The latest Bank of Canada interest rate decision is in, and unsurprisingly, policymakers decided to hold the overnight rate at 2.25%. I think that makes sense given the current backdrop.
Inflation remains stubbornly persistent, thanks in part to the ongoing Iran conflict and the resulting disruptions to global shipping. Higher energy prices tend to work their way through the economy, increasing transportation, manufacturing, and consumer costs.
South of the border, inflation has also proven difficult to fully eliminate. The U.S. consumer price index recently ticked up to 4.2%, reminding investors that inflationary pressures have not completely disappeared. Given how closely intertwined the Canadian and U.S. economies are, it would not be surprising to see similar pressures continue showing up here as well.
Because of that, my focus right now is less on chasing returns and more on strengthening my emergency fund. Canada has technically entered a recession based on the definition of two consecutive quarters of declining gross domestic product (GDP). Yes, economists often look at a wider range of indicators before officially declaring a recession, but I still think it serves as a useful warning sign.
That is why one exchange-traded fund (ETF) I think deserves consideration right now is Global X High Interest Savings ETF (TSX:CASH). Here’s how it works if you’re unfamiliar.
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Why CASH is better than holding cash
Most Canadians keep their emergency fund in a traditional savings account. The problem is that banks generally do not pay much interest on those deposits. After all, banks make money by lending out those same deposits at higher rates, so they have little incentive to offer particularly attractive savings rates.
If you want better yields from most major banks, you usually need to purchase a Guaranteed Investment Certificate (GIC). A GIC allows you to lock your money away for a predetermined period in exchange for a higher interest rate. The downside is obvious: your money becomes less accessible. If an emergency arises before maturity, you may face penalties or lose access to those funds altogether.
CASH takes a different approach. When investors buy units of the ETF, the fund deposits that money into institutional high-interest savings accounts at major Canadian banks. In effect, individual investors gain access to the kinds of rates typically reserved for large institutional clients. After deducting its 0.11% expense ratio, CASH currently offers a trailing 12-month yield of 2.19%, paid monthly.
Of course, this is not completely risk-free. Unlike a GIC, the principal for CASH is not guaranteed. And unlike a traditional savings account, the ETF itself is not covered by Canada Deposit Insurance Corporation (CDIC) protection. Still, in practical terms, CASH is about as low-risk as an exchange-traded fund (ETF) can get.
Understanding how CASH trades
One advantage CASH has over a GIC is liquidity. The ETF trades throughout the day on the Toronto Stock Exchange just like any stock. Investors can generally buy or sell shares whenever the market is open without waiting for a maturity date.
If you look at the price chart, you will notice a distinctive sawtooth pattern. Throughout the month, interest earned from the underlying high-interest savings accounts gradually accumulates, causing the ETF’s net asset value (NAV) to slowly rise.
Then, on the ex-distribution date, the ETF’s NAV drops by approximately the amount of the monthly distribution that is being paid out to investors. After that, the process begins again.
Because CASH earns income from savings accounts, the yield tends to rise when interest rates are high and decline when interest rates fall. With the Bank of Canada currently holding rates steady, investors can still earn a relatively attractive yield with very little risk, at least for the time being.
