Buyer Beware: High interest cash ETFs are uninsured deposits
High interest cash ETFs may pose more danger than you're willing to accept
The collapse of Silicon Valley Bank highlights a risk many investors are unknowingly taking.
With interest rates higher than any time in the past decade, Canadian investors are chasing high interest savings ETFs - about $1 billion per month is going into these ETFs.
In January alone, CI High Interest Savings ETF, Horizons High Interest Savings ETF, Evolve High Interest Savings Account ETF, Purpose US Cash Fund all hit the top 25 in terms of net creations. It has been this way for several months.
Currently, CI High Interest Savings ETF and Purpose High Interest Savings Fund are two of the largest ETFs in Canada with over $11 billion in combined assets under management.
These ETFs generate income (currently close to 5%) for investors by investing in high interest savings deposit accounts at Canadian banks. For example, the CI ETF has the following holdings:
On the surface these ETFs appear low risk. They generally are. But as we saw this weekend with the collapse of Silicon Valley Bank, risk can emerge suddenly and unexpectedly.
Are High Interest Savings ETFs Safe?
Investors must understand that these ETFs are effectively unsecured loans to the banks. They are uninsured deposits not protected by CDIC (similar to FDIC in the US), and, like we saw this weekend with Silicon Valley Bank, the risk to deposits can quickly go from 0 to 100 if the liquidity of the underlying bank comes into dispute.
Depositors at Silicon Valley Bank will be made whole by the Federal government, but can you imagine stress of not knowing whether or not you’ll lose your life savings?
The chances of one of the underlying banks not making good on these deposits is very low. And even if there is a problem, it is likely the Feds come in and save the day. But I believe many people are investing their money in these high interest savings ETFs not recognizing the small chance of catastrophic risk. If they knew, they might second-guess whether a 5% yield is worth it - especially given they can get something similar from lower risk short-term Treasuries.
Ask yourself, would you deposit $100k into an uninsured savings account at your local bank branch? If not, why would you buy one of these ETFs?
I think many people look at these ETFs and mistakenly assume they are CDIC insured. That’s what they’re used to when it comes to bank products. Also, people are generally lulled into a sense of safety when it comes to Canadian banks.
The ETF companies are not forthcoming with this risk. You have to dig to find any mention. I found the following on Purpose’s fund facts sheet for the Purpose High Interest Savings Fund:
Again, the probability of a liquidity issue with one of the underlying banks is very low. But the outcome of this very low probability is catastrophic. If people knew, they might think twice.