There are not many free lunches in investing outside of diversification. If you’re earning any sort of return, you likely face some risk attached to it. Enjoying the income from dividend stocks? You’re exposed to market risk. Liking the yield of corporate bonds? You’re affected by rising interest rates.
That being said, sometimes investors can catch a break. Thanks to the Bank of Canada’s latest interest rate hike of 50 basis points, or 0.5%, high-interest savings accounts (HISAs) are now paying competitive yields. Notably, with the overnight rate set at 3.75%, many HISAs are paying over 4% annually.
A great way to gain the benefits of a HISA in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) is via an exchange-traded fund, or ETF that invests your money into HISAs held with Canadian banks. Let’s look at how this works.
Most investors are familiar with ETFs that hold underlying “baskets” of stocks and bonds. However, ETFs can hold other assets, such as commodities, precious metals, derivatives, or even cash. For cash, this can include deposits in HISAs.
ETFs that invest in HISAs have virtually no market risk. When the market undergoes a correction, bear market, or otherwise crashes, these ETFs don’t drop, making them a safe haven. Without a doubt, keeping cash in a Schedule 1 Canadian bank is as safe as it gets these days.
When you invest in a HISA ETF, your cash is held in an account with these banks, which loan it out to third parties. In return, you earn passive interest income. The banks lend out the money at a rate linked to the Bank of Canada’s overnight rate, which is influenced by any changes in the interest rate.
With interest rates increasing steadily since the start of 2022 (and forecasted to continue), the yields on these HISA ETFs will only get higher and higher. At over 4%, many of these HISA ETFs are now paying yields competitive with Canadian dividend stocks!
When investing in HISA ETFs, keeping an eye on fees is critical. Like all ETFs, they charge a management expense ratio (MER). This is the percentage in fees you pay on an annual basis. For example, a HISA ETF with a MER of 0.10% would cost you around $10 in annual fees for a $10,000 investment.
Subtracting the MER from the gross yield of the ETF gives you the net yield, which is what you actually receive. For example, if a HISA ETF pays a gross yield of 4.20% with a MER of 0.10%, the net yield would be reduced down to 4.10%. This is why keeping the MER low is essential.
Canadian investors looking for a passive income can consider the following HISA ETFs:
The post New Investors: Here’s an Absolutely Brilliant Way to Earn Passive Income appeared first on The Motley Fool Canada.
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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
By: Tony DongTitle: New Investors: Here’s an Absolutely Brilliant Way to Earn Passive IncomeSourced From: www.fool.ca/2022/11/11/new-investors-heres-an-absolutely-brilliant-way-to-earn-passive-income/Published Date: Fri, 11 Nov 2022 19:15:00 +0000