The Bank of Canada continues to balance slowing economic growth against inflation that has proven more persistent than many expected. Higher energy prices, ongoing geopolitical tensions, and resilient price pressures have complicated the path toward lower interest rates. Canada has also technically entered a recession under the definition of two consecutive quarters of declining GDP.
With that backdrop, I have become a little less interested in squeezing out every last percentage point of return and a little more interested in making sure my emergency fund is earning a reasonable return. That is why I think the Purpose High Interest Savings Fund (TSX: PSA) is one exchange-traded fund (ETF) which deserves a closer look.
Source: Getty Images
Why PSA beats a traditional savings account
Most Canadians keep emergency savings in a regular bank account. The problem is that banks generally pay relatively modest interest because they earn profits by lending those same deposits out at much higher rates.
Guaranteed Investment Certificates (GICs) can improve the yield, but they introduce another tradeoff. Your money is tied up for a fixed period, reducing flexibility if an unexpected expense arises before maturity.
PSA offers a middle ground. Rather than locking money into a GIC, the fund deposits investor capital into high-interest savings accounts with major Canadian financial institutions. That allows investors to access institutional-style savings rates while still buying and selling the investment through the stock market.
After deducting its 0.17% management expense ratio (MER), PSA currently provides a 2.2% trailing 12-month yield, with distributions paid monthly. It is important to understand, though, that this is not identical to a savings account.
Unlike a GIC, the return is not guaranteed. And unlike a personal bank account, units of the ETF are not protected by Canada Deposit Insurance Corporation (CDIC) coverage. Still, as far as ETFs go, PSA sits among the lowest-risk investments available.
How PSA works
One advantage PSA has over a GIC is liquidity. Because it trades on the Toronto Stock Exchange, investors can generally buy or sell units throughout the trading day without waiting for a maturity date.
If you examine the fund’s price history, you will notice a recurring sawtooth pattern. As interest accumulates inside the underlying high-interest savings accounts, the fund’s net asset value (NAV) gradually rises throughout the month. When the monthly distribution is paid, the NAV falls by roughly the amount of that distribution before beginning the process again.
The yield also adjusts alongside interest rates. When the Bank of Canada raises rates, the income generated by the underlying savings accounts generally increases over time. When rates fall, distributions gradually decline as well. With the overnight rate expected to remain around current levels, investors can still earn a competitive yield while maintaining daily liquidity and taking very little investment risk.
For me, that makes PSA an attractive place to park an emergency fund or cash that may be needed in the near future, while reserving long-term investment accounts for assets with greater growth potential.
