One of the toughest jobs in investing today is finding a productive place to park cash you want to deploy into the markets at a later date.
Never mind the arguments about how holding cash to invest later is a form of market timing and a long-term drag on returns. People are holding a lot of cash these days – that’s reality. Helping them earn at least a modest return on this cash is a step forward.
The inverted yield curve in June – short-term interest rates higher than long-term rates – is worrisome in that it shows investors are concerned about an economic downturn. But the inverted curve also means that short-term rates on cash and cash-equivalent investments are some of the most attractive available.
Let’s use T-bill rates as a proxy for cash returns. As of June 19, one-year T-bills offered a yield around 1.7 per cent. But that’s sort of a wholesale rate that only the biggest players in the investing universe get. A quick check of one particular online broker’s fixed income inventory found one-year T-bills priced to yield about 1.3 per cent. The difference between the wholesale rate and this retail rate is profit for the broker.
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Investment savings accounts are the best alternative for combining safety, convenience, lack of fees and at least somewhat competitive interest rates. They are essentially savings accounts packaged like no-load mutual funds for use in brokerage accounts. All online brokers offer these accounts, yet there’s a sad lack of disclosure about what particular options are available and the rates they offer. You may have to call your broker to find out which investment savings accounts are available.
The going rate for investment savings accounts in mid-June was 1.6 per cent. You’re lagging the latest inflation rate of 2.4 per cent at that rate, but you’re in line with T-bills and certainly doing better than the zero interest paid when cash sits uninvested in your brokerage account.
A higher yield of about 2 per cent after fees was available in mid-June from exchange-traded fund versions of the investment savings accounts, including the brand new CI First Asset High Interest Savings ETF (CSAV-T) and the well-established Purpose High Interest Savings ETF (PSA-T). Trading commissions will cut into your returns from holding these funds, unless you deal with a broker that waives these charges. Questrade and Virtual Brokers charge nothing to buy ETFs, but regular commissions to sell. National Bank Direct Brokerage waives buy and sell commissions if you buy ETFs in blocks of 100 or more shares.
For U.S. cash piling up in a U.S.-dollar registered retirement savings plan, tax-free savings account or cash account, consider an investment savings account denominated in U.S. dollars. Rates on these accounts in mid-June were commonly pegged at 1.7 per cent.
Rob Carrick