What are HISAs, money markets and T-bills?

For the most part, it’s been years since we’ve seen savings accounts that could really qualify as high interest — but the increase in interest rates in 2022 and 2023 has given High Interest Savings Accounts (HISAs) a new life. This is a banking product where you have the flexibility to withdraw money whenever you need it. Although this is true in most cases, check the details of the product you’re considering. You’ll still benefit from a higher rate of interest than you’d get with a chequing account.

Some HISAs don’t require a minimum balance, a benefit when compared to a GIC. However, in contrast to the GIC, most HISAs don’t guarantee a fixed rate of interest and the HISA rate will fluctuate with market interest rates — a nice feature when rates are rising, but not terrific when they’re falling. Some HISAs will charge fees for maintaining the account or withdrawing money.

You may want to consider the HISA for some smaller portion of your short- to medium-term investment money. HISA deposits work well as an emergency fund or for any time that you may need quick access to liquid funds. Money can also be accumulated in a HISA with the intention of purchasing a GIC once you reach the GIC minimum amount required. HISAs are generally eligible for Canada Deposit Insurance Corporation (CDIC) insurance, but check to confirm when you open the account.¹

Now that we’ve reviewed HISAs, which are available from various banks and financial institutions, let’s turn to comparable products you can also hold at Investor’s Edge — HISA exchange traded funds (ETFs) and HISA mutual funds.

Another way to take advantage of some of the benefits of a HISA at Investor’s Edge is to purchase a HISA ETF or HISA mutual fund. The current convention is that most HISA ETFs hold only bank deposit investments, while some HISA mutual funds may contain bank deposit investments and other money market instruments. Check the description of the product you’re considering for details.

HISA ETFs

This product is created by an ETF manufacturer by investing in HISAs from different Canadian financial institutions. You, as the HISA ETF holder, benefit from the combined rate offered by those accounts. By pooling money from a number of investors, HISA ETF manufacturers can often obtain better rates than individuals can from the financial institutions where they invest.

Check a particular HISA ETF product description to see the current yield of the fund. Of course, this yield can and will change over time, so it makes sense to periodically revisit this number to make sure the product you’ve chosen is still appropriate for your situation.

Like most ETFs, HISA ETFs charge management expense fees, often expressed as a percentage of the average dollar amount of a fund investment and known as a Management Expense Ratio (MER). This is usually in the 0.10% to 0.20% range for these products. This amount is not charged to you directly but is paid out of fund assets and is reflected in the fund’s return.

Most HISA ETFs calculate interest daily and distribute the payments monthly. These payments are generally taxed as interest income. However, certain HISA ETFs reinvest the interest in the fund. This results in the fund price rising over time and the sale of those units producing a capital gain or loss for tax purposes.

Similar to a HISA, you’ll benefit from rising interest rates with this ETF, but see the fund’s yield reduced when rates move lower. There’s no minimum holding period and your money is easily accessible. You can buy or sell HISA ETF units any day while the stock exchange is open; regular ETF brokerage commissions apply. Minimum purchase is one unit of the ETF, which is usually about $50. Note that HISA ETFs are not eligible for CDIC insurance.

HISA mutual funds

The concept behind a HISA mutual fund is very similar to a HISA ETF, with some important differences. Where the HISA ETF generally invests exclusively in Canadian High Interest Savings Accounts, some HISA mutual funds may contain a mix of savings account investments and short-term money market instruments.

Remember that mutual funds don’t trade on a stock exchange, and this includes HISA mutual funds. Rather, they’re priced at the end of the business day and your order is filled at that day’s net asset value. Money market mutual fund trades, including HISA mutual funds, are commission-free at Investor’s Edge. Check the product description to see whether there’s a minimum purchase requirement, whether the mutual fund charges an MER and whether it’s eligible for CDIC insurance.

Money market instruments include relatively safe, but not risk-free, short-term securities. Examples include short-term Canadian or provincial government securities such as Treasury bills (T-bills), high quality short-term corporate debt from highly rated Canadian companies and other short-term debt. Money market investments are available as standalone products at Investor’s Edge or as holdings in a money market ETF or money market mutual fund. Changes in interest rates and credit risk associated with these investments mean they carry a small risk, and these products aren’t eligible for CDIC insurance.

As the name implies, money market ETFs invest in money market instruments and trade on a stock exchange like other ETFs. They aim to offer slightly higher yields compared to traditional savings accounts and may be able to provide a higher rate than a HISA or HISA ETF. The returns will fluctuate based on prevailing market rates and conditions.

The MER for the money market ETF is likely to be higher than for the HISA ETF, as it involves analyzing and selecting from a wider range of securities. This may not matter if the ETF achieves a higher yield. Money market ETFs can only be bought or sold during market hours, like other ETFs.

Money market mutual funds hold similar investments to those in money market ETFs, except some of these mutual funds also hold investments in HISAs.

Money market mutual funds aim to maintain a stable net asset value (NAV) of $1 per share while generating income, usually distributed monthly or occasionally quarterly. Money market mutual funds trade only at the end of the business day like all mutual funds, although you can enter your order online anytime. These products trade commission-free at Investor’s Edge.

Treasury bills, also known as T-bills, are short-term debt investments issued by the government. They’re considered very safe and, as a result, may pay less interest than other debt products with the same term. You buy T-bills at a discount to their par value and receive par value when the T-bill matures. The difference between your original price and the amount you receive at maturity is your interest payment. This gain is treated as interest income for tax purposes.

You can buy T-bills individually at Investor’s Edge or invest in a T-bill ETF or mutual fund that holds a range of T-bills. If you like the idea of owning T-bills, most money market funds or ETFs will hold some T-bills, in addition to other short-term debt instruments. Individual T-bills, T-bill ETFs and T-bill mutual funds are not eligible for CDIC insurance. However, they’re considered very low risk as they’re backed by the creditworthiness of the issuer, that is, the Canadian or Provincial government.

Individual T-bill purchases are usually for short time periods, from several weeks and up to one year. Investor’s Edge offers both Canadian and U.S. T-bills, but they typically have relatively high minimum purchase requirements, in the range of $25,000 and higher. Once the minimum requirement is met, T-bills can be purchased in $1,000 increments. Note that T-bills can be sold before maturity, so your money isn’t locked in.