he said.

Over the long term though, Petursson said cash can be a drag on a portfolio because of its lower returns, meaning investors will miss out on higher growth opportunities. He added that holding around 5% of a portfolio in a cash ETF can help an investor deploy into the market during periods of volatility.  

Merrick noted one of the downsides is that they are not covered by the Canada Deposit Insurance Corp., which guarantees money in Canadian bank accounts of up to $100,000 per account type at a financial institution. He said that for some people, the security afforded by CDIC protection matters, while others are indifferent. “As the saying goes, liquidity and security don’t matter until they are everything. But I feel that the chances of needing this are fairly low,” Merrick said. 

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Read more about ETFs:

• Which ETFs are the most tax-efficient for Canadian investors?
• Single-stock ETFs: Approach with caution
• Mutual funds vs. ETFs: What you need to know to decide what investment works for you
• Best cash-alternative ETFs

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