Let’s say you’re the average value investor who doesn’t see a whole lot of value in today’s market. You’re doing some prudent things like selling a few stocks that you feel are overvalued, keeping in mind selling everything is a really dumb move.
Although yields aren’t very high today, you’d still like to get paid a little in exchange for keeping your money in your brokerage account. After all, they are lending out that excess cash. You should get to share in the spoils. At least a little.
Yeah, you could transfer the cash to one of the various online banks, but that takes effort, dammit. Besides, the whole point of keeping this cash on hand is to take advantage of opportunities. Transferring to and from other accounts takes time.
Here are a few different places you can park short-term cash without taking it out of your brokerage account.
High-yield savings ETF
Let’s talk a little about the most boring ETF in the history of mankind. Naturally, I love it. My favorite flavor is also vanilla and I prefer to visit countries without strong opinions about anything, namely Switzerland and Sweden. I’m also a big fan of oatmeal.
It’s the Purpose High Interest Savings ETF (TSX:PSA) and it’s the equivalent of keeping your brokerage cash in a high interest savings account. It’s a decent spot for Canadian investors to park their short-term cash.
As much as I joke about how boring the Purpose ETF is, it’s actually pretty useful.
Here’s what it does. The fine folks at Purpose take their capital and invest it into a number of high interest savings accounts. The yield on them is right around 1.1%. It then takes 0.1% as a management fee, leaving investors with a 1% yield.
That’s a little worse than what you’ll get on your own, but there’s a big advantage to using this ETF. It gives investors a way to earn a little interest without a) being subject to the price whims of bonds and b) having to transfer money out of their brokerage account. 1% isn’t much but it’s a hell of a lot better than 0%.
The price chart is the perfect example of the efficient market theorem. Let’s take a look.
Here’s what happens. Investors know this ETF pays about 50 cents per share each year, broken down into 12 months. Thus, each monthly payout works out to a tiny bit more than 4 cents. Each week a penny per share is earned but not paid out. This means the ETF is now worth $50.01, $50.02, etc as the month goes on. It peaks at slightly more than $50.04. Then it starts over the next month.
A couple of issues, however. The first is liquidity. Google Finance says the average daily volume is 8,879 shares. That’s probably sufficient for anyone who isn’t a baller, but you’ve still got to make sure you’re paying the correct price. Paying $50.01 versus $50 usually doesn’t matter. It matters with this ETF.
There’s also commissions to worry about. Questrade has free ETF trading, but most other online brokerages don’t. Say you’re using TD and paying $9.99 per trade. Here’s how the cost would break down if you bought 100 shares and held them for six months.
Purchase price: $5,000
Interest earned: $25
Commissions paid: $20
Total profit: $5
Annual yield: 0.2%
Not very exciting, is it? Even if you triple the amount of money invested, the total yield still isn’t very attractive.
Purchase price: $15,000
Interest earned: $75
Commissions paid: $20
Total profit: $55
Annual yield: 0.73%
Keep in mind that if you use a traditional bank’s online brokerage, you’ll have access to their GICs. CIBC currently offers a six-month GIC that yields 0.85%, but you’ll have to pay a penalty to get it out. It also has a flexible GIC that pays 0.5%.
RBC offers a cashable GIC that pays 0.7%, but it comes with a minimum purchase price of $20,000 for non-registered accounts. The minimum is much lower inside your RRSP.
TD offers a 100 day GIC that pays 0.4% annually if you invest $10,000 or less. The rate goes up to 0.68% if you’re putting in more than $100k.
And so on. Just keep in mind that you’ll have to have money invested with TD to get that TD offer, and so on. I use QTrade and Questrade, which don’t offer GICs. Sad!
Related: Oaken Financial offers great GIC rates, but there’s a catch.
Other short-term cash options
An underrated place to park short-term cash is using T-bills. These are short-term debt instruments issued by governments and banks that offer comparable rates to short-term GICs.
Here’s how a T-bill works. You’d buy it for $0.99 (and change) and then sell it at $1 in a couple of months. The spread between the two is your interest.
QTrade’s bond service lists 20 or so options, which all come due less than three months from now. There’s a Bank of Nova Scotia t-bill that can be bought for 99.79 cents and sold for $1 on May 25th. The yield is 0.21% for just under three months, which means this particular t-bill comes with an annual yield of approximately 0.9%. There’s plenty of liquidity in the T-bill market too, so it wouldn’t be hard to sell in a hurry. And brokerages don’t charge commissions for bonds, it’s reflected in the price.
You can also buy a short-term bond index. Canada’s largest is iShares DEX Short-Term Bond Index (TSX:XSB) which yields 2.3%. The problem with that is there is some price movement. The ETF is down 1.7% in the last year and 0.81% in the last six months. Not much, but it’s still something to consider.
The bottom line
It might not seem like much to put your cash to work in some of these short-term vehicles, but something is better than nothing. This isn’t something you should get overly excited about. Still, an extra 1% is better than a kick in the teeth. Unless you’re into that sort of thing.