Guaranteed Investment Certificates (GICs) are among the simplest ways for Canadians to earn interest without taking much risk. You deposit money with a financial institution, agree to a specified term, and receive a predetermined rate of interest. Eligible deposits are also protected by Canada Deposit Insurance Corporation (CDIC) coverage, subject to applicable limits.
For conservative investors, that’s an attractive proposition. A non-redeemable GIC held to maturity provides certainty about the interest you’ll earn and when your principal will be returned. You don’t have to worry about stock market volatility or changing bond prices.
The drawback is liquidity. Many of the more competitive GIC rates require you to lock up your money for months or years. If an unexpected expense arises or a better investment opportunity appears, you may be unable to access your funds before maturity. Cashable GICs offer more flexibility, but they can come with lower interest rates or restrictions on when withdrawals are permitted.
That’s why I think investors looking for relatively safe, short-term income should also consider Canadian Treasury bills. They offer a different balance of liquidity, yield, and capital preservation.
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Why Treasury bills are worth considering
Treasury bills, commonly called T-bills, are short-term debt securities issued by governments to finance their operations. In Canada, federal T-bills are backed by the federal government and generally mature in less than one year. Rather than paying a conventional coupon, they’re typically issued at a discount to their face value and redeemed at par when they mature.
For example, an investor might purchase a T-bill for $990 and receive $1,000 at maturity. The $10 difference represents the investment’s return. Because the Canadian federal government has exceptionally strong AAA-rated creditworthiness and T-bills mature relatively quickly, they carry very little credit risk and comparatively low interest-rate sensitivity.
They also offer flexibility. T-bills can be sold before maturity, although their market value can fluctuate as interest rates change. The main inconvenience is purchasing and managing individual securities. You may need to work through your brokerage’s fixed-income platform, compare available maturities, and reinvest the proceeds whenever a bill matures.
Harvest Canadian T-Bill ETF
Fortunately, an exchange-traded fund (ETF) can handle that process for you. One option I like is the Harvest Canadian T-Bill ETF (TSX: TBIL) at a 0.1% management fee.
TBIL holds a portfolio of Canadian federal T-bills with short remaining maturities. As those securities mature, the fund reinvests the proceeds into newly issued bills, allowing its income to gradually adjust to prevailing short-term interest rates.
As of October 16, TBIL had a 2.2% annualized yield, which Harvest updates daily. Unlike a conventional GIC, the ETF trades on the stock exchange, meaning investors can generally buy or sell units during regular trading hours.
Trade-offs
There are some trade-offs. TBIL’s net asset value (NAV) can fluctuate slightly, its distributions aren’t guaranteed, and ETF units aren’t eligible for CDIC deposit insurance. Investors also need to account for trading commissions, if applicable, and bid-ask spreads.
At TBIL’s October 16 NAV of $50.05, a $100,000 investment would purchase 1,998 whole units. The ETF’s most recent monthly distribution was $0.09 per unit. Assuming that remains unchanged, an investor would receive $181.82 monthly, or $2,181.82 annually.
That’s consistent with the fund’s approximately 2.2% annualized yield, although actual monthly distributions will change as its underlying T-bills mature and are replaced. Finally, this is also before the impact of potential taxes if held outside a registered account.
Date to watch
Finally, one important date to watch is October 28, when the Bank of Canada is scheduled to announce its next interest rate decision. If the central bank raises its policy rate, newly issued T-bills would generally begin offering higher yields as short-term market rates adjust. TBIL would quickly capture those higher rates as its existing holdings mature and the fund reinvests.
For me, that’s the main distinction between TBIL and a fixed-rate GIC. A GIC can lock in today’s yield for a predetermined period, while TBIL offers greater liquidity and a monthly income stream that adjusts with short-term interest rates.
