High Interest Savings Account (HISA) vs Cash ETF Canada

The main difference between a High-Interest Savings Account (HISA) and a Cash Exchange-Traded Fund (Cash ETF) is that a HISA is a type of savings account that offers a higher interest rate compared to a regular savings or checking account, while a Cash ETF is an investment fund that invests in short-term, low-risk fixed-income securities such as government bonds, treasury bills, or money market instruments.

A HISA is typically offered by banks and financial institutions and individuals can earn interest on their savings while maintaining the flexibility to access their funds whenever needed, while Cash ETFs aim to provide investors with returns that are similar to the returns generated by holding low-risk or risk-free assets.

Both HISAs and Cash ETFs have their own sets of benefits and drawbacks.

HISAs offer stability, ease of access, and guaranteed returns.

They are suitable for individuals who prioritize the safety of their funds and want easy access to their money.

HISAs may have lower returns compared to other investment options and may be subject to fees or minimum balance requirements.

In contrast, Cash ETFs offer the potential for higher returns compared to HISAs while still providing liquidity.

They can be bought and sold on the stock market like other ETFs, offering the flexibility of trading.

Cash ETFs are not guaranteed and are subject to market fluctuations and potential risks.

When comparing HISAs and Cash ETFs, several factors should be considered.

These include liquidity, returns, risk, and accessibility.

Each individual’s financial goals, time horizon, and risk tolerance will play a role in determining which option is most suitable.

What is a High-Interest Savings Account ?

A high-interest savings account, also known as a high-yield savings account, is a type of savings account that offers a higher interest rate compared to regular savings accounts.

These accounts are typically provided by banks or credit unions and are insured by the government up to a certain amount, making them a secure option for savers.

The main advantage of a high-interest savings account is that the money deposited into it earns interest over time, allowing it to grow at a faster rate than it would in a regular savings account.

The interest rate on these accounts can vary, but it is generally higher than the average inflation rate, making it a desirable option for individuals looking to earn a return on their savings.

High-interest savings accounts are particularly beneficial for individuals who have specific financial goals, such as buying a house or going on a trip.

These accounts enable savers to not only set money aside for these goals but also earn interest on their savings, helping them reach their goals faster.

In summary, a high-interest savings account is a secure and rewarding option for individuals who are looking to grow their savings at a faster rate while also keeping their money safe.

How Does a HISA Work?

A High-Interest Savings Account (HISA) is simply a savings account.

To open a HISA, individuals can go to a bank or financial institution and provide the necessary identification and documentation.

Once the account is opened, individuals can deposit money and start earning interest.

The interest is usually calculated daily or monthly and added to the account balance.

It’s important to note that HISAs may have limitations on withdrawals and could require a minimum balance to earn the advertised interest rate.

When considering a HISA, individuals should compare the interest rates offered by different banks or financial institutions.

It is also crucial to consider any associated fees and the financial institution’s reputation.

Benefits of a HISA

There are various benefits of a High-Interest Savings Account (HISA).

HISAs offer higher interest rates compared to regular savings accounts, which allows money to grow at a faster rate.

This higher yield is a significant advantage for individuals looking to maximize their savings.

Another advantage is the stability of HISAs.

These accounts are low-risk investments, making them an ideal option for capital preservation.

With a HISA, individuals have the peace of mind knowing that their funds are secure and protected.

Liquidity is a key benefit of a HISA.

Unlike other investments, funds in a HISA can be easily withdrawn whenever needed, ensuring quick access to money.

This flexibility is particularly important for emergencies or unexpected expenses.

Most HISAs are CDIC insured, providing an extra layer of protection for depositors.

This federal deposit insurance means that individuals’ deposits are safeguarded up to a certain amount, offering reassurance and reducing risk.

Drawbacks of a HISA

Compared to other investment options like stocks or bonds, HISAs offer lower interest rates which result in lower earnings on savings.

Another drawback is inflation risk.

A HISA may not keep up with inflation, causing a decrease in the purchasing power of your money over time.

Limited growth potential is also a drawback of HISAs.

They are low-risk investments with limited growth potential.

If you are aiming for higher returns on savings, it is important to consider other alternatives.

Some financial institutions may also have withdrawal restrictions.

What is a Cash ETF?

Cash ETFs, also known as money market ETFs, are exchange-traded funds that specialize in investing in short-term, low-risk securities such as Treasury bills and commercial paper.

These funds offer investors a convenient and accessible way to participate in the cash market while generating a modest return and maintaining high liquidity.

The primary objective of cash ETFs is to align with prevailing interest rates while diversifying risk through investments in a diverse portfolio of cash equivalents issued by different entities.

Cash ETFs are particularly suitable for investors who aim to safeguard their capital and require quick access to funds.

They can serve as a temporary parking solution for idle cash, providing a higher yield compared to traditional savings accounts.

Before investing in a cash ETF, it is important for investors to consider factors such as the expense ratio, liquidity, and underlying assets.

Understanding the fund’s objective and duration is crucial in aligning investment goals with the chosen strategy. 

Cash ETFs serve as a valuable tool to maintain stability, preserve capital, and achieve moderate returns.

How Does a Cash ETF Work?

A Cash ETF, also known as a cash exchange-traded fund, operates by replicating the performance of a cash index.

This type of investment fund provides investors with exposure to short-term fixed-income securities including government bonds, treasury bills, and commercial papers.

Cash ETFs function by pooling investors’ money to purchase a variety of cash equivalents.

These cash equivalents are highly liquid and have low-risk characteristics, making them suitable for capital preservation and easy access to funds.

A fund manager actively manages the cash ETF to ensure it mirrors the underlying cash index.

offers flexibility and convenience.

Cash ETFs have low costs, which makes them appealing to cost-conscious investors.

Benefits of a Cash ETF

Cash ETFs offer several advantages, including diversification, stability, liquidity, and income generation.

These benefits make cash ETFs appealing to conservative investors looking for low volatility in their portfolios.

By including various short-term fixed income securities, cash ETFs help diversify investments, reducing overall risk.

Cash ETFs provide stability to portfolios and are highly liquid, allowing investors to easily buy and sell shares during market hours.

Cash ETFs generate income through interest payments from the underlying fixed income securities.

This income can be reinvested or used for cash flow purposes.

Cash ETFs offer a favourable investment option for those seeking the benefits of diversification, stability, liquidity, and income generation.

Drawbacks of a Cash ETF

Cash ETFs typically offer lower returns compared to riskier investments.

This is because they focus on low-risk assets such as short-term government bonds or cash equivalents.

While this focus on stability and capital preservation is appealing to some investors, it may limit the growth potential of cash ETFs.

Another drawback of cash ETFs is that they generally do not pay dividends to investors.

This means that potential income from dividend-paying stocks or bond funds is missed.

For investors who rely on dividend income for their investment strategy, this can be a significant drawback.

Furthermore, changes in interest rates can impact the value of cash ETFs.

When interest rates rise, the value of these funds may decline, resulting in potential losses for investors.

It is important to consider this risk when investing in cash ETFs.

HISAs vs Cash ETFs: A Comparison

1. Liquidity

High-Interest Savings Accounts (HISAs) and Cash ETFs vary in terms of liquidity.

HISAs provide high liquidity, allowing investors to easily access their funds without any penalties or restrictions.

This makes HISAs suitable for individuals who require immediate access to their money.

On the other hand, Cash ETFs may have lower liquidity compared to HISAs.

Investors may encounter limitations or restrictions when attempting to access their funds.

While ETF shares can be bought and sold on an exchange, the process of selling shares and receiving cash might take time depending on market conditions and trading volumes.

When selecting between HISAs and Cash ETFs, it is important to consider your liquidity needs.

If you need quick and convenient access to your funds, a HISA may be the better choice.

2. Returns

Returns on High Interest Savings Accounts (HISAs) and Cash Exchange Traded Funds (ETFs) can vary based on market conditions and interest rates.

HISAs offer a fixed interest rate, such as 2.5% annually.

On the other hand, Cash ETFs do not guarantee a fixed return.

The returns on cash ETFs are influenced by the performance of the underlying assets in the fund. If the assets perform well, the returns can be higher than HISAs.

Conversely, if the assets perform poorly, the returns can be lower or even negative.

It’s important to note that while HISAs offer predictable returns, they may have lower growth potential compared to cash ETFs.

Cash ETFs have the potential for higher returns, but they also come with higher risk.

The performance of the underlying assets significantly impacts the returns.

3. Risk

When considering the risk of High-Interest Savings Accounts (HISAs) and Cash ETFs, keep the following factors in mind:

  • Volatile market conditions: HISAs and Cash ETFs can be affected by market fluctuations. HISAs are generally low-risk as they are not directly exposed to the broader asset market(s). Cash ETFs, on the other hand, carry higher risk based on the performance of the underlying assets.
  • Interest rate risk: HISAs are subject to interest rate risk. If interest rates decrease, returns on the account may also decrease. Cash ETFs may have varying levels of interest rate risk depending on the securities held in the fund.
  • Inflation risk: Both HISAs and Cash ETFs are exposed to inflation risk, which can erode the purchasing power of investment returns.
  • Default risk: HISAs, especially those held with reputable financial institutions, have low default risk as they are insured by government deposit insurance programs. Cash ETFs have higher default risk, especially if they hold securities issued by financially unstable companies.
  • Accessibility

Accessibility is important when choosing between High-Interest Savings Accounts (HISAs) and Cash ETFs in Canada.

  • HISAs are accessible to anyone with a bank account. They can be opened online or at a physical branch, and most banks offer them. This makes HISAs a convenient option for individuals looking to save money and earn interest.
  • Cash ETFs are accessible through investment platforms or brokerage accounts. Investors can buy and sell shares of Cash ETFs on the stock market. This allows investors to easily access their funds and liquidate their investments if necessary.
  • HISAs offer more flexibility when withdrawing funds. Most HISAs allow unlimited transactions and withdrawals, making it easy to access money when needed. Cash ETFs may have restrictions on withdrawal frequency and may require the selling of shares, which can take time.
  • Accessibility also refers to the minimum investment required. HISAs often have low or no minimum balance requirements, while Cash ETFs may require a higher initial investment, making them less accessible to some investors.

Factors to Consider When Choosing Between HISAs and Cash ETFs

When making a decision between High-Interest Savings Accounts (HISAs) and cash Exchange-Traded Funds (ETFs), it is important to consider the following factors:

  • Return on investment: HISAs offer a fixed interest rate, providing stability, while cash ETFs have the potential for higher returns but also come with higher risk.
  • Liquidity: HISAs are highly liquid, allowing for easy access to funds when needed. On the other hand, cash ETFs may have withdrawal restrictions, which could limit your access to cash.
  • Risk tolerance: Assess your personal risk tolerance and investment goals. If you are a conservative investor, HISAs are a safer option. If you are willing to take on more risk for the potential of higher returns, cash ETFs may be more suitable for you.
  • Diversification: Cash ETFs offer the opportunity to diversify your investments by investing in various assets, while HISAs focus solely on cash. Consider the importance of diversification in achieving your financial goals.
  • Management fees: Keep in mind that Cash ETFs may have associated management fees, which can affect your overall returns. It is essential to understand the fee structure and take it into account when making your decision.

Remember, it is always advisable to consult a financial advisor who can provide personalized guidance based on your individual financial situation and goals.

Coins and savings account statement on desk

Frequently asked questions

  • What is the difference between a high interest savings account (HISA) and a cash ETF in Canada?
  • Which major banks in Canada allow the purchase of high-interest savings account ETFs?
  • BMO and TD do not allow the purchase of high-interest savings account ETFs. Investors looking to invest in these ETFs must buy them directly or choose mutual funds instead. Other brokerage accounts like Questrade and Wealthsimple Trade provide access to these ETFs.

  • Are high-interest savings account ETFs considered a safe investment?
  • High-interest savings account ETFs are generally considered safe and stable investments, especially when compared to more volatile options. They invest in low-risk instruments and provide capital preservation. It’s important to note that they are not insured by CDIC, unlike traditional HISAs. Investors should carefully assess their risk tolerance and investment horizon before making a decision.

  • What is the current gross yield for high-interest savings account ETFs in Canada?
  • High-interest savings account ETFs in Canada are offering gross yields around the 5% mark. These ETFs invest their assets in savings accounts at major banks, which allows them to access higher interest rates than individual investors typically have access to.

  • Is there a risk of lower returns for high-interest savings account ETFs in the future?
  • The Office of the Superintendent of Financial Institutions (OSFI) is considering potential changes to high-interest savings account ETFs due to concerns about their impact on banks. If changes are implemented, it could potentially lower the returns by approximately 0.5%. Even with a lower yield, high-interest savings account ETFs are still expected to offer better returns than related products that are bought and sold like mutual funds.

  • Do high-interest savings account ETFs in Canada provide insurance coverage?
  • No, high-interest savings account ETFs in Canada are not insured by the Canada Deposit Insurance Corporation (CDIC). This means that in the unlikely event of a financial institution’s failure, the funds invested in these ETFs would not be protected by the CDIC’s insurance coverage. Investors should be aware of this when considering these ETFs as an investment option.

Harshil Dhanky

Harshil Dhanky is a financial services professional based out of Toronto, Ontario with extensive experience in the Canadian banking industry across Toronto, Calgary, and Vancouver in the capital markets, asset management, and lending sectors.

In the past, Harshil has worked with a range of consumer lending websites, personal finance advisors, investment managers, insurance companies, and other financial institutions to write and edit whitepapers, articles, blog posts, and other collateral read by consumer audiences to help them make better financial decisions.

His work spans a wide range of Canadian personal finance topics including savings and retirement programs, debt management tips, mortgages and personal loans, and other key financial issues for Canadian consumers at each stage of their life.