In recent times, high-interest savings account (HISA) exchange-traded funds (ETFs) have been the focal point of many asset allocation discussions, and for good reason. The past two years have witnessed the Bank of Canada executing one of the fastest rate hike cycles, with a notable increase of 475 basis points since March 2020. This aggressive campaign resulted in HISA ETFs yielding very attractive rates, generally north of 4.5% throughout 2023. The surge in yields prompted investors to reevaluate their portfolios, gravitating towards the stability of cash over the volatility of stock and bond markets. In 2023 alone, the HISA ETF asset class experienced an impressive growth of approximately 65%, gathering over $29 billion by year-end.*
- The majority of the repricing from the deposit-taking institutions due to recent regulatory changes has already been factored into the net yield of PSA and PSU.U. We don’t expect a material one-time cut in yield.
- Purpose Investments has enhanced the asset allocations for its High Interest Savings ETFs by adding short-term Bank of Canada Treasury Bills, aiming to boost yield without relying solely on deposit accounts.
- The funds’ liquidity remains unaffected, with ETFs anticipated to trade very close to fair value, historically experiencing intraday premiums/discounts within a $0.01 range from NAV.
- For clients seeking diversification, traditional money market funds (MNY, MNU.U) present a comparable risk profile to high-interest savings ETFs but offer a higher yield.
Why have HISA ETFs been the talk of the town lately?
Recognizing the growing significance of HISA ETFs, the Office of the Superintendent of Financial Institutions (OSFI) initiated a review of the liquidity treatment provided for these funds under the Liquidity Adequacy Requirements (LAR) Guideline. The outcome of this review mandated all Schedule I Canadian banks (deposit-taking institutions) to adhere to new capital requirements – i.e., transition over to 100% run-off factor on deposits originating from HISA ETFs in their calculation of Liquidity Adequacy Requirements (LAR) guideline by January 31, 2024.
Before delving further into this article, we want to clarify a commonly misconstrued aspect arising from the consultation: the liquidity of HISA ETFs. Contrary to popular belief, the focus of OSFI’s review was not on questioning the liquidity of HISA ETFs. Instead, the objective was to ensure that any deposit-taking institution accepting deposits from HISA ETFs maintains an adequate reserve of high-quality liquid assets, such as government bonds, capable of supporting the withdrawal of all HISA ETF balances within a 30-day period.
The underlying assets from the funds are allocated between deposit accounts with Schedule I banks and Bank of Canada Treasury Bills (T-Bills) – both recognized as highly liquid assets. These funds operate under contractual agreements with deposit-taking institutions, allowing them to fulfill all unitholder redemptions effectively. Historically, HISA ETFs have traded extremely close to fair value with intraday premiums/discounts within $0.01 from NAV.
So, how does this regulatory shift impact the funds?
We do not expect any more material cuts to the fund’s yield stemming from repricing changes from the banks.
In response to the updated capital requirements, deposit-taking institutions and asset managers have entered into strategic agreements, adapting to the changes and fortifying the structure to enhance benefits for their clients. This not only brings clarity to the asset class but also propels the products towards the next phase of growth. Moreover, we anticipate the potential emergence of additional deposit-taking institutions in the future, fostering increased competition and creating an environment conducive to higher yields.
While the yield on these products has experienced a slight decrease over the last three months in response to regulatory changes, they continue to offer numerous operational advantages (listed below) and deliver significantly better rates than most traditional savings vehicles accessible to Canadians. We do not expect any more material cuts to the fund’s yield stemming from repricing changes from the banks.
- Highly liquid with no lock-up periods, unlike GICs and term deposits
- Can be traded in and out in large blocks during market hours
- No transfer limits, account level fees, or minimum/maximum investment amounts
Canadians, on average, earn 3.3x more on their cash allocation by investing in HISA ETFs.
With PSA’s inception in 2013, these funds have set a new benchmark, a minimum acceptable return retail investors should earn on their cash. Compared with other traditional savings accounts, Canadians, on average, earn 3.3x more on their cash allocation by investing in HISA ETFs.
In addition to HISA ETFs, Purpose also provides access to actively managed cash management strategies with the Purpose Cash Management Fund (Ticker: MNY) and the Purpose USD Cash Management Fund (Ticker: MNU.U), that invest in ultra-short-term, very high-quality money market instruments such as bankers acceptances, bearer deposit notes, and commercial paper. These funds remain unaffected by OSFI’s decision and are ideal for investors looking to attain a higher yield with a risk profile similar to HISA ETFs.
How is Purpose positioning PSA and PSU.U?
As a leader in this asset class, Purpose is able to offer clients an investment approach that has been tested through time and designed to meet the needs of today’s cash investors. To enhance the asset allocation of both the Purpose High Interest Savings Fund (Ticker: PSA) and the Purpose US Cash Fund (Ticker: PSU.U) in light of the recent regulatory changes, the funds will be adding exposure to short-term Government of Canada Treasury Bills (T-Bills) alongside deposit accounts at Schedule I Canadian banks.
Both deposit accounts and T-Bills are recognized as the safest and lowest-risk investments, contributing to the avoidance of any potential capacity constraints on the funds while maximizing their yield. Notably, the funds will refrain from investing in any other money market instruments, including commercial paper.
How has the strategy performed over various interest rate regimes in the last decade?
Over the past decade since its inception in October 2013, the strategy has exhibited substantial growth across multiple interest rate cycles and varying market conditions, as depicted in the graph below. The fund has navigated through cycles of both rising and falling interest rates successfully, with yields rising and falling in lockstep with the Bank of Canada overnight rate. Over time, the fund has evolved into a significant component of cash allocations within portfolios, resulting in a continuous uptrend in assets under management.
How has the fund performed during crisis periods (e.g., COVID-19 and the US regional bank crisis)?
For ETF units of PSA/PSU.U, the interest is accrued in the NAV daily, and at month’s end, when the distribution is paid out, PSA’s NAV resets at $50.00 ($100.00 for PSU.U) and follows the same pattern the following month. Since the underlying assets are allocated to deposit accounts and T-Bills, the fund’s NAV is not subjected to market risk and, therefore, does not fall below the threshold, as illustrated in the chart below.
In addition, the fund’s assets under management remained stable during both periods, reinforcing the attractiveness of these ETFs for retail holders compared with other traditional savings accounts.
Similarly, the contagion effect did not follow through to the fund during the US regional bank crisis. The investors continued holding assets with HISA ETFs as Canadian banks remained stable throughout.
The bottom line
Despite a slight dip in yields due to regulatory changes, we believe HISA ETFs will remain a preferred choice, offering superior rates compared with traditional savings options. To position these funds for future growth within the altered regulatory framework, Purpose has strategically adjusted the asset allocation, now including short-term Government of Canada Treasury Bills alongside deposit accounts with Schedule I banks. The impressive 10-year track record of the Purpose High Interest Savings Fund showcases resilience across diverse interest rate environments and crisis periods, ensuring stability and attractive yields for retail investors. Over the last decade, HISA ETFs have established a new benchmark for cash allocations, providing clients with compelling alternatives in the evolving landscape of financial products.
*Morningstar Direct as at December 31, 2023. Includes AUM for CAD and USD HISA ETFs.
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed; their values change frequently, and past performance may not be repeated. Investment fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
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