Personal Finance Insights

Savings Account or HISA ETF?

One of the outcomes of high inflation is higher interest rates, which central banks use to help slow the economy and bring inflation back to target levels. While borrowers—such as those with mortgages, loans and credit card balances—are negatively impacted by rising rates, savers and people seeking lower-risk, highly liquid investments stand to benefit from high interest rates.

Two products the latter group may wish to consider are savings accounts and exchange-traded funds (ETFs) that invest in high interest savings accounts (HISA). Which product may suit your needs? Let’s look at the features of each.

Savings accounts

A savings account often represents our first notable exposure to banks or credit unions. As a youngster saving money from cash gifts or a summer job, a savings account helps keep our money safe.

The interest paid by savings accounts is largely determined by the Bank of Canada’s key rate. The rate that banks and credit unions pay on savings accounts typically depends on the deposit amount (larger deposits generally earn higher rates).

Savings accounts are used for liquidity and short-term needs, since you have ready access to your funds without limitations or other restrictions. Most people use such accounts as an emergency fund, or to save for short-term expenses like a vacation, school tuition or general household needs (property taxes, regular purchases for the home, etc.).

Savings accounts are easy to open. Many Canadian banks and credit unions have physical locations and online account access. Other financial institutions are exclusively online but may offer higher interest rates because they have fewer costs relative to bricks-and-mortar competitors.

Some savings accounts impose a minimum deposit or may charge a monthly fee. Note that interest earned from these accounts is considered taxable income. Canadian bank deposits in a savings account are eligible for insurance coverage—up to $100,000—by the Canada Deposit Insurance Corporation (CDIC).1 Provincial credit unions are protected by the province’s deposit insurer, not by CDIC.1

High interest savings account exchange-traded funds (HISA ETFs)

An ETF is a pooled investment security that trades on a stock exchange. ETFs are usually passive investments that track the composition and performance of a designated index. There are also actively managed ETFs, which have the ability to deviate from the index in an effort to outperform it.

ETFs offer investors the ability to pool their funds together to acquire a basket of securities often linked to a benchmark, such as the S&P 500 Index, which consists of 500 different stocks. By pooling funds, investors gain exposure to all 500 holdings, which provides diversification in order to seek stronger risk-adjusted returns. Buying all 500 stocks on your own, in the same individual weightings as the index, is difficult and costly. That’s why many investors turn to ETFs.

A HISA ETF is a savings account that trades on a stock exchange. Shareholders pool their funds and the ETF manager invests the funds in HISAs from Canadian financial institutions, such as the major Canadian banks.

These institutions pay interest to the HISA ETF, which then allocates interest income to the HISA ETF shareholders. By pooling funds and having a larger amount to invest, HISA ETFs can obtain higher interest rates than most individuals. As well, investing in HISAs from several institutions helps diversify a HISA ETF’s holdings.

Like with savings accounts, HISA ETF investors enjoy daily liquidity as they can sell shares (at net asset value) on the stock exchange as needed. HISA ETFs have no restrictions related to holding periods, minimum balances or early redemption fees.

Keep in mind there are costs to invest in a HISA ETF, including trading commissions to buy and sell. Also, the ETF manager earns a management fee that’s included in the management expense ratio. All ETF management fees are reflected in the net return.

Another factor to consider is that HISA ETFs are not insured by CDIC. However, the holdings are held at a third-party custodian. The Canadian Investor Protection Fund also provides limited protection for property held by a member firm on behalf of eligible clients, if the member firm becomes insolvent.2

Whether you choose a savings account or HISA ETF will depend on your financial objectives and personal circumstances. Both can help you take advantage of higher interest rates so you can build wealth using products that are more conservative than typical stocks, bonds and mutual funds.

CI Direct Investing’s team of professional financial advisers will work with you to optimize your investments. We’ll show you your options and guide you toward choices that make sense, given your stage of life and financial goals.

Book a call to speak to one of our advisers today.