Tag: XSB

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.

Best places to park short-term, nearly-risk free Canadian cash

As a result of the Bank of Canada’s decision to hold the overnight interest rate target at 0.5%, options for Canadian dollar cash balances are bleak.

Cash can always be held at zero yield and would be immediately available for deployment.

There are also financial institutions that will allow you to lock your money in for a 1-year GIC and earn around a 1.25% risk-free return. However, the sacrifice in liquidity in the event that you would want to deploy such capital is unacceptable from an investment perspective. One can also purchase a cashable GIC (typically redeemable within 30 days after purchase) that earns slightly less yield – my local BC credit union offers such a product with a 0.85% yield.

I was curious as to the best exchange-traded products that would offer some yield at the lowest risk.

There are basically two options. They are (TSX: XSB) and (TSX: VSB). Both are short-term government bond funds. VSB is significantly cheaper on management expenses (0.11% vs. 0.28% for XSB), and both portfolios offer similar durations (roughly 2.8 years), and VSB has slightly better credit quality (55% weight to AAA instead of 50% for XSB). VSB should eventually have a better net yield after expenses (roughly 1.1%) due to the smaller MER. While the 1.1% net return is small, it is better than zero and is nearly risk free – there is anti-correlation between general market movement and the likely price movement of this fund – the capital gain on VSB should rise if there was some sort of crisis due to the heavy government bond exposure of the fund.

Another alternative which is deceptively cash-like but will not serve any purpose if you wish to save money for some sort of financial crisis is the high-quality corporate bond fund also offered by Vanguard (TSX: VSC). Although VSC will offer you another 80 basis points of yield, it has the disadvantage of likely having a liquidity premium in the event there was some adverse financial event – i.e. your cash-out price will likely be materially less than NAV.

All three ETFs trade at modest premiums to NAV.