HISA ETFs adjust to new era as OSFI liquidity rules take effect

As new liquidity requirements for high-interest savings account ETFs take effect, a combination of lower rates offered from deposit-taking banks and changes to what the ETFs hold are affecting yields on the popular products.

In October, the Office of the Superintendent of Financial Institutions (OSFI) ordered stricter liquidity requirements for high-interest savings account (HISA) ETFs to be in place by Jan. 31. Based on the regulator’s review of the deposits’ stability, banks now must classify deposits from HISA ETFs as unsecured wholesale funding with 100% run-off.

The stricter classification means lower rates for deposits from the funds.

ETF manufacturers said banks have been implementing pricing changes over the past three months, with the effect on yields mostly flowing through before the Jan. 31 deadline, though negotiations are ongoing.

Raj Lala, president and CEO of Evolve ETFs in Toronto, said the yields could still change as manufacturers try to secure more competitive rates with banks.

“The conservative, almost worst-case scenario, is that we’re somewhere around overnight,” Lala said, referring to the Bank of Canada’s overnight lending rate, which is currently 5%. “But we’re all kind of [hoping] we can get a little bit more than that.”

Andres Rincon, head of ETF sales and strategy with TD Securities, said there’s likely to be divergence among banks in the rates offered. While the OSFI rules are clear on how to classify deposits, “we’ll see a different value to these deposits across the banks for a multitude of reasons,” he said. “And because of that, the rates will be different.”

On Oct. 31, when OSFI announced the changes, HISA ETFs offered gross yields between 5.3% and 5.5%. As of late January, gross yields on most of the funds clustered around the BoC’s 5% lending rate.

TD Securities initially predicted a 50-basis-point drop in yields, but issued a report in January saying yields may fall even further. 

Some of the funds have adjusted holdings in response to OSFI’s review, while others already made use of flexibility in their prospectus. Daniel Straus, managing director of ETF research and strategy with National Bank Financial, said he expected the funds, which are “essentially active,” to adjust allocations based on what the banks offer.

“[Funds] have the freedom stated in their prospectus to modify and rotate their portfolios to other safe short-term instruments,” he said.

“Even though some of these ETFs may have ‘savings’ in their name [or ticker], that’s not exactly what they are. They’re not the same thing as a direct savings account.”

About 10% of the $8.5-billion CI High Interest Savings ETF (CSAV) was invested in Canadian government issues as of the end of December. The $5.6-billion Purpose High Interest Savings Fund (PSA), which last year expanded its investment objective to include money-market securities, had almost 30% of the fund in Canadian treasury bills as of Jan. 30.

Vlad Tasevski, chief operating officer and head of product with Purpose Investments Inc., said Purpose will try to optimize yield by being “agnostic” about the Purpose fund’s holdings and adjust between savings accounts and treasuries. “That’s why we’ve already redeployed a portion of those deposits away from those [savings] accounts into the Canadian treasuries,” he said.

The Ninepoint High Interest Savings Fund (NSAV), which also changed its investment objective last year, had 44% of the fund allocated to high-interest savings accounts as of late December, and roughly half split between short-term corporate bonds and banker’s acceptance notes. As a result, the Ninepoint ETF was offering higher yields than other HISA funds (5.40% on Dec. 31).

The $5.2-billion Evolve High Interest Savings Account Fund (HISA) and the $4.4-billion Horizons High Interest Savings ETF (CASH) were still allocated entirely to bank deposits as of late January. Though funds both can invest in other vehicles, the companies said they have no plans to do so.

OSFI’s review shook up the investment product landscape before the new liquidity rules were announced in October as manufacturers launched money-market funds that don’t rely on bank deposits.

Some money-market funds and GICs now yield more than HISA ETFs, but Lala said there’s a tradeoff, with investors giving up some of the liquidity offered in the savings ETFs.

More than $9.3 billion flowed into money-market and cash ETFs last year, according to National Bank Financial, though flows slowed later in the year and both categories saw redemptions in December.

A report from TD Securities attributed the decline in popularity of HISA ETFs in part to the stricter liquidity rules, but investors could also be looking to redeploy cash.

“We’ve been in this pretty big bull run in the equity markets where people decide that they want to actually move some money off the sidelines and into the market,” Lala said.

Straus noted flows into other fixed-income products, namely aggregate and longer-term bond funds, as investors anticipate rate cuts and take advantage of securities that were beaten up in 2022.

“When the markets are ripping, people pull money from underneath their mattresses,” Straus said.

National Bank of Canada is the largest deposit taker of HISA funds, followed by Bank of Nova Scotia, CIBC and Bank of Montreal, according to TD Securities.