With HISA ETFs under review, manufacturers push alternatives

A delay in regulatory changes to high-interest savings ETFs is good news for manufacturers and investors, but issuers are still hedging their bets with different types of cash products.

Last week, the Office of the Superintendent of Financial Institutions (OSFI) said it would wait until the fall to update liquidity adequacy requirements for high-interest savings account (HISA) ETFs. Banks will be expected to align with any changes by January 2024, rather than being required as of Aug. 1 to classify deposits from HISA ETFs as if they will fully “run off.”

Some providers had expressed concern that banks reclassifying deposits from HISA ETFs would lead to lower rates on the products.

Raj Lala, president and CEO of Evolve ETFs in Toronto, called OSFI’s decision “a positive step” while noting that manufacturers and investors will have to wait until the fall for longer-term clarity.

“We’re expecting that the status quo on the existing products will remain at least until fall and most likely through the rest of the year,” Lala said.

Evolve’s HISA ETF and competing products from CI Global Asset Management, Purpose Investments Inc. and Horizons ETFs Management (Canada) Inc. offer net yields of 5.2%–5.3%.

But those companies — and other competitors — are launching alternative cash-like products that offer slightly lower rates but don’t rely on bank deposits.

Guardian Capital LP was the latest to enter the space with a pair of ETFs and mutual funds that invest in short-term treasuries. The Guardian Ultra-Short Canadian T-Bill Fund (TSX:GCTB) invests primarily in Government of Canada and provincial treasuries with remaining maturities of three months or less, while the Guardian Ultra-Short U.S. T-Bill Fund (TSX: GUTB.U) invests in U.S. treasuries with the same duration.

Mark Noble, senior vice-president of retail strategy with Guardian Capital, described the rush into non-HISA cash-like ETFs as “almost an arm’s race.”

HISA ETFs are “one of the great disrupters in asset management over the last five years,” he said, amassing billions as interest rates have risen and providing independent asset managers an entry point into “the very lucrative treasury market and deposit-taking market of the banks.”

Without clarity from OSFI, any discussion about HISA rates coming down is only speculation, Noble said. Still, firms are making sure they have alternatives to offer.

“This is a category that has some vulnerability due to regulatory issues,” he said. “There could be a substantial pivot into other cash alternatives that also pay higher rates than what would typically be generated by the internal savings products,” such as banks’ retail high-interest savings accounts and GICs.

The Guardian funds, which charge a management fee of 0.12% for the ETF and F series (0.37% for the A series) are targeting gross yields of 4.95% for the Canadian fund and 5.19% for the U.S. fund.

That’s roughly in line with other cash management products whose gross distribution yields range from around 4.5%–5% for the Canadian funds, and slightly more for the U.S. products.

The iShares Premium Money Market ETF launched in 2008 and enjoyed a long run as the only game in town before rising rates drew in competitors. BMO Global Asset Management launched its money-market ETF series almost two years ago and Purpose followed in September 2022.

Evolve and Horizons launched their products this past spring, and CI plans to introduce Canadian and U.S. money-market ETFs before the end of the month. In a sign of the category’s fierce competition, Evolve has waived the management fees on its cash management funds until the end of this year.

“With a money-market fund, you’re going to have some duration risk and you’re going to have some credit risk attached to it, whereas you don’t really have that for HISA funds,” Lala said.

But if HISA rates end up dropping and money-market yields are significantly better, the latter could become a more viable option.

And asset managers haven’t only moved into cash management funds as a safety net based on OSFI’s review, Lala said. Some big banks don’t allow HISA ETFs to be traded by their discount brokerages, so the money-market and T-bill funds provide options in those channels.