How investors are responding after rule changes to HISA ETFs

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High-interest savings account (HISA) exchange-traded funds (ETFs) are having a tough go after a regulatory change that took effect in January, competition from new money market ETFs, and hot equity markets have led investors to withdraw $1.45-billion since the start of this year.
The rule change by the Office of the Superintendent of Financial Institutions led to lower yields on HISA or “cash alternative” ETFs, which invest mainly in high-interest deposit accounts held by Canada’s big banks. In response to the new rules, some fund companies also launched new money market ETFs to attract clients who are comfortable taking on more risk to earn a higher yield.
In addition, equity markets have been on a tear with the S&P 500 and the Nasdaq indexes each up about 10 per cent year to date, and $9-billion has flowed into U.S. equity ETFs, according to data from TD Securities Inc.
Asset managers say they expected outflows from the cash alternative ETFs due to the rule change, which took effect on Jan. 31 and required banks to reclassify how they accounted for deposits in HISA ETFs. The change resulted in a cut to these cash alternative ETFs’ yields by about 20 to 50 basis points.
HISA ETFs saw net outflows of $1.45-billion for the year to May 31, says Daniel Straus, managing director of ETF research and strategy at National Bank of Canada Financial Markets.
CI High Interest Savings ETF CSAV-T from CI Global Asset Management had $1.46-billion in redemptions on its own, while Global X High Interest Savings ETF CASH-T and some U.S.-dollar cash ETFs have seen inflows.
“Pure play” money market ETFs, on the other hand, had net inflows of $1.42-billion during the same period.
The figures for HISA ETFs outflows and money market inflows “are very close and, while I believe it’s accurate to say that ETF investors have been switching out of cash and into money market products, the month-to-month flows don’t look like mirror images of each other,” Mr. Straus explains.
“That means the trend of ‘switching’ from cash alternative ETFs to money market is in place, especially since the OFSI ruling late last year,” he says. “But it’s buried among other market trends such as the never-ending search for yield coupled with tentative bursts of market bullishness that usually trigger outflows from cash-like assets.”
When bond markets tanked in 2022 and interest rates started to rise, investors jumped into HISA ETFs, whose yields rose in lockstep with central bank’ interest rate moves. Currently, they’re yielding just shy of 5 per cent, even with the cut in yield from the new rules. In 2023, despite the pending rule change that OSFI consulted on beginning in May, cash alternative ETFs raked in a net $7-billion.
However, with the Bank of Canada’s quarter-point interest rate cut on June 5 – the first in four years – the rates on cash ETFs will slip and more investors may look elsewhere for yield.
Despite the recent outflows, cash alternative ETFs (Canadian- and U.S.-dollar versions) had assets under management (AUM) totalling $21-billion at the end of May, according to National Bank Financial, far higher than the $4.3-billion for money market ETFs.
Some of the cash alternative ETFs have adjusted to the new regulatory environment by adding other investments including Canadian Treasury Bills or high-grade short-term corporate bonds, banker’s acceptances and commercial paper to boost yield.
“The managers are trying to stay competitive by mixing deposits with money market instruments,” Mr. Straus explains.
Raj Lala, chief executive officer of Evolve Funds Group Inc., which offers High Interest Savings Account Fund HISA-NE, says he thinks most investors who moved out of cash alternative funds went back into the market because they couldn’t sit on the sidelines as equities rebounded. “[I]t really wasn’t to do with 40-basis-points lower rate or yield on the HISA funds,” he says.
Evolve’s Canadian and U.S.-dollar cash alternative ETFs have a combined $4-billion in AUM – down by about $1-billion since the OSFI review and rule change.
“Many people have been kind of layering back into the market but also recognizing that they still need to maintain some liquidity in their portfolio and keep their powder dry for when they see the next best buying opportunity,” Mr. Lala adds.
In May 2023, Evolve created Premium Cash Management Fund MCAD-T, which invests in high-quality short-term debt securities with a duration of a year or less, in response to the then pending OSFI rule change. It has a current yield of 5.2 per cent and $146-million in AUM.
“You’re definitely seeing growth in some of the money market funds, and that’s coming from investors saying, ‘I’m okay reaching for higher yield and taking on a little bit more duration and a little bit more credit risk,’” Mr. Lala says, adding that flows suggest some investors are shifting money from cash alternative ETFs into Premium Cash Management Fund and other Evolve products.
Purpose Investments Inc. expanded the holdings of Purpose High Interest Savings Fund PSA-T to include Bank of Canada Treasury bills after the OSFI changes and after consulting with clients, says Vlad Tasevski, the firm’s chief operating officer and head of product.
“That’s a new sort of investment that we added into the portfolio to maximize the yield,” he says, adding that it’s a safe investment like cash deposits.
In addition, the company offers Purpose Cash Management Fund MNY-T, which it launched in March 2020 and holds commercial paper, bearer deposit notes, T-bills and other cash equivalents. The two ETFs allow clients to customize their portfolio to manage risk and yield return, Mr. Tasevski says.
Purpose has seen about $700-million in outflows from its cash alternative ETFs since the rule change, but saw a slight rebound in May of about $100-million in inflows. Mr. Tasevski says most of the outflows were from clients redeploying cash into the hot equity markets, which “just happened to coincide with the OSFI decision,” he adds.
Mr. Tasevski says cash alternative ETFs have their place in a portfolio and offer investors much better yield than they can get from a regular savings account, which is the next area of focus for these funds.
“We still see a lot of opportunity to expand the total market for those investors to get a much higher yield,” he says, adding that the amount invested in cash alternative ETFs is a fraction of the total amount of cash savings being held by Canadians elsewhere.
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