With HISA ETFs facing regulatory uncertainty, T-bill ETFs offer a compelling alternative, says investment industry expert
Central banks have gained ground on their campaign against inflation, but they’re also flirting with recession as relentless rate hikes have brought about an inversion in the yield curve. Still, the recent increase in short-term interest rates has also opened up a once-in-a-generation opportunity in the fixed-income space.
“T-bills are not a new investment strategy. They’re some of the oldest securities around,” says Mark Noble, senior vice-president of Retail Strategy and Sales Enablement at Guardian Capital. “Over the last decade, they haven't been as widely used by investors likely because their yields have been so low. But now there appears to be real value to owning cash due to their much higher yields.”
Last month, Guardian Capital launched ETF series of its Guardian Ultra-Short Canadian T-Bill and Guardian Ultra-Short U.S. T-Bill Funds on the TSX. The funds offer interest income by investing primarily in Canadian and U.S. treasury bills with durations of generally less than six months.
A Generational Opportunity
Quoting figures from BMO Capital Markets and National Bank, Noble says more than $20 billion is invested in money-market ETFs as at May 30 this year. The bulk of that has been in high-interest savings account ETFs, which have attracted around $14 billion in net new AUM between the beginning of 2022 and the end of last quarter.
“You’d automatically assume that investors are going defensive. I would actually argue that's not the case at all,” Noble says. “For the first time in a generation, investors are being compensated for owning securities on the short end of the curve.”
While the inverted yield curve might conjure concerns around recession, it also means the highest yields to be earned are on the short end of the duration spectrum. Noble says the lowest duration-risk securities are offering rich yields, with premiums to the benchmark rate that are usually found among corporate or high-yield bonds.
“You'd have to go back to probably 1981 or 1982 for the last time this level of inverted yield curve happened,” he says. “People in the industry today who were around for that would probably be well into their 60s now … For most of us investing today, this is a brand-new playing field.”
HISA ETFs Facing Uncertainty
HISA ETFs have caught fire among investors. According to National Bank, the category took in positive inflows from investors every month in 2022, bringing its full-year inflow total to $8.8 billion – double what it took in for 2021.
HISA ETFs hold high-interest deposits in Canada’s Big Six banks, and they can be purchased by small retail investors as well as large institutions. That’s a point of concern for the Office of the Superintendent of Financial Institutions (OSFI), which is taking a hard look at its liquidity adequacy requirements (LAR) for deposit-taking institutions that accept cash deposits related to HISA ETFs.
In a statement last week, OSFI hinted that it may make changes to its LAR guideline, in which case deposit-taking institutions would have until January 21, 2024 to fall in line.
It’s unclear at this point how a change in liquidity requirements would impact HISA ETFs; one possibility, Noble says, is that it could potentially lower the yields the products offer. A number of large bank dealers have already put restrictions around the use of HISA ETFs, including removing them from among the options they offer on self-directed investing channels.
“There's already a limited investor base for these ETFs currently despite their massive success,” Noble says.
A Lower-Risk Lift in the Income-vs-Inflation Race
Given the uncertainty around HISA ETFs, Noble says ultra-short-term T-bills present an ideal alternative to investors and advisors seeking cash-like asset exposure.
“Income-focused advisors usually want to achieve yields of around 1.5% to 2% above inflation for their clients,” Noble says. “Inflation is around four and a half per cent right now, so these advisors need to generate around 6% to 7%, and they can get the majority of that by being in these low-risk securities.”
Noble estimates that yields for T-Bill ETFs are currently in the neighbourhood of 5%, just slightly lower than the 5.41% offered by HISA ETFs. Both HISA ETFs and T-Bill ETF strategies, he says, come with very low credit risk, with HISA ETFs’ risk based on the credit rating of large Canadian banks and T-Bills having the credit rating of short-term government debt.
“If we go back two years, you'd only be making 25 basis points on that portion of your portfolio,” Noble says. “Now you can meet two thirds or more of your income target by simply sitting in this part of the curve.”
