The latest Bank of Canada rate cut is working its way through the entire lineup of products for investors who want to park cash.
But one of these investment options has emerged as the top choice for investors seeking both security and maximum yield. It’s the money market fund, which can be bought in both an exchange-traded fund or mutual-fund format.
Money-market funds can hold a mix of government-issued treasury bills and short-term corporate borrowings in what’s known as the money market. Safety comes from the fact that holdings in a money-market fund mature in less than a year, often 180 days or less. Also, these securities are issued by entities with strong credit ratings.
Yields on money-market funds were around 3.5 per cent before the Bank of Canada trimmed its overnight rate by 0.25 of a percentage point on Wednesday. Expect yields to come down more or less in line with this cut.
This is exactly what’s happening with investment savings accounts, which hold assets in bank savings accounts and are bought and sold like mutual funds. Example: The RBC Investment Savings Account yield is down to 2.55 per cent from 2.8 per cent.
Another contender for investors with cash is the high-interest savings account ETF, a product that hit its stride as interest rates peaked. Falling rates have slashed yields back to around 2.9 per cent, if you factor in the latest Bank of Canada rate cut. HISA ETFs keep their assets in bank savings accounts as well.
Money-market funds don’t offer quite the security of investment savings accounts, which are eligible for coverage through Canada Deposit Insurance Corp. HISA ETFs are not covered by deposit insurance, but you have the comfort of knowing your money is held by banks and not invested in marketable securities.
What makes money-market funds relevant to cautious investors is the fact that their unit price is more or less fixed. With money-market ETFs, for example, there’s a floor price of maybe $50 or $100. This price gradually rises a tiny amount through the month to reflect the accruing interest payment, then resets back to the floor price. Money-market mutual funds typically have a unit value set at $10.
A sub-category of money-market funds holds strictly government T-bills. There’s a little safety in these funds because governments are a lesser credit risk than corporations but expect a slightly lower yield.
Mind your brokerage costs when choosing a cash parking spot. Investment-savings accounts cost nothing to buy or sell, and the same generally applies to money market mutual funds. ETFs of any type can be purchased at no cost from some brokers, while others charge as much as $9.99 per trade.