How cash ETFs put your money to work

There are a few different types of cash ETFs, but many essentially work by taking a position in a high-interest savings account at a large bank, said Chris Merrick, founder and owner of Merrick Financial. Others invest in low-risk debt securities such as bonds, called money market ETFs. He emphasized that cash ETFs are able to preserve capital while providing liquidity, unlike GICs which lock funds for a specified period. “Liquidity is good. You can earn interest income, which is better than a bank savings account. And they are usually kept for short-term goals,” he said.

Merrick said the cash ETF pays monthly interest based on the current borrowing rate set by the Bank of Canada. “Unfortunately, when interest rates go down, as they are now, so do the rates on cash ETFs,” Merrick said.

One of BMO’s best-selling ETFs over the past year has been its money market ETF, despite relatively low yields, said Erika Toth, director and head of ETF and portfolio consulting at BMO Global Asset Management. Toth said they can offer advantages such as “lowering portfolio risk if an investor wants to exit stocks or bonds” because cash ETFs are a more conservative asset compared to more volatile stocks.

Liquidity and returns without market risk

Cash ETFs can also help investors through transition periods.

Toth said as investors age, the need for cash flow increases, leading some to look for safer assets to put their money in, but younger clients find them useful when saving for certain financial goals. “Even for younger clients – saving for a home, saving for renovations or your children’s education, it’s still a great way to ensure you’re getting paid in cash and that the money is always available.” Toth said cash ETFs can help those who have recently exited the market and want OTC cash to work.

Philip Petursson, chief investment strategist at IG Wealth Management, said cash ETFs could be a good option for any investor looking to earn income while keeping their cash holdings liquid. “I think as long as investors have a requirement that they need cash within 12 months and they don’t want to be exposed to any market volatility at all, I think it’s going to be a good place to invest,” he said.

However, Pettuson said cash could be a drag on investment portfolios in the long term because of its lower returns, meaning investors would miss out on higher growth opportunities. He added that holding about 5% of a portfolio in cash ETFs can help investors stay exposed to the market during volatile times.

Merrick noted that one disadvantage is that they are not insured by the Canada Deposit Insurance Corporation, which guarantees funds held by financial institutions in Canadian banks up to $100,000 per account type. For some, the sense of security provided by CDIC protection is important, while for others it doesn’t matter, he said. “As the saying goes, liquidity and security don’t matter unless they become everything. But I think the likelihood of that being needed is pretty low,” Merrick said.

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