Looking for a liquid, accessible, and affordable way to preserve capital while earning interest in a brokerage account? A good option here might be a money market exchange-traded fund (ETF). Money market ETFs are typically low risk and pay out monthly interest much like a guaranteed investment certificate (GIC).

However, unlike a GIC, investors who buy money market ETFs are not subject to a lock-up period. They’re free to buy and sell shares as they see fit, which provides greater flexibility among other benefits.

Here’s all you need to know about investing in Canadian money market ETFs.

What is a money market ETF?

A money market ETF is simply an ETF that holds money market instruments. These are short-term fixed-income securities characterized by high liquidity and low risk that can easily be converted into cash. Examples of money market instruments include U.S. and Canadian government Treasury bills, or T-Bills, commercial paper, GICs, certificates of deposit, repurchase agreements, and banker’s acceptances.¹

Now, it’s important to distinguish money market ETFs from their closely related cousin, high interest savings account, or HISA, ETFs. As the name suggests, HISA ETFs hold their assets in deposits with HISAs at various banks. They do not hold the usual mix of assets money markets do and are not money market ETFs.² However, they have similar characteristics, such as low risk and monthly interest payments.

The return an investor can expect from a money market ETF is expressed by its yield, which can be calculated in two ways:

1. Annualized Distribution Yield: This yield calculation takes the most recent distribution paid by the ETF, annualizes it (i.e., projects it over a full year), and then divides the result by the ETF’s current net asset value (NAV). The annualized distribution yield offers a snapshot of the ETF’s potential income-generating potential based on its recent distribution and NAV.
2. Trailing 12-Month (TTM) Yield: This yield calculation takes the sum of all the distributions paid by the ETF over the previous 12 months and divides it by the ETF’s current NAV or market price. The TTM yield provides a historical perspective on the ETF’s income generation over the past year.

Neither metric will provide an exact measurement of the yield an investor will receive. Instead, they should be relied upon as useful approximations.

Finally, like all ETFs money market ETFs charge a fee, called a management expense ratio (MER). This is comprised of management fees plus any fund operation, administrative, and marketing expenses. It is expressed as a percentage deducted from your investment annually. For example, a 0.25% MER would result in around $25 in fees annually for a $10,000 investment.

Top Canadian money market ETFs

The following Canadian-listed ETFs are either explicitly categorized as money market ETFs or hold similar assets and function similar to money market ETFs:

BMO Money Market Fund ETF Series

ZMMK is currently the largest Canadian money market ETF with assets under management of just over $525 million as of April 2023. The ETF holds a mixture of high-quality money market instruments issued by governments and corporations in Canada, which include treasury bills, banker’s acceptances, and commercial paper that mature in less than 365 days.

iShares Premium Money Market ETF

CMR is the longest-running money market ETF in Canada, having debuted during the height of the 2008 Great Recession. The ETF seeks to provide both liquidity and income via a portfolio of short-term high-quality debt securities, which include commercial paper and certificates of deposit.

Horizons 0-3 Month T-Bill ETF

Although not technically a money market ETF, CBIL functions similar enough due to its high liquidity, low risk, and steady income potential. The ETF holds 100% Canadian Federal Government T-bills with maturities of less than three months. These assets are considered risk-free in terms of default and have a low sensitivity to interest rate movements.

Pros of investing in money market ETFs

Money market ETFs have several advantages that make them popular investments among Canadian investors:

1. Low risk: Unlike stock or bond ETFs, the value of money market ETFs is designed to remain stable and is unlikely to be hurt by market crashes or rising interest rates.
2. Income: Money market ETFs usually pay monthly interest and have yields that keep up with rising interest rates.
3. Liquidity: Unlike GICs, investments in a money market ETF do not have a lockup period. As with any other ETF, money market ETFs can be bought and sold when markets are open.

Cons of investing in money market ETFs

However, money market ETFs are not perfect investments by any means. They have some disadvantages, which include:

1. Not risk-free: Unlike deposits in a HISA account or GIC, money market ETFs are not insured by the Canadian Deposit Insurance Corporation (CDIC).³
2. Inflation risk: The relatively meagre returns earned by money market ETFs may not be able to keep up with high inflation.
3. Low returns: Compared to riskier assets like stocks, money market ETFs are expected to earn a much lower long-term return.

Are money market ETFs right for you?

Whether or not money market ETFs are right for you depends on three factors: your risk tolerance, investment objectives, and time horizon.

Generally, money market ETFs are most suitable for low-risk investors socking away cash to spend in the near future. For example, this could include someone looking to make a down payment in two years. By buying a money market ETF, this investor can earn interest while keeping their principal investment safe.

For higher-risk investors looking to grow a portfolio long-term, a money market ETF could be a good way to park some cash for rebalancing purposes. However, investors shouldn’t expect these ETFs to produce high returns over time given their low-risk nature.