How Cash ETFs Keep Your Money Working – MoneySense

Chris Merrick, founder and owner of Merrick Financial, said there are a few different types of cash ETFs, but most of them basically involve taking positions in high-yield savings accounts at major banks. Others invest in low-risk debt securities such as bonds, also known as money market ETFs. He emphasized that cash ETFs offer the ability to preserve capital while providing liquidity, unlike guaranteed investment certificates, which hold the money for a set period of time. “The liquidity is good. You get interest income, which is better than a bank savings account. And often they are held for short-term goals,” he said.

Merrick said cash ETFs pay monthly interest based on current interest rates set by the Bank of Canada. “When interest rates fall, as is unfortunately the case now, interest rates for cash ETFs also fall,” Merrick said.

Erika Toth, director and head of ETF and portfolio advisory at BMO Global Asset Management, said that despite relatively lower returns, one of BMO’s best-selling ETFs over the past year was one of BMO’s money market ETFs. Toth said they can offer benefits such as “the ability to reduce the risk of a portfolio if an investor wants to exit stocks or bonds,” since cash ETFs are a more conservative asset compared to more volatile stocks.

Liquidity and returns without market exposure

Cash ETFs can also help investors navigate times of transition.

As investors get older, Toth says the need for cash flow increases, causing some to look for safer assets to put their money in, but younger clients find them useful when saving for certain financial goals. “Even younger customers – saving to buy houses or saving for renovations or for raising children – it’s still a good way to make sure you’re getting something paid for with your money and that the money is readily available.” Toth said cash ETFs can help someone who has recently come out of the market and wants the money they have on the sidelines to be productive.

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

In the long term, however, Petursson says cash can be a drag on a portfolio due to its lower returns, meaning investors will miss out on higher growth opportunities. He added that keeping about 5% of a portfolio in a cash ETF can help an investor navigate the market during periods of volatility.

Merrick noted that one of the drawbacks is that they are not covered by the Canada Deposit Insurance Corp., which guarantees money in Canadian bank accounts up to $100,000 per account type at a financial institution. He said some people care about the safety that CDIC protection provides, while others are indifferent. “As the saying goes, liquidity and security don’t matter until they are everything. But I think the likelihood of this being necessary is pretty slim,” Merrick said.

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