As GIC, bond yields fall, this ETF looks better

After a year-long freak-out over inflation and high interest rates, the bond market is now worrying about other things.

That’s why yields on bonds and guaranteed investment certificates have fallen lately. The yield on the five-year Government of Canada bond was about 3 per cent at midweek, down from 3.7 per cent in early March. In bond land, that’s a massive decline. Yields on GICs have retreated enough to make the once-common 5-percent return a rarity.

Yields plunged on news of the failure of Silicon Valley Bank and stayed low as global bank Credit Suisse was taken over in an emergency rescue. For now, the bond market is putting more emphasis on the risks posed by banking instability than on inflation and high interest rates. Conditions are volatile in financial markets these days, so don’t dismiss the potential for inflation worries to flare up again. But for now, investors with money to put into bonds and GICs must face up to falling yields.

Looking for a way to cling to high rates? Take a look at high-interest savings account (HISA) exchange-traded funds and mutual funds. Their yields haven’t moved lately and are expected to remain stable until the Bank of Canada cuts its overnight rate. Barring a blow-up in the global financial system or a sudden weakening of the economy, expect the central bank to keep the overnight rate steady until at least late this year or early 2024.

HISA ETFs consistently rank among the top-selling exchangetraded fund products these days. Investors are using them as a supplement or replacement for traditional bond funds and as a place to securely park cash. Deposits in these ETFs are held in savings accounts at major banks.

The gross yield for HISA ETFs – that’s the yield you find in online ETF company product profiles – is about 4.95 per cent these days. Subtract a fund’s management expense ratio, usually about 0.15 or so, and you get a net yield of roughly 4.8 per cent.

HISA mutual fund yields start at 4.05 per cent for some big bank products and move moderately higher from there. Offsetting the lower yield is the fact that you can typically buy and sell these funds through an online broker with no buy or sell commissions. HISA ETFs are bought and sold like stocks, which means commissions of just under $10 per trade at most.

Inflation in Canada declined to 5.2 per cent year-over-year in February from 5.9 per cent in January, which is good news for the real rates of return on HISA ETFs. One of the criticisms of these products, as well as GICs, is that they produce negative returns after inflation is factored in. But if inflation continues to fall, then real returns could turn positive within a few months.