In this column, published every two weeks, we bring you concrete ideas on how to invest your money.
With rising interest rates, guaranteed investment certificates (GICs) have become popular again. But they are not the only ones riding the wave!
• Also read: In the eye of Quebec Inc.: CGI will help the United States with artificial intelligence
• Also read: Smart Investor: Help, I need a financial advisor!
Investors who have a brokerage account have access to another product that has benefited greatly from the rate hike: high-yield exchange-traded funds (ETFs).
Bank accounts in the fund
These ETFs consist almost entirely of deposits in high-interest accounts held at institutions such as National Bank, CIBC and Scotiabank.
Currently, these ETFs offer an annual return of around 5.3%. That’s more than what one-year GICs from most major financial institutions, including Desjardins, offer. What’s more, it is possible to withdraw money whenever you want. In the case of GICs, the funds are generally “frozen” for a year or more.
Many Canadians smelled a lot. By 2022, they have invested up to $9 billion in high-yield ETFs. And they put in $9 billion more since the beginning of the year. Assets held in nine Canadian high-yield ETFs currently approach $23 billion, according to CIBC Capital Markets.
Too good to be true!
But then it was (a little) too good to be true. On Halloween, the Financial Institutions Regulator issued a ruling against high-yield ETFs.
Bottom line: The federal regulator will now consider high-yield ETF deposits in bank accounts riskier. Why? Because investors can choose them whenever they want.
The consequence: banks will no longer offer such attractive interest rates on these wholesale deposits. Thus, according to TD Securities, the net yield of high-yield ETFs could decrease by 0.5% per year (if we take the current situation, it would go from 5.3% to 4.8%).
Revenge of the money market
This expected decline in yield from high-yield ETFs will gradually play out over the next three months, according to CIBC. Attractive money market ETFs (and mutual funds) with net returns currently ranging from 4.98% to 5.1%.
High interest ETFs and money market ETFs have a “low” level of risk, but it’s still worth noting that the amounts invested in them are in no way protected by deposit insurance.
And while current rates are attractive, you always have to ask yourself how much of your portfolio you want to keep in cash. The spreads usually recommended by experts are between 0 and 10-15%, but it all depends on the forecasts for the stock and bond markets as well as your personal situation.