Chris Merrick, founder and owner of Merrick Financial, said there are just a few several types of money ETFs, but many essentially work by taking positions in high-yield savings accounts at major banks. Others put money into low-risk debt securities comparable to bonds, called money market ETFs. He emphasized that unlike guaranteed investment certificates, which lock up money for a certain time period, money ETFs offer the chance to preserve capital while providing liquidity. “Liquidity is good. You get interest income that is better than a bank savings account. And often they are held for short-term purposes,” he said.
Merrick said money ETFs pay monthly interest based on current Bank of Canada lending rates. “Unfortunately, when interest rates go down, like they are now, interest rates on cash ETFs go down as well,” Merrick said.
Erika Toth, director and head of ETF and portfolio advisory at BMO Global Asset Management, said that one in all BMO’s best-selling ETFs last 12 months was one in all its money market ETFs, despite the comparatively lower returns. Toth said they’ll offer advantages comparable to “the ability to de-risk a portfolio if an investor wants to exit stocks or bonds,” since money ETFs are a more conservative asset in comparison with more volatile stocks.
Liquidity and returns without market exposure
Cash ETFs also can help investors navigate transition periods.
As investors age, Toth says the necessity for money flow increases, leading some to search for safer investments during which to speculate their money, but young clients find them useful when saving for specific financial goals. “Even younger customers – who are saving to buy a home or for renovations or their children’s education – it’s still a good way to ensure you get some of your money and the funds are readily available.” Toth said money ETFs could help someone who has recently exited the market and desires the money they’ve on the sidelines to be productive.
Philip Petursson, chief investment strategist at IG Wealth Management, said money ETFs may very well be option for any investor trying to earn a return while maintaining liquidity of their money holdings. “I think whenever an investor has the need to need the money within 12 months and doesn’t want to be exposed to market volatility at all, I think this would be a good place to put their money,” he said.
However, in the long term, money generally is a drag on a portfolio resulting from lower returns, Petursson said, meaning investors will miss out on higher growth opportunities. He added that holding about 5% of a portfolio in a money ETF will help an investor gain exposure to the market during times of volatility.
Merrick identified that one in all the disadvantages is that it isn’t covered by Canada Deposit Insurance Corp. which guarantees funds in Canadian bank accounts as much as $100,000 per account type at a financial institution. He said that for some people the safety that CDIC protection provides is very important, while others are indifferent. “As they say, liquidity and security don’t matter until they are everything. But I think the likelihood of that being necessary is pretty slim,” Merrick said.
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