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Bay Street is fighting over high-interest ETFs that retail investors love, sparking a federal review, say sources
March 9, 2023
4:44 pm
kesa
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Bay Street is fighting over high-interest ETFs that retail investors love, sparking a federal review, say sources

https://www.theglobeandmail.com/business/article-banks-high-interest-savings-etfs/

The federal banking watchdog has launched a review of cash exchange-traded funds, one of Canada’s most popular retail investments, amid a Bay Street spat that stems from surging demand for them.
The Office of the Superintendent of Financial Institutions, which regulates banks, launched its review in the fall and is studying any liquidity concerns posed by these ETFs, according to three financial industry sources. The Globe and Mail is not identifying the sources because they were not authorized to speak publicly about the matter.
Cash ETFs are hybrid funds that function like high-interest savings accounts, yet offer much better interest rates – around 4.99 per cent annually. These rates make cash ETFs similar to guaranteed investment certificates. But unlike GICs, which are sold on fixed terms, cash ETF investors can take their money out at any time, just like they could with bank accounts.
Cash ETFs are able to pay high interest rates because select banks offer them access to wholesale funding – that is, the banks pay the funds premium interest rates they would normally reserve for institutional clients, or for large orders. Similar rates would be available to wealthy retail investors who wanted to deposit millions of dollars.

[rest of article text removed]

March 9, 2023
5:03 pm
mordko
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…or the big banks could just cut margins and bonuses a notch, raise HISA interest rates and attract liquidity. Problem solved.

March 9, 2023
5:14 pm
AltaRed
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mordko said
…or the big banks could just cut margins and bonuses a notch, raise HISA interest rates and attract liquidity. Problem solved.  

The banks do have the option to raise their ISA rates to about the same level if they chose to do so, albeit there is probably 10bp or so of administrative costs administering million of smaller accounts to retail investors versus a few billion dollars that each of CASH or CSAV or PSA (as institutions) would have in those deposits.

March 9, 2023
5:22 pm
Dean
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kesa said

- Bay Street is fighting over high-interest ETFs that retail investors love, sparking a federal review, say sources

. . .

- The Globe and Mail is not identifying the sources because they were not authorized to speak publicly about the matter.

. . .

.
... a.k.a. unsubstantiated 'Hearsay'

Meh sf-confused

    Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

March 9, 2023
5:50 pm
Norman1
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OSFI is right to investigate "cash" ETF's. What some of the ETF's consider to be "cash or cash equivalents" is not what one would think of as cash deposits.

Horizons High Interest Savings ETF's 2021 annual financial statements, for example, define "cash or cash equivalents" as follows:

Cash and cash equivalents consist of cash on deposit and short-term, interest bearing notes with a term to maturity of less than three months from the date of purchase.

March 9, 2023
5:51 pm
mordko
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Banks asking the regulator to limit competition is too crazy. You can’t make it up.

March 9, 2023
5:54 pm
mordko
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Norman1 said
OSFI is right to investigate "cash" ETF's. What some of the ETF's consider to be "cash or cash equivalents" is not what one would think of as cash deposits.

Horizons High Interest Savings ETF's 2021 annual financial statements, for example, define "cash or cash equivalents" as follows:

Cash and cash equivalents consist of cash on deposit and short-term, interest bearing notes with a term to maturity of less than three months from the date of purchase.

  

Dictionary seems to agree with Horizon’s definition.

March 9, 2023
5:57 pm
Norman1
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Try taking a "cash equivalent" term deposit that matures in two months to the grocery store and see if the store will accept it as "cash" for groceries.

March 9, 2023
6:13 pm
mordko
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Horizon operates funds rather than takes anything to the grocery store so does not seem relevant.

This is: https://www.investopedia.com/terms/c/cashandcashequivalents.asp#:~:text=Cash%20and%20cash%20equivalents%20refers,of%20less%20than%2090%20days.

March 9, 2023
6:18 pm
mordko
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Also, I have a sneaking suspicion that every single institution you use for HISAs does not keep all of your deposits in the form that can be taken to a grocery shop.

March 9, 2023
6:56 pm
kesa
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the yield p/u is enticing but I’m not risking it for a ‘break the buck’ type scenario.

March 9, 2023
7:14 pm
Norman1
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mordko said
Also, I have a sneaking suspicion that every single institution you use for HISAs does not keep all of your deposits in the form that can be taken to a grocery shop.

Banks and credit unions don't need to because they have agreements with the Bank of Canada or their credit union central to borrow grocery-store-accepted cash against what the HISA money has been put into.

What central bank or credit union central does that "cash" ETF have a backstop agreement with?

March 9, 2023
7:46 pm
savemoresaveoften
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kesa said
the yield p/u is enticing but I’m not risking it for a ‘break the buck’ type scenario.  

Norman1 said

mordko said
Also, I have a sneaking suspicion that every single institution you use for HISAs does not keep all of your deposits in the form that can be taken to a grocery shop.

Banks and credit unions don't need to because they have agreements with the Bank of Canada or their credit union central to borrow grocery-store-accepted cash against what the HISA money has been put into.

What central bank or credit union central does that "cash" ETF have a backstop agreement with?  

What is more relevant is whether those cash bearing instrument are govt or corp paper. If it is 100% government issues only, then a much lower chance of default and I will say the chance of breaking the buck is close to zero. After all that is the ultimate concern as an investor, not the definition of what cash is.

March 9, 2023
8:46 pm
mordko
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Norman1 said

What central bank or credit union central does that "cash" ETF have a backstop agreement with?  

Tier 1 Chartered Banks: https://horizonsetfs.com/ETF/cash/#holdings.

You don’t have to use these ETFs but none of it is relevant to the topic unless you can point to the regulation any of this breaks.

March 9, 2023
9:19 pm
Norman1
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Answer the question: What central bank or credit union central does that "cash" ETF have a backstop agreement with?

That "cash deposits" statement is a lie. A two-month deposit note is not cash. Who will be advancing cash for that deposit note to the ETF before maturity, if needed?

If it really is in 100% cash in bank accounts accessible anytime, then why the qualifier in their annual report?

I had another look at the annual report and at the June 2022 interim report. Still can't tell how much of that "cash and cash equivalents" is actually cash deposits. I guess we'll have to see what OSFI finds and whether that "100.00% cash deposits" statement is "cash" or "cash or cash equivalents".

The definition is important. Would the Canadian Western Bank Flex Notice Account mentioned previously be considered a "cash deposit"?

March 9, 2023
10:06 pm
co
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savemoresaveoften said

What is more relevant is whether those cash bearing instrument are govt or corp paper. If it is 100% government issues only, then a much lower chance of default and I will say the chance of breaking the buck is close to zero. After all that is the ultimate concern as an investor, not the definition of what cash is.  

I agree. In fact with the same rate I’d take a three-month federal government treasury ETF over HISA/daily deposit at a Tier 1 bank any day. It exists on the US market but as far as I know not on the Canadian market.

On the other hand if it’s holding three-month bank corporate debt then it could be an issue.

The closest central banking concept to “grocery cash”-like savings would be the Canadian Overnight Repo I guess? I don’t think there’s a fund that tracks that but would love to be proven wrong.

March 10, 2023
3:55 am
mordko
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Norman1 said
Answer the question: What central bank or credit union central does that "cash" ETF have…

Sorry, I don’t have to answer random questions which are not relevant to the topic. If you can point to the regulation(s) which are being broken then we can continue this discussion.

March 10, 2023
4:34 am
Bill
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If I understand right the issue is not safety of funds but liqidity. These ETFs do not have the access to liquid cash that the HISA (and other) banks do, if needed during a run on deposits. Is what I'm understanding here (for me there's no point posting Globe links behind a paywall).

But if this is disclosed as required at time of purchase is there a problem?

March 10, 2023
4:54 am
mordko
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None of these claims are made in the Globe article. The article does not claim that any of the Tier 1 banks’ funding used by these ETFs is not liquid.

March 10, 2023
5:50 am
savemoresaveoften
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What is not clear to me is the following:

Most of these are open ended funds, so they create and collapse units depending on the net inflow / outflow etc. If investors do a massive withdrawal over a very short period, can they collapse it as quickly (meaning they just withdraw the deposit from the banks getting the funding). Or there is a limit in the contract how quickly they can withdraw from the bank getting the funding.
The 3mth near cash equivalent holding should ONLY be an issue IF its a BIG part of the total deposits. If its govt paper, then maybe there is an immediate buyer. If its the funding bank's paper, not so much ?

TD and RY blocking investors from buying them is just a business decision to protect their cheap funding source, not to protect the investors for sure.

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