Cash ETFs are set to take a hit

The golden era of cash ETFs could be coming to a close, thanks to some new house rules courtesy of Bay Street’s watchdog.  

Driving the news: Canada’s banking watchdog is imposing new rules on one of Canada’s most popular retail investments, cash exchange-traded funds (ETFs), a move that will lower the big returns investors have been getting from the funds, per The Globe and Mail.

  • Cash ETFs, which are sold by independent investment companies, operate like high interest savings accounts but offer a much more attractive 5.3% annual interest rate.

  • They offer investors the premium rates that banks only give wealthy and institutional clients and give investors the flexibility to cash out whenever they want, unlike a GIC. 

Why it’s happening: The new rules will force the banks (which have taken deposit money from these ETFs) to hold more of a liquidity reserve against those deposits, a change that will lead to the ETFs paying out lower yields and making them less appealing to investors. 

  • Cash ETF yields are expected to drop by 0.5% annually as a result of the new rules — a hit that will give big banks' guaranteed investment certificates the upper hand.   

Why it matters: Cash ETFs are some of 2023’s best-selling funds, with Canadians pouring ~$23 billion into them so far this year. Investors who have been reaping the rewards of high yields will miss out, but the banks win because GIC rates will now be more competitive.—LA