Tag: HSAV

Cash ETFs – Revisited

With the increase in Bank of Canada interest rates:

Cash ETFs:
(TSX: CASH) – gross yield 479bps – MER 13bps – net yield 466bps
(TSX: CSAV) – gross yield 396bps (November 24 distribution * 12, note not adjusted for recent rate increase(s)) – MER 16bps – this should be roughly in-line with the others
(TSX: HSAV) – gross yield 475bps – MER 12bps – net yield 463bps – CAUTION: trading above NAV, do your calculations accordingly
(TSX: PSA) – net yield 459bps

IBKR will give 368bps above CAD$13k.
HISA rates (one example): Home Trust gives 365bps.

Low duration, low risk, liquid:
(TSX: ZST) – 6 month effective duration – YTM 490bps – MER 16bps – net yield 474bps (November 30, 2022 numbers, note roughly 2/3rds investment-grade corporate debt here)
(TSX: XSB) – 2.7yr effective duration – YTM 410bps – MER 10bps – net yield 400bps

Sacrifice liquidity for yield:
GIC Direct is reporting 550bps rates (1 to 5 years).

US Dollar:
(TSX: HISU.U) – Cash ETF – MER 15bps
(TSX: PSU.U) – Cash ETF – MER 15bps
(NYSE: IBTD) – 0.58yr effective duration – YTM 454bps – MER 7bps – net yield 447bps – matures end of 2023
(NYSE: VGSH) – 1.9yr effective duration – YTM 460bps – MER 4bps – net yield 456bps

Cash ETFs

I’m sitting on some relatively heavy losses (0.7%) in my investment in the Canadian Short Term Bond Index ETF (TSX: XSB). The loss was a result of speculating that an average 3-year yield would perform better than a short-term cash account. Needless to say, it is annoying that had I just kept the cash in the account (even earning zero-yield, as Questrade generously offers on cash) I would have done a lot better.

Now that the Bank of Canada has cranked up short-term interest rates even further, the yield curve is flatter and spot yields are about 70bps lower than 1-year yields. The compensation for duration is quite low.

So while I contemplate flip-flopping to even shorter maturities than 3.11 years in exchange for a boost-up of about 100bps on spot rates, we look at the cash ETF options (alphabetical order by ticker symbol):

(TSX: CASH) – info – gross yield 378bps – MER 13bps
(TSX: CSAV) – info – gross yield 296bps (pre-BoC 75bps increase on Sept 7) – MER 16bps
(TSX: HSAV) – info – gross yield 375bps – MER 12bps
(TSX: PSA) – info – net yield 359bps – MER 17bps

All four of the above trade with penny spreads on the TSX in sufficient liquidity volumes.

For comparison, Interactive Brokers offers 276bps on their CAD cash yields. The question is whether it makes sense to flip cash for near-cash, and for each $10,000 transaction, it would cost approximately $2 in commissions to make a trade for approximately 90bps of yield, good for a $90/year difference, or $7.50 monthly.

The question then becomes whether the structural risk of the cash ETF (What happens if the market makers decide to quit? What happens in a true market crisis where everything blows up? What happens if the “cash” investments the ETF invests in goes belly up? What happens if the custodial arrangements the ETF management has turns out to be fraudulent or defective, etc.?) becomes worth it for a $7.50/$10k monthly difference. Is it worth a 360bps difference? Likely. Is it worth a 90bps difference? Probably not.

Cash parking – why bother?

A year ago, if you had spare cash in the brokerage account, it made sense to dump it into a cash-parking ETF such as (TSX: PSA) and get your 200 basis points of yield while you waited to make a decision on your capital.

You can see the effect of the decrease in interest rates from the Bank of Canada:

Now cash in this instrument yields 65 basis points, minus a 15 basis point MER, leaving a net of 0.50%. Might as well keep it in zero yielding cash instead of bothering with the hassle.

I found it amazing to know that despite the decrease in interest rates to nearly nothing, that PSA’s assets under management is still $2.2 billion! The managers are being paid $3.3 million to administer a savings account.

I note that one of their competitors, (TSX: HSAV) had to decrease its management expense ratio from 18bps to 8bps. Its gross yield pre-MER is 75bps on a $313 million net asset value.

Might as well keep it in liquid cash at this point. Who knows if the market maker will decide to have a heart attack and you can only liquidate with a 25 cent spread at the worst moment?