The recent volatility in interest rates has significantly changed the landscape for fixed income investments in Canada. Following a long period of near-zero rates, the Bank of Canada’s swift interest rate hikes have renewed interest in high-yield savings accounts and exchange-traded funds (ETFs).
With fierce competition in the market, many consumers are now inclined to pursue the highest possible interest rates, often requiring them to move their funds from bank to bank. To address this challenge, Horizons has launched CASH.to, a high-interest savings ETF. This article serves as a comprehensive guide to understanding CASH.to, including its safety and how to purchase it.
What is CASH.to?
CASH.to is the ticker symbol for the Horizons High Interest Savings ETF, which is traded on the Toronto Stock Exchange—denoted by the “.to” suffix indicating Canada.
This ETF aims to create monthly income for investors by investing in high-interest savings accounts provided by Canadian chartered banks. Its main objectives are to enhance monthly income distributions while ensuring the preservation of capital and maintaining liquidity.
By investing in CASH.to, you can access Canadian dollar-denominated cash-equivalent assets without the need to manage various bank accounts. This ETF serves as a simple solution for holding cash and earning attractive interest rates that typically surpass standard savings accounts.
How CASH.to Operates
When you invest in CASH.to, your funds are combined with those of other investors and deposited into high-interest savings accounts at prominent Canadian banks. The fund manager actively seeks the best available rates, reallocating funds between banks to optimize returns.
This pooling approach offers substantial benefits. With billions in assets under management, CASH.to can secure better rates than individual investors typically would.
Operational Highlights:
- Monthly distributions are credited directly to your brokerage account.
- You must possess shares by the ex-dividend date to receive that month’s distribution.
- The fund continually reallocates assets to maintain optimal yield.
- Returns are reflective of the collective performance of various high-interest accounts.
The operational mechanics are akin to a conventional savings account where you deposit cash and earn interest; however, CASH.to leverages its scale to obtain superior rates for its investors.
CASH.to Yield Explanation
The yields generated by CASH.to are based on interest accrued from deposits in Canadian banks. The returns shift in line with current interest rates. In the low-interest climate of 2021, yields were around 0.6%, but recent interest rate hikes have elevated yields to approximately 3.5% to 4.5%.
These figures generally surpass those available directly from banks. The stated yields are annual rates, with monthly distributions calculated as approximately one-twelfth of the annual yield.
The fund has a management expense ratio (MER) of 0.11%. This fee is subtracted before the yield is reported, which means the rate you see is already adjusted for all costs, and there are no further deductions necessary to ascertain your actual returns.
If you hold shares by the ex-dividend date, your distributions will arrive in your brokerage account monthly, mirroring the traditional savings account experience but functioning within an ETF framework.
Understanding CASH.to Share Price Dynamics
The share price of CASH.to follows a consistent cycle aligned with its monthly distributions. The ETF maintains a net asset value floor of $50, ensuring that its trading price stays at or above this threshold.
Throughout the month, the share price gradually appreciates as the fund accrues interest income, peaking just before the distribution is paid. Following the ex-dividend date, the share price typically resets to the $50 minimum.
Key Pricing Features:
- The share price increases incrementally with each trading day.
- This increase reflects the value of the accumulated distribution.
- The share price resets to $50 post-payout.
This structure implies that the timing of your purchase has minimal impact on your overall returns. Buying shares mid-month at a higher price offsets the cost through the forthcoming distribution, negating any timing disadvantage for investors.
Tax Implications of CASH.to
If you hold CASH.to in a non-registered account, the monthly distributions will be taxed as interest income, contributing to your total income for the year and taxed at your applicable marginal tax rate.
Selling your CASH.to shares for more than their purchase price results in a capital gain, where 50% of the gain is counted as taxable income. For instance, a $100 profit would see $50 added to your taxable income, which is then taxed at your marginal rate.
Registered Account Considerations:
- RRSPs
- TFSA accounts
- LIRA accounts
- RESP accounts
Holding CASH.to within these registered accounts means you won’t need to pay taxes on distributions or price appreciation.
Purchasing CASH.to
To acquire CASH.to, you can go through your brokerage or an online discount brokerage account. This ETF is compatible with both registered and non-registered investment accounts.
CASH.to can be placed in registered accounts like TFSAs and RRSPs. Although some brokerages may impose commission fees for transactions, many platforms now offer commission-free ETF trading.
Caveat: Certain financial institutions limit access to this ETF. For instance, TD Direct Investing currently prevents its clients from buying CASH.to, which seems to be a commercial decision rather than a regulatory one.
Before making an order, check if your brokerage supports transactions in CASH.to. If not, you may need to transfer to a broker that allows High Interest Savings ETF trades.
CASH.to vs. GICs
CASH.to and Guaranteed Investment Certificates (GICs) present two different strategies for cash management in Canada. GICs are fixed-term investments provided by banks and trust companies that lock in a fixed rate of return for a specified timeframe.
The yield structures for both options vary significantly. A GIC guarantees a constant interest rate for its entire term, while CASH.to offers monthly dividends that fluctuate according to market conditions and short-term rates.
Liquidity further distinguishes the two, as GICs generally require investors to keep funds locked in until maturity. Conversely, CASH.to shares can be traded during market hours, allowing easier access to capital.
Additionally, protection and fees differ. Eligible GICs are covered by CDIC insurance up to a maximum of $100,000, safeguarding your principal. Conversely, CASH.to does not have this protection, and its management fees could reduce your net returns, while there are typically no fees associated with GICs.
In summary, while CASH.to offers more flexibility to withdraw funds at any time, it involves management fees and lacks CDIC insurance.
Exploring Other Investment Alternatives
In addition to GICs, there are other viable options to consider against CASH.to:
High-Yield Savings Accounts
You might opt to directly place funds into a high-interest savings account, potentially avoiding CASH.to altogether. The returns from CASH.to frequently surpass those provided by most traditional bank deposit accounts.
While higher rates may be achieved through promotional offerings for new deposits, this often requires managing money transfers between institutions and maintaining multiple accounts. A crucial advantage of traditional deposits is CDIC protection, which secures funds in eligible accounts at member institutions of the Canadian Deposit Insurance Corporation.
CASH.to, in contrast, lacks CDIC coverage, making standard savings accounts a more secure choice for those prioritizing capital safety.
Money Market Funds
Money market funds invest in short-term bonds with maturities of 30 to 60 days, allowing their yields to track interest rate changes. They offer a reasonable alternative to CASH.to, though it’s essential to evaluate the quality of the bonds within these funds to ensure they align with your risk tolerance.
Impact of Declining Interest Rates on CASH.to
If interest rates were to fall, monthly distributions from CASH.to would be affected adversely. Since the fund generates returns from cash deposits at Canadian banks, its earnings would diminish in a lower interest environment.
Your monthly payments may decrease as the fund yields less on its holdings. During low-rate periods like 2021, distributions could significantly drop, potentially reverting to levels around 0.6%.
Implications for Your Investment:
- Lower monthly distributions
- Reduced annual yield percentage
- Decreased passive income generation
The fund’s success is intimately linked to the interest paid by Canadian banks for deposits. Therefore, returns won’t be fixed and will adjust in real time based on prevailing market conditions.
Assessing the Safety of CASH.to
CASH.to lacks CDIC insurance, which sets it apart from GICs and traditional high-yield savings accounts. This lack of insurance applies broadly to all ETFs, stocks, and bonds, not just CASH.to.
The ETF deposits funds in accounts at major Canadian banks such as Scotiabank, CIBC, and National Bank. These institutions are recognized as some of the most secure in the world, which lends a degree of safety to your investment.
While CASH.to is not entirely risk-free due to the absence of CDIC protection, it does present a relatively low risk. A collapse of one of Canada’s major banks would likely generate far-reaching economic ramifications that would overshadow individual deposit loss concerns.
Important Safety Considerations:
- No coverage through CDIC
- Assets distributed across multiple reputable Canadian banks
- Stable track record of the Canadian banking system
- Risk is comparable to other ETF investments
Even under typical economic conditions, the risk to your investment is minimal. Nonetheless, it’s essential to understand the differences between ETF investments and insured deposit accounts.
Final Considerations
CASH.to presents an appealing option for those seeking to keep their funds easily accessible while potentially earning competitive returns. Unlike fixed-term products, you won’t be tied down with your capital for months or years. The ability to trade during market hours offers a level of flexibility unique to this type of investment.
This ETF can be held within your existing TFSA, RRSP, or any other investment accounts you already manage, eliminating the need for new accounts or juggling various institutions. Given its advantageous interest distributions, CASH.to merits consideration, although you’ll need to evaluate the implications of lacking CDIC insurance in light of your own risk preferences and financial goals.
The increasing popularity of this fund underscores its value for investors who are looking for liquidity along with reasonable returns on their cash assets.