Over the last couple of years, central banks globally embarked on a path of tightening monetary policies. With a more hawkish stance, interest rates were driven up. For long-term bondholders, this spelled trouble as bond prices move inversely to interest rates.
However, for short-duration fixed income investors, this became an opportunity. Instruments that previously offered meager returns started fetching competitive yields. This scenario presented a silver lining for those investors with an eye on cash management and short-term liquidity.
As the search for yield intensified, high-interest cash ETFs became a focal point for Canadian investors. These instruments, designed to capture higher yields available in the market, began to represent an attractive parking place for cash. They offered better returns than traditional savings accounts, while also providing liquidity.
Adding to the mix, providers like Horizons ETFs and Guardian Capital made significant strides, launching Treasury Bill (T-Bill) ETFs. T-Bills, being short-term government securities, are considered very low risk. With the enhanced interest rate environment, the yields on these instruments also became highly competitive, making T-Bill ETFs a strong contender in an investor's arsenal.
While the attention has predominantly been on high-interest cash ETFs and T-Bill ETFs, these aren't the sole options available to Canadians for managing cash within investment accounts. Here's all you need to know about the other options for your dry powder: ultra-short term bond ETFs and money market ETFs.
Navigating Money Market ETFs: Balancing Yield, Liquidity, and Risk
Money market ETFs have increasingly become an integral part of the investor's toolkit, especially for those seeking stable returns coupled with higher liquidity.
Like their mutual fund counterparts, these instruments offer a balance between short-term maturity and diversified holdings, and while they provide many benefits, they also have specific characteristics and risks that investors should be aware of.
Diving deeper into the features of money market ETFs, we find that they hold a mix of short-term debt instruments. These include commercial paper, which is unsecured, short-term debt issued by corporations mainly for the financing of payroll, accounts payable, and inventories. Treasury Bills (T-Bills), another staple of these ETFs, are government-issued and are among the safest debt instruments available. Lastly, they also encompass banker's acceptances, which are short-term debt instruments guaranteed by a bank, primarily used in international trade.
A defining characteristic of these ETFs is the maturity of their holdings. Instruments within money market ETFs usually mature in less than one year. This short duration aims to minimize the interest rate risk, ensuring that the principal value remains stable over time.
However, it's crucial to acknowledge the risks that come with money market ETFs. First and foremost, unlike Guaranteed Investment Certificates (GICs), they aren't insured by the Canada Deposit Insurance Corporation (CDIC). This means there's potential for some loss of principal in the unlikely event of a default by one of the underlying assets.
Additionally, while T-Bills are almost risk-free, the ETFs' inclusion of commercial paper and banker's acceptances introduces a degree of credit risk. Although this risk is minimal, it's still higher than that of high-interest cash ETFs and T-Bills alone. Nevertheless, despite these risks, money market ETFs present a lower risk profile than regular bond ETFs, attributed to their short maturities and diversified holdings.
The following money market ETFs are available to Canadian investors:
- Purpose Cash Management Fund (MNY)
- iShares Premium Money Market ETF (CMR)
- BMO (TSX:BMO) Money Market Fund ETF (ZMMK)
- CI Money Market ETF (CMNY)
Exploring Ultra-Short Term Bond ETFs: Yield, Duration, and Risk Dynamics
Ultra-short term bond ETFs have solidified their position in the investment landscape as an appealing option for investors desiring enhanced returns without significantly extending their investment horizon.
At the core of ultra-short term bond ETFs are a variety of debt instruments that slightly exceed the typical duration of those found in money market funds. This means that they venture a bit further out on the yield curve, aiming to capture better returns.
While they still prioritize high-quality holdings, the nature of their investments might introduce slightly elevated levels of credit risk. This isn't necessarily a drawback but rather a trade-off, as this additional risk is typically compensated with a higher yield.
You get the usual exposure to T-Bills and commercial paper, but also some longer-duration investment-grade corporate bonds from various sectors, and on occasion even high-yield bonds and floating rate notes. Each ultra-short term bond ETF is unique, so be sure to check their holdings carefully.
To put it simply, ultra-short term bond ETFs represent a middle ground for investors looking to step up from the safety of money market funds without diving deep into longer-duration bond funds. They offer an attractive yield pick-up, albeit with slightly more risk.
The following ultra-short term bond ETFs are available to Canadian investors:
- Franklin Bissett Ultra Short Bond Fund (FHIS)
- BMO Ultra Short-Term Bond ETF (ZST)
- Horizons Active Ultra-Short Term Investment Grade Bond ETF (HFR)
This content was originally published by our partners at the Canadian ETF Marketplace.