One of the most popular ETF categories among Canadian investors throughout 2022 and 2023 were funds holding deposits in high-interest savings accounts, or HISAs.
These ETFs act as the functional equivalent of money market funds, paying out yields that move in lockstep with interest rates and offering virtually no market risk.
As bond ETFs lost value during the rising rate environment, investors flocked to these ETFs as a lower risk alternative to traditional fixed income, and a more liquid alternative to GICs.
However, a new competitor just debuted. On April 12th, Horizons ETFs launched both the Horizons 0-3 Month U.S. T-Bill ETF (UBIL.U) and the Horizons 0-3 Month T-Bill ETF (CBIL), tracking ultra-short maturity government bond issues from the U.S. and Canadian governments respectively.
Let's take a deep dive into these two ETFs and assess how they can fit into a portfolio:
UBIL.U ETF: The U.S. version
UBIL's holdings are held in U.S. government Treasury Bills, also known as "T-Bills". T-Bills are universally regarded as a "risk-free" asset due to a unique combination of virtually no credit or interest rate risk.
When it comes to credit risk, T-Bills are as it gets. The chance of the U.S. Federal government defaulting on its debt is extremely remote. By virtue of being backed by the full faith and credit of the most powerful economy in the world, T-Bills remain the "flight to safety" asset for many.
Given their short maturities of between zero to three months, T-Bills also possess a very short, almost minimum duration, which is a measure of interest rate sensitivity. When rates rise, the price of T-Bills will barely budge, which makes them suitable for short-term investors.
Let's look at UBIL.U. Firstly, investors need to note that this ETF is traded in U.S. dollars, hence the ".U" extension. Right now, it charges a 0.12% management fee, with the full expense ratio to be determined at a later time. As of April 19th, 2023, the ETF has attracted just over $36 million in AUM.
The advantages of UBIL.U over buying individual Treasury issues are twofold. Firstly, it's convenient. Buying foreign bonds as a Canadian investor can be somewhat complicated. Secondly, UBIL pays monthly interest with a target annual yield of 4.25% right now, which will move in line with U.S. interest rates.
CBIL ETF: The Canadian version
What if you're investing in Canadian dollars? The alternative is CBIL, which instead holds Canadian government T-Bills also possessing a maturity of three months or less.
Like U.S. T-Bills, Canadian government T-Bills also possess very high credit quality and low duration. There is an argument to be made that Canadian T-Bills are less "safe" given that our currency isn't the world's reserve currency and our comparatively small economy, but I wouldn't worry about that.
My point is, if you have faith in the Canadian federal government to make good on its debts, then there's no reason to worry about a default. Canada is a highly developed nation with a sound economy and the rule of law. Investing in Canadian T-Bills is nothing like buying, say, Russian bonds.
Currently, CBIL charges a management fee of 0.10% and has attracted just over $28 million in AUM since its inception. Right now, the ETF is targeting an annual yield of 4.23% paid on a monthly basis, which again can rise and fall depending on prevailing interest rates in Canada.
The verdict on these ETFs
I think these ETFs are a great alternative to the existing HISA ETFs, especially for investors unable to access the latter due to their choice of brokerage or worried about possible regulations impacting them.
The underlying assets for both UBIL.U and CBIL are highly liquid, so I wouldn't be worried about low AUM or trading volume for either ETF. This is a concern many investors have with new ETFs, but it shouldn't be an issue with these ETFs given the nature of their holdings.
What I like in particular is the combination of monthly payouts and low fees. While the overall expense ratio is yet to be determined, a 0.10% - 0.12% expense ratio makes these ETFs highly competitive with existing ultra short-term bond ETFs in the Canadian market.
In any case, UBIL.U and CBIL provide Canadian investors with yet another affordable and transparent alternative to HISA ETFs and GICS for their cash management needs.
This content was originally published by our partners at the Canadian ETF Marketplace.