Great Lakes Investment Group
December 05, 2023
Money Wellness Education Economy Entrepreneurs Women & wealthHave High-Interest Savings Accounts Lost Their Value?
On Oct. 31, 2023, the Office of the Superintendent of Financial Institutions (OSFI) announced changes in the liquidity requirements for HISA (High-Interest Savings Account) ETFs that may affect the rates offered by these product types in the future.[i]
What does this all mean, and how could it impact your investments in the more liquid portion of your accounts? It’s not news to anyone that we have had historically low-interest rates in Canada for over a decade. This has dramatically impacted the ability to generate income on the short end of the maturity curve.
As a point of interest, the spread between 30 T-Bills and 10-year Gov’t of Canada Bond has been negative for over a year. This means you are getting a higher level of interest by investing for 30 days than you would if you invested for 10 years.
Using the 30 T-Bill as a proxy for short-term or liquid rates in Canada, we can see why the HISA became so popular with investors. Only in the fall of 2022 did we witness the 30 T-Bill yield rise above 3%; before that, we saw rates closer to 1% or less for much of the last decade.[ii]
This background information helps us understand where the hype for the HISA ETFs came from. Canadian investors welcomed the promise of daily liquidity with higher yields with open arms. According to National Bank Financial, cash alternative ETFs like HISA ETFs grew their Assets Under Management (AUM) to over $15 billion in 2022 and added another $6.9 billion so far this year.[iii] That’s nearly $22 billion in less than two years, which is not a small amount of money.
With this much money flooding into the category, some attention would surely be drawn to the asset class. The entire concept was for an ETF to use its buying power to get access to the highest level yield from the HISAs offered by the banks, then provide access to those yields for investors that may or may not be able to get that access on their own.
The move by OFSI will require Banks that hold deposits for HISA funds to hold “sufficient high-quality liquid assets, such as government bonds, to support all HISA ETF balances that can be withdrawn within 30 days” by Jan. 31. This move could have a potentially negative impact on the yield delivered by these HISA accounts.
Whether the new regulation was necessary or not may be debatable. The move intends to avoid the carnage we saw in the US, as some of their high-profile bank failures came from runs on their deposits. Forcing the banks to maintain high-quality liquid assets could avoid failures if they ever suffered a run by clients looking to remove their deposits so we will give them the benefit of the doubt.
How negative the impact on HISA ETF yields will depend on the underlying investments and the yield curve. If we continue to see an inversion in the curve with 30 T-Bills continuing to yield sizeably more than vehicles like the 10-year Gov’t of Canada bond, the impact on the current yields of the HISA accounts may not be massive.
All of this being said, at Great Lakes Investment Group, we pride ourselves in doing extensive research into all areas of the market that will help our clients attain their financial goals. As such, the team has poured significant research and person-hours into cash solutions long before this issue arose. We realize that the market is constantly shifting and that pivots can often become necessary at unexpected moments.
One size does not fit all, and appropriate diversification in all areas of your portfolio is the only way to mitigate the negative impacts of unforeseen changes in the marketplace. Whether you continue to deploy cash assets into this market section will depend entirely on your personal situation and the Financial Blueprint developed by our team. We welcome the conversation to discuss how best to diversify the cash components of your portfolio.
[i] OSFI’s ruling on HISA ETFs and its potential impact on the product moving forward - The Globe and Mail
[ii] Interest rates - Bank of Canada
[iii] HISA ETFs might not be dead yet | Wealth Professional