Make Your Cash Work for You with Cash ETFs

Article based on my contributions to the article by The Canadian Pres: Cash ETFs offer yields and liquidity for funds on the sidelines, finance experts say

You want to keep cash available to seize market opportunities, but you don't want it sitting idle and earning next to nothing. This is where cash exchange-traded funds (ETFs) can play a valuable role in your financial strategy, offering a blend of liquidity and return that is increasingly popular among Canadian investors.

So, what exactly are cash ETFs?

Understanding Cash ETFs

Cash ETFs are investment funds that hold cash or cash-equivalent securities. Many of these ETFs work by holding funds in high-interest savings accounts at major banks. Others, known as money market ETFs, invest in low-risk debt like government bonds.

These products provide a straightforward way to earn a modest return on your cash holdings, with interest typically paid monthly based on the Bank of Canada's current rates.

The liquidity is good. You get the interest income, which is better than a bank savings account. And often they're kept for short-term goals

The Benefits of Holding Cash ETFs

Cash ETFs offer several advantages, making them a versatile tool for various financial goals.

• Liquidity and Flexibility: Unlike a GIC that locks your money in for a set term, cash ETFs offer excellent liquidity. You can access your funds quickly, making them ideal for short-term goals or for holding money you plan to invest soon.

• Capital Preservation: For investors looking to de-risk their portfolio, cash ETFs are a conservative option compared to more volatile stocks. They are designed to preserve your initial investment while providing a better yield than a standard bank savings account.

• Strategic Deployment: Holding a portion of your portfolio, perhaps around 5%, in a cash ETF can be a strategic move. You can deploy into the market during periods of volatility, allowing you to buy assets at a lower price.

What to Consider Before Investing

While cash ETFs are a useful tool, there are a couple of points to keep in mind.

1. Their returns are modest. Over the long term, holding too much cash can be a drag on your portfolio's growth, as you may miss out on higher returns from equities.

2. No CDIC protection. Unlike the money in your bank account, cash ETFs are not covered by the Canada Deposit Insurance Corp. (CDIC).

   
   

Is a Cash ETF Right for You?

Cash ETFs can be an excellent place for money you need within the next 12 months and want to shield from market volatility. Whether you are saving for a renovation, your children's education, or waiting for the right investment opportunity, they offer a smart way to make your cash work for you.

If you have questions about how to integrate cash ETFs or other investment vehicles into your financial plan, our fee-only, advice-only approach ensures you receive guidance that is tailored to your best interests.

Contact us to build a strategic plan for your financial future; no product sales, no pressure, advice only.