The Office of the Superintendent of Financial Institutions (OSFI) issued a ruling on Oct. 31, 2023, that requires banks taking deposits from ETF issuers to have 100% of the capital needed to support those deposits in case they get rapidly withdrawn.
The most popular HISA ETFs
The reason for HISA ETFs’ popularity with investors is not hard to see. After a couple of the worst years ever for fixed income, they present a place to park your money with essentially zero volatility, combined with yields tracking ever-higher interest rates (now more than 5%). Not only do these funds find some of the best deals in savings accounts for you, but you can also buy and sell them on a whim.
As of Oct. 31, the CI High Interest Savings ETF (CSAV) ranked as the fourth largest ETF in Canada, with $8.7 billion in assets under management, CEFTA figures show. And HISA ETFs’ appeal seems undiminished, even as fixed income reasserts its position in investors’ portfolios with interest rates expected to top out soon, if they haven’t done so already. Over the month of October, the Horizons High Interest Savings ETF (CASH) and CSAV were the number two and number three ETFs in Canada, respectively, in net inflows.
Are HISA ETFs safe?
The sudden shift of capital into HISA ETFs caught the attention of the OSFI, which oversees banks operating across the country. The regulator was concerned about the potential for instability in the banking system should investors withdraw their money as fast as, or faster than, they deposited it, as the ETF format enables them to do. The OSFI undertook a public consultation process last spring, considering “systemic concerns with contagion, potential for regulatory arbitrage, and the absence of guarantees or deposit insurance typically found with traditional savings accounts,” it said in its ruling on Hallowe’en.
When new regulations around HISA ETFs take effect
The OSFI ruled that, as of Jan. 31, 2024, “any deposit-taking institutions exposed to such funding must hold sufficient high-quality, liquid assets, such as government bonds, to support all HISA ETF balances that can be withdrawn within 30 days.”
What it means for Canadian investors
While the decision is directed at the banks offering HISAs, it will have indirect effects on the ETFs holding these savings accounts. Some Canadian investors have expressed concern that the new rules might restrict the number of banks taking deposits from fund companies and might constrain yields as a result.
An analysis by TD Securities suggested yields would drop around half a percentage point come January. However, Naseem Husain, senior vice president and ETF strategist at Horizons ETFs, emphasizes the upside of regulatory clarity.
“At the end of the day, the OSFI decision regulates and confirms the ongoing viability of HISA ETFs, ensuring they’re here to stay and will continue to be a viable investment option,” says Husain. “This decision will likely lead to greater competition in the space from a product perspective, and that could incentivize more investors to consider using HISA ETFs in their portfolios.”
Michael McCullough
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