Advisors and their clients have been reacquainting themselves with cash products as interest rates hit heights not seen in years.
On Jan. 25, the Bank of Canada enacted its eighth straight interest-rate hike. The past year’s hikes have boosted rates for cash equivalents like high-interest savings accounts, money market funds and GICs, sparking fresh interest in an often-overlooked asset class.
“For clients and advisors, cash products are clearly a hot commodity right now versus what they’ve been for past decade,” said Scott Sullivan, principal, Canadian products at Edward Jones.
ISS Market Intelligence reported that fixed-term deposits reached a new high in the first half of 2022, with advisors flocking to GICs. ISS expected the trend to continue.
The resurgence in consumer demand for GICs takes Steve Nyvik back to the early 1990s, when he started in the industry.
“There was quite a lot of GIC work back then, but over time, as interest rates came down, money left the GIC world as people went looking for better returns,” said Nyvik, a senior portfolio manager and financial planner with Lycos Asset Management in Vancouver.
Higher returns have made GICs a source of comfort for older investors in particular, who have both a greater need for liquidity and can remember when the products played a more prominent role in portfolios.
“They’re easy for people to wrap their heads around. You know how much interest you’re getting and the principal is guaranteed,” Nyvik said.
With the Bank of Canada enacting a “conditional pause” on hikes, Nyvik said he expects to see a revival in GIC laddering, a traditional rate-hedging strategy that splits an investor’s principal into GICs of ascending terms.
When creating a five-year ladder with 1-year, 2-year, 3-year, 4-year and 5-year GICs, for example, “every year, you have 20% coming due to use for your living needs,” with the opportunity to reinvest if rates look favourable, Nyvik said.
However, absolute returns for cash equivalents continue to be outstripped by inflation, leaving investors net losers, points out David Strachan, portfolio manager with Watermark Financial Group in Stouffville, Ont.
Anyone locking into longer-term GICs is relying on central bankers to bring inflation back under control, Strachan said, so clients may be better off sticking with highly liquid, variable-rate high-interest savings accounts (HISAs). He said that money market funds are less attractive because their associated fees typically push their yields below lower-risk products that have protection from the Canada Deposit Insurance Corp. (CDIC).
With rates for HISAs at similar levels for both U.S.- and Canadian-dollar accounts, Strachan said investors should decide which currency to hold based on where they intend to spend the cash.
“If you are a snowbird, for instance, it always makes sense to hold U.S. dollars because doing so eliminates the foreign exchange risk,” he explained.
While Strachan prefers liquidity, he said the outlook for products with longer fixed terms is much better than a year ago, when he would generally have advised clients to steer clear.
“Now, at these levels, I think it makes sense to have a part of the portfolio that will produce 5% rain or shine,” he said. Since he uses a 4%–6% discount rate for long-term cash flow projections, Strachan said GICs returning above 5% allow for a larger cash position without dragging on desired outcomes.
At Ottawa’s Mandeville Private Client Inc., portfolio manager Duane Francis drives home the impact of inflation to clients setting their cash allocations, inviting them to think carefully about their plans for the money and discouraging longer-term holdings while the threat to their purchasing power remains high.
“Negative real returns are not positive in my world, but people don’t always get that,” Francis said. “We don’t tend to keep a lot of cash, but if you need liquidity or you have some upcoming large purchases, that’s when you use it, and also for buying opportunities.”
He said HISA ETFs are popular among his clients.
“They’ve been yielding 4.5%–5%, which is healthy, even if it’s negative in real terms, and you have liquidity. Your money is not locked up for a year or two; you can get hold of it the next day if you need it,” Francis said.
His clients are not the only ones embracing HISA ETFs, which have been on the market since 2013.
HISA ETFs saw record inflows in 2022, according to National Bank Financial, most of which occurred in Q4. The sector added $8.8 billion during all of 2022, more than doubling total assets under management in the process.
Investors may be attracted by the generally higher interest rates available in HISA ETFs compared to regular HISAs, but should also consider the fees charged by ETF providers, Sullivan said, as well as the products’ lack of CDIC coverage.
“A lot of those underlying deposits are in the big-six Canadian banks, but you want to be aware of what you’re investing in and that you’re comfortable with the business model,” he said. “Good advisors can help out with that.”