The growth of high-interest savings account (HISA) exchange-traded funds (ETFs) became the defining story for Canada’s ETF industry in 2023. Money market funds, including HISA ETFs, attracted roughly $9.7 billion in investor flows in the first ten months of the year, representing about 29.1% of net inflows into Canada’s ETF universe — only slightly behind fixed income (34.7%) and equities (31.3%). Money market ETFs held $24.7 billion in assets at the end of October, up from $15.7 billion at the end of 2022, according to Canadian ETF Association (CETFA) statistics. A regulatory ruling scheduled to take effect soon, however, could materially affect this rapidly growing segment of the Canadian ETF market.
The Office of the Superintendent of Financial Institutions (OSFI) issued a ruling on Oct. 31, 2023, that requires banks accepting deposits from ETF issuers to maintain 100% of the capital needed to support those deposits in case investors withdraw their money quickly. That requirement is intended to address stability concerns related to the speed with which ETF investors can redeem their holdings.
The most popular HISA ETFs
HISA ETFs became popular because they provide a near-cash alternative with very low volatility while offering yields that reflect higher interest rates — now above 5% in many cases. These funds effectively aggregate competitive retail savings rates from partner banks into an ETF wrapper, allowing investors to buy and sell shares on an exchange and access daily liquidity. For investors seeking capital preservation with a higher yield than traditional chequing accounts, HISA ETFs have been an attractive option.
As of Oct. 31, the CI High Interest Savings ETF (CSAV) ranked as the fourth-largest ETF in Canada, with $8.7 billion in assets under management, according to CETFA. HISA ETFs continued to attract strong inflows even as fixed income regained favor with investors. In October, the Horizons High Interest Savings ETF (CASH) and CSAV were among the top ETFs in Canada by net inflows.
Are HISA ETFs safe?
The sudden concentration of investor capital in HISA ETFs prompted OSFI to review the potential implications for the banking system. Regulators were particularly concerned about the risk that large, rapid withdrawals could create instability for deposit-taking institutions that provide the underlying savings accounts. In its public consultation, OSFI highlighted systemic concerns such as contagion risk, potential regulatory arbitrage, and the absence of deposit insurance guarantees that typically protect traditional retail savings accounts. The October ruling was intended to address these issues.
When new regulations around HISA ETFs take effect
OSFI’s ruling requires that, beginning Jan. 31, 2024, deposit-taking institutions exposed to HISA ETF funding hold sufficient high-quality liquid assets, such as government bonds, to cover all HISA ETF balances that could be withdrawn within 30 days. In practice, this means banks must set aside eligible liquid assets to ensure they can meet a large, rapid outflow without destabilizing operations or relying on emergency support.
What it means for Canadian investors
Although the rule is targeted at banks that provide the underlying savings accounts for HISA ETFs, it will inevitably affect the ETFs themselves. Some investors worry the new requirements could reduce the number of banks willing to accept deposits from ETF issuers, potentially lowering competition among deposit providers and compressing yields. Early analyses by market participants suggested a potential hit to yield levels, while ETF strategists point to regulatory clarity as a positive development that supports long-term viability.
Naseem Husain, senior vice president and ETF strategist at Horizons ETFs, says the OSFI decision “regulates and confirms the ongoing viability of HISA ETFs, ensuring they’re here to stay and will continue to be a viable investment option. This decision will likely lead to greater competition in the space from a product perspective, and that could incentivize more investors to consider using HISA ETFs in their portfolios.”
Husain also notes that HISA ETFs remain competitive when compared with guaranteed investment certificates (GICs) on a rate basis while offering substantially greater liquidity. The primary driver of their yields will continue to be prevailing interest rates and how banks price deposits, rather than the ETF structure itself.
For individual investors, the immediate impact may include slightly lower yields on some HISA ETFs if banks pass on higher funding costs, or reduced availability of partner banks for certain fund providers. Over the longer term, clearer regulation may encourage more product innovation and stable arrangements between ETF issuers and deposit-taking institutions, which could benefit investors through improved transparency and stronger risk management.
Investors who use HISA ETFs should consider a few practical steps: review communications from their ETF providers about changes in counterparties or fund mechanics; compare yields and liquidity characteristics with alternative short-term options such as GICs or cash management accounts; and ensure their portfolio allocations reflect their liquidity needs and risk tolerance. As always, understanding the terms and holdings of each HISA ETF — including where the underlying deposits are held and what protections exist — helps investors make informed choices.
Read more about ETFs in Canada:
- Buying ETFs in Canada: MoneySense ETF Finder Tool
- Best fixed-income ETFs for Canadian investors
- Best all-in-one ETFs for Canadian investors
- Taking an active approach to ETF investing in Canada