The main difference between the CASH.TO ETF and a GIC is that the ETF is publicly traded and comprised of high-interest savings accounts from leading Canadian banks while the GIC is provided by a single institution as a financial instrument for a client.
Additionally, the CASH.TO ETF is also highly liquid and can be transacted at any time while capital in GICs is typically locked in for a fixed term
Overview of the CASH.TO ETF
The CASH.TO ETF is a Canadian exchange-traded fund that aims to maximize savings during high interest rate environments.
It invests in low-risk assets, namely the deposit accounts of the large Canadian banks.
Traditional savings accounts at banks have comparatively lower yields.
Higher-yielding instruments such as GICs have lock-up periods where investors cannot access their funds.
CASH.TO offers the best of both worlds by offering a yield that is comparable to high-yielding instruments while offering strong liquidity through trading availability on a stock exchange.
The fund’s primary goal is to offer investors a low-volatility investment option that ensures stable income and capital preservation.
The fund achieves this objective by generating interest income for investors, which is then distributed as monthly dividends per share.
As such, the ETF is best used by people looking to park their excess savings into a low-risk fund or save towards the purchase of an asset or discretionary item (such as a vacation).
Performance and Returns of CASH.TO
When evaluating the performance and returns of CASH.TO, it is important to consider key metrics and historical data.
CASH.TO consistently delivers strong returns with an average annual gross yield of 4.65% as of July 15, 2024.
The fund provides investors with a steady and reliable passive income stream through monthly dividends.
Annualized distribution yield as of July 16, 2024 was 4.55%.
Effectively this means that all earned interest is paid out as shareholder dividends.
CASH.TO also has a low management expense ratio of 0.11%, ensuring that a greater percentage of the fund’s returns goes to investors.
This makes it a cost-effective option for individuals looking to invest.
Benefits of CASH.TO
The benefits of investing in CASH.TO are plentiful.
Primarily, it provides a convenient way to earn interest on cash accounts and offers high liquidity on the Toronto Stock Exchange with a last 12-month average of 1,300,845 units exchanging hands daily (as of July 15, 2024).
Investing in the ETF also offers the advantage of generating income through regular distributions, which can serve as a valuable source of passive income.
Investors can achieve diversification by gaining access to a diverse portfolio of high interest savings accounts, including:
- National Bank Cash Account (47.25%)
- Scotiabank Cash Account (36.98%)
- CIBC Cash Account (15.75%)
- Cash (0.02%)
As of July 16, 2024
This broad allocation of investments across multiple accounts and financial institutions helps mitigate risk.
Risks of CASH.TO
Despite all these benefits, CASH.TO, like any investment, carries risks.
Market fluctuations and changes in interest rates can impact its performance.
Additionally, there is an opportunity cost of investing in CASH.TO versus potentially higher-yielding savings accounts or ETFs, including the PSA as listed below.
The CDIC also only insures deposits held by member institutions up to a maximum of $100,000.
Since funds in the CASH.TO ETF are technically not classified as member institution deposits, ETF holders would not receive insurance coverage in the rare case thatany of the banks fail.
Overview of GICs
A Guaranteed Investment Certificate (GIC) is a low-risk investment option that is best suited for individuals that value security when seeking to grow their savings.
By nature, GICs guarantee a fixed rate of return over a specific time period (ranging from a few months to a few years).
In general, the longer the term, the higher the interest rate offered by the GIC.
The Bank of Canada interest rate heavily influences GIC rates available to Canadians.
To invest in a GIC, the investor deposits an amount and selects a fixed term.
During the term, the money is locked in and cannot be accessed or withdrawn without incurring a penalty.
Benefits of GICs
The most important benefit of a GIC is the stability it offers.
Particularly for short-term goals such as the purchase of a car or vacation, GICs are ideal tools to grow your savings at a steady rate to finance the upcoming purchase.
GICs are also a relatively low-risk option. Unlike ‘risk assets’ like stocks and ETFs, GIC returns are guaranteed.
Additionally, they are also insured for up to $100,000 by the Canada Deposit Insurance Corporation.
For investors seeking a low-maintenance investment option, GICs are a top investment vehicle to consider.
Due to their predictability of returns and wide availability at most financial institutions, they generally require little to no monitoring, and can be accessed by almost any investor – from novice to expert.
An added benefit of the GIC is the tax-advantaged growth it offers when implemented within a registered account such as an RRSP, TFSA or RESP.
As these accounts are largely focused on long-term goals such as retirement or a child’s education, the GIC can enable steady, predictable growth that is free from the tax burdens of a non-registered investment account.
Drawbacks of GICs
Despite the safety and stability that GICs offer, there are some considerations to keep in mind as well.
While the fixed return aspect of a GIC can be reassuring for investors, it also represents a risk in certain market circumstances.
Particularly in periods of high inflation, the fixed rate may not be enough to outpace the price growth of other goods and services in the economy.
This means that your purchasing power as a GIC investor declines even though you have opted to invest your money rather than hold it in cash.
There is also an opportunity cost involved with holding funds in a GIC.
In periods where equity markets are soaring, the returns of a GIC are relatively lackluster in comparison.
In addition to the above, it should be noted that GIC funds are locked in if you opt for a non-cashable GIC.
This means that any withdrawal of deposits prior to the maturity of the GIC will incur a penalty.
However, even if you opt for a cashable GIC that allows for early withdrawals, you then have to contend with a lower rate offered than the one on non-cashable GICs.
Lastly, there is usually a minimum deposit requirement of $500 to $1,000 depending on the institution you set up a GIC with.
Comparison: CASH.TO vs GICs
While both CASH.TO and GICs offer similarly low-risk investment returns, there are also some important aspects to keep in mind.
Similarities between the two are as follows:
1. Guaranteed growth
Both GICs and the CASH.TO ETF offer guaranteed growth within a fixed time period.
While the rates of return differ between the two, the ‘guaranteed’ nature of returns differs from other assets such as stocks where your capital may fluctuate to the positive or negative depending on market circumstances.
2. Low risk
Another commonality between the two is that they represent low risk to the investor.
Returns of both CASH.TO and GICs are contingent on the long-term stability of Canadian financial institutions which are among the best-regulated and managed in the world.
3. Great for saving
Lastly, both the GIC and the CASH.TO ETF are primarily useful for investors seeking to save up towards a purchase rather than those seeking rapid growth.
There are also some differences to be aware of:
1. Lock in periods
CASH.TO is traded as an ETF where you can transact your capital at any time without any penalty.
On the other hand, a GIC is typically structured with a lock-in period wherein you cannot make withdrawals without incurring a penalty.
2. Terms
A GIC has a fixed term associated with the investment.
At the end of the fixed term, the investor receives back the principal amount invested and the interest earned during the holding period as stipulated by the annual rate and term.
On the other hand, there is no fixed term for holding CASH.TO.
3. Rates
In most cases, the GIC will offer higher rates to investors to compensate them for the fact that they have to lock in their money for a fixed time period.
Which Option is Best for You?
Consider your financial goals: Determine which option is best for you – liquidity, safety, or higher potential returns.
Evaluate risk tolerance: Assess your comfort with investment fluctuations to determine which option is best for you.
ETFs, which can have higher volatility compared to GICs, may not be the best choice if you prefer safety.
Time horizon: Determine how long you are willing to invest to decide which option is best for you.
GICs typically have fixed terms, while ETFs can be bought or sold at any time, providing more flexibility.
Income needs: Consider if you need a regular income stream to choose the option that is best for you.
GICs provide fixed interest payments, making them suitable if you require a stable income.
On the other hand, ETFs offer potential dividend income, which may be more suitable if you don’t need regular income.
Investment knowledge: Evaluate your understanding of the investment options to determine which option is best for you.
If you have limited knowledge and prefer a simpler, more stable investment, GICs may be the best option.
If you are knowledgeable and willing to monitor your investments, ETFs may be more suitable for you.
