2 Ultra-Low Risk ETFs That Yield Over 3.5%

These ETFs invest in high-interest savings accounts and are as safe as it gets.

| More on:

Not many assets were safe in 2022. Thanks to high inflation and rising interest rates, both stocks and bonds fell in tandem. Unless most of your portfolio was held in cash, chances are you’re experiencing some unrealized losses like the rest of us.

The problem with holding too much cash is that it doesn’t do anything. Cash doesn’t grow. In fact, it loses value to inflation as time goes on. However, it is the only “risk-free” asset out there. If you’re dead-set on minimizing the effects of a market crash, nothing beats the protection of cash.

However, there are some exchange-traded funds, or ETFs, out there that invest your cash in high-interest savings accounts (HISA), which is as low risk as it gets. With the recent Bank of Canada interest rate hike of 0.75%, both of these ETFs now yield over 3.5% each.

Purpose High Interest Savings ETF

The Purpose High Interest Savings ETF (TSX:PSA) is a great way to hold cash in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) while still earning regular interest income. When you buy shares of PSA, the fund manager invests your capital in HISAs with Schedule 1 Canadian banks, which is as safe as it gets.

Every month, investors who hold PSA earn interest income. Currently, the annual gross yield of the fund stands at 3.7% thanks to rising interest rates. This is a fantastic return considering how low risk the fund is. PSA is virtually immune to market risk and will not drop in value during a correction.

The ETF currently costs a management expense ratio (MER) of 0.15%, or $15 annually, for a $10,000 investment. Keeping fees low is important, as they are deducted from your overall gross yield. The net yield of the fund can be approximated by gross yield minus MER, which comes out to around 3.6%.

Horizons High Interest Savings ETF

Horizons High Interest Savings ETF (TSX:CASH) works similarly to PSA — the ETF also deposits investor capital into HISAs with Schedule 1 Canadian banks. Compared to PSA, the gross yield of CASH is slightly higher at 3.8%. This is higher than many bond funds, without the interest rate risk. As interest rates increase, expect the yield to rise accordingly.

CASH is slightly less popular than PSA, with assets under management (AUM) of $357 million versus $2.5 billion, respectively. However, both are more than liquid enough, with a small bid-ask spread. This helps keep transaction costs low, which is critical for low-yielding products. The more you save on trades, the more money ends up in your pocket.

In terms of fees, the ETF currently has a management expense ratio of 0.13%. This reduces the net yield of CASH down to just 3.7%, which is always a plus for low-yielding ETFs. Keep in mind that this can change as the fund manager incurs management expenses, taxes, etc. A good way to keep track is to check up on the expense ratio every quarter.

The Foolish takeaway

If you’re worried about a market crash, either PSA or CASH can be a great way to hold cash for a buying opportunity while earning interest. If you’re worried about further interest rate hikes, both ETFs can be great substitutes for some portion of a bond allocation. Either way, these ETFs are as “risk-free” as investing gets while still earning a small return.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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.

More on Investing

chart reflected in eyeglass lenses
Investing

How Should a Beginner Invest in Stocks? Start With This Index Fund

This Vanguard index fund is the perfect way to start a Canadian investment portfolio.

Read more »

analyze data
Bank Stocks

Is BMO Stock a Buy for its 4.7% Dividend Yield?

Bank of Montreal is up 20% since late August. Are more gains on the way?

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

A person uses and AI chat bot
Tech Stocks

AI Where No One’s Looking: Seize Growth in These Canadian Stocks Before the Market Catches Up

Beyond flashy headlines about generative AI, these two Canadian AI stocks could deliver strong returns for investors who are willing…

Read more »

Rocket lift off through the clouds
Investing

2 Small-Cap Stocks That Canadians Should Consider in November

Small-cap stocks can have explosive upside. However, you need to be very choosey. Here are two small cap Canadian stocks…

Read more »

Middle aged man drinks coffee
Stock Market

Top Canadian Stocks You Can Buy Now With Just $1,000

Undervalued Canadian stocks such as Lassonde and Jamieson Wellness trade at a sizeable discount to consensus price target estimates.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »