If you have any bearish leanings as I do, then you’re probably beginning to wonder whether you should start to pull funds out of stocks. While it doesn’t seem like a downturn is imminent, it pays to begin building a bearish position, stockpiling cash for a rainy day. But knowing when to sell often is more difficult than knowing when to buy. As a dividend investor, the beautiful thing is that you don’t necessarily have to know when to sell; you can simply take the capital returned to you through dividends and start to put it, or at least a portion of it, aside for the future.
Companies such as Royal Bank (TSX:RY)(NYSE:RY) and Enbridge (TSX:ENB)(NYSE:ENB), with their respective 3.68% and 5.47% dividends, can give you the opportunity to build a defensive position over time, as you wait for opportunities to arise without selling any shares. Their dividends also have the benefit of growing. Enbridge raised its dividend by 10% recently and plans to do so for several years. Royal Bank raised its dividend by 3% in February and will likely raise it again in the future. Without selling any shares, money builds in your account.
However, most brokers don’t offer interest for the cash you’re holding. As such, it can be difficult to see the cash sitting there doing nothing, leading some investors to continuously buy more shares, even at lofty prices. But there are some options for parking your cash. These may not pay huge amounts, but they allow you to earn cash while you wait for buying opportunities.
Three options for holding your cash are the Purpose High-Interest Savings ETF (TSX:PSA), iShares Premium Money Market ETF Comm (TSX:CMR), or Horizon Active Floating Rate Bond ETF Comm (TSX:HFR). Each of these offerings has a different yield and expense ratio.
The Purpose ETF has a decent yield of 1.9% and the cheapest management expense ratio (MER), the fee that is paid to the ETF provider, of 0.12%. The iShares yield is slightly less at 1.20% and has a slightly higher MER of 0.25%. Horizons, by far, has the highest yield at 2.25%, but that comes at a cost, as the MER is the highest of this group at 0.46%.
Of the three savings ETFs, I most prefer the Purpose ETF, even though it doesn’t have the highest yield. It has the simplest structure, with the money being merely held in bank accounts, the same as if you had your own bank account. The downside is that this ETF is not available through all online brokers, so this not is an option if your broker happens to be the one that doesn’t offer it to its investors.
My second choice would be the iShares Money Market ETF. Even though it has a lower yield, the fee is the second cheapest of the three and it is widely available at most, if not all, brokers. It also has a relatively simple structure, using government and corporate paper to achieve the rate of return. As the oldest ETF on the list, it is well established with the longest history of the three.
My last is the one with the highest yield, the Horizon Active Floating Rate ETF. While this is not a bad choice, given the 2.25% yield, which is the highest of the group. The issue with this ETF is that it uses a complicated structure of bonds of various durations and swaps (insurance on the bonds) to achieve the higher yield. If you cannot access the Purpose option, then using this ETF combined with iShares’s ETF might be a conservative way to lock up cash.
There are two negative points to consider before investing in these ETFs. The first is that they are not insured by the Canadian government in the same way as a regular savings account. The second is that they all charge a fee to buy units of the ETFs, unless your broker offers free ETF purchases, as many brokers now do. But if you want to keep your cash ready for purchases without having to transfer funds in and out, these are the funds for you.
Keep those dividends building as cash allows you to be prepared for a downturn as well as to keep fully invested. These ETFs will give you a decent return with a high probability of capital preservation. Use these ETFs to save those dividends for when the bear market returns.