Answering Readers Questions on HISA cash deposits

Responding to my HISA Rates page, a reader recently asked me about three interest bearing investments:

Purpose ETF

The Purpose High Interest Savings ETF is an Exchange Traded Fund listed on the TSX which is composed of deposits held at various Canadian deposit taking banks, trust companies, and credit unions. According to their website, the fund currently holds deposits with the following institutions: National Bank of Canada, Manulife Bank of Canada, First West Credit Union, First Calgary Credit Union, Coast Capital SavingsProspera Credit UnionVancouver City Savings Credit Union, BlueShore Credit Union, Westminster Savings.

Any Canadian investor with a brokerage account able to trade on the TSX can invest in this ETF. Your rate of return will be linked to the interest received by the fund from these deposit taking institutions. Their rates will be similar (and sometimes higher) to the rates offered by the large(er) institutions offering High Interest Savings Account mutual funds. Investors can buy and sell the Purpose High Interest Savings ETF just like they would shares of stocks on the TSX, and I assume there is also a market maker working to ensure liquidity of this ETF.  I’m not sure about the advantages of using this ETF other than potentially receiving a modestly higher interest rate, but with today’s low interest rates, we’re talking about fractions of a percent.

For most individual investors, since they are usually under the insured limit ($100,000 for CDIC deposits) it doesn’t help to diversify their cash deposits. As long as your cash deposits are less than $100,000, my recommendation is to use a single HISA with the highest rate and switch only when a better rate becomes available.

The two USD money market funds

The CIBC and RBC US$ money market funds mentioned by a reader are US dollar Canadian money market mutual funds. Each of these funds invests in US dollar denominated money market investments such as commercial paper and various types of trusts and asset backed notes. These mutual funds should be considered low risk, but are not risk free. These mutual funds also are slightly higher risk than High Interest Savings Accounts because the creditworthiness of the securities in these mutual funds is slightly lower than the CDIC insured deposits found of HISAs. In the grand scheme of risk though, these two US dollar money market mutual funds are still low risk. If you are a Canadian based investor with a US dollar cash portion of your portfolio, these two mutual funds are probably a good place to park your cash, if you are willing to understand the risks, you will receive a higher rate of interest compared to straight insured cash deposits, and you’ll also receive a higher rate of interest compared to what you’ll get if you just leave the US dollars sitting in your account.

Lending Loop

Investing in P2P lending sites such as Lending Loop is probably on the higher risk side of the risk spectrum. As an investor, participating in a P2P site like Lending Loop means you will be making syndicated business loans. A small business might use Lending Loop to get a loan at a rate and terms that are better than what they could get from their bank, and your loan to them will make up a portion of the total amount they borrow. A common strategy for P2P lending is to take your investment and build a portfolio of loans to various borrowers over a range of credits and timeframes that suit your investment objectives. Since the market for P2P loans is still a lot less developed than other forms of lending in Canada, as an investor, you should understand that you’re taking more risk and accepting a potentially higher reward.

P2P lending is not a substitute for a cash deposit, but it can make up a portion of fixed income portfolio, with a risk profile closer to high yield bonds than to cash.