RBC iShares ETFs are comprised of RBC ETFs managed by RBC Global Asset Management Inc. and iShares ETFs managed by BlackRock Asset Management Canada Limited ("BlackRock Canada").
Key takeaways
- As rates have risen since 2022, short-term bond yields are near their highest levels in more than 15 years.
- With attractive yields available in short-term bond markets, investors seeking an alternative to cash may consider using ETFs to add income and help keep pace with inflation.
Central bank rate hikes have roiled financial markets since 2022, but the volatility in interest rates has also created opportunities for investors. As interest rates have risen, some short-term bond markets are paying their highest yields in more than 15 years (Exhibit 1).
Exhibit 1 – Government of Canada two-year bond yields are at their highest since the Global Financial Crisis
Source: Bank of Canada as of 12/12/2023
Depending on income needs, investors seeking short-term options to put their cash to work can consider a range of offerings, including savings accounts, Guaranteed Investment Certificates (GICs), money market funds and fixed income ETFs (Exhibit 2). In today’s environment of higher interest rates, short-term bond ETFs can be a compelling way to diversify beyond deposit accounts and GICs.
Exhibit 2 – Comparison of yields currently available on different short-term investments
Source: BlackRock, RBC as of 12/12/2023. Indices used are: FTSE Canada Short Term Overall Bond Index™, FTSE Canada Floating Rate Note Index™, FTSE Canada Universe + Maple Short Term Corporate Bond Index™. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Diversification options for cash and short-term savings
For many, it helps to think of your cash in layers, and segment it based on how soon you will need to use it. As a general rule, the sooner the investor needs to use the cash, the less risk they may want to take on with an investment.
For daily cash needs to pay for living expenses like gas and groceries, bank accounts are the most flexible. You can add or withdraw money at any time. They are also insured, up to $100,000 per account, by the Canadian Deposit Insurance Corporation (CDIC). Most savings accounts pay interest, although the rate can be low. Some accounts have no fees, but with others you may be charged for deposits or withdrawals.
For any additional cash that you don’t need immediately, you have options beyond a bank account. These include GICs, money market funds and short-term fixed income ETFs. However, it’s important to note there are important differences between these options, including investment objectives and risks:
- A Guaranteed Investment Certificate (GIC) is an investment that generally pays a set rate of interest over a fixed period of time until maturity, whereupon the original principal is returned. Similar to a savings account, GICs are insured by the CDIC up to a certain amount. However, as GICs tend to have a fixed term, an early withdrawal may result in a penalty.
- Money market mutual funds and ETFs seek to meet current income, capital preservation and liquidity needs typically through allocations to high-quality, short-term debt securities, but are not CDIC-insured.
- Short-term bond ETFs can potentially generate higher returns given current higher yields and provide diversification benefits. Fixed income ETFs can provide efficient, diversified access to a range of exposures, including iShares Floating Rate Index ETF (XFR), the iShares Core Canadian Short Term Bond Index ETF (XSB), the RBC Canadian Discount Bond ETF (RCDB), target maturity corporate bond ETFs and the iShares Core Canadian Short Term Corporate Bond Index ETF (XSH). It’s important to note that like individual bonds, the prices of bond ETFs may fluctuate depending on interest rate movements. Short duration bond ETFs typically carry a higher degree of risk than the other cash alternatives and should not always be used as a substitute.
Exhibit 3 - Important features of short-term investment options
| Daily Liquidity | CDIC Insured | Principal Protection | Diversified Exposure | |
|---|---|---|---|---|
| Savings Accounts | ✓ | ✓ | ✓ | |
| GICs | ✓ | ✓ | ||
| Money Market Funds | ✓ | ✓ | ||
| Short-Term Fixed Income ETFs | ✓ | ✓ |
Conclusion
When putting cash to work, it is important for investors to balance their needs for preservation of capital, income and liquidity. With attractive yields currently available in bond markets, investors can consider using ETFs to add income and keep pace with inflation. Today’s higher yield levels may also provide a cushion against further rate increases.
RBC iShares offers a variety of fixed income ETFs across a range of strategies: money markets, floating rate, target maturity, short-term, ESG and inflation-linked. Investors can apply these approaches in a targeted way as new opportunities evolve. The transparency of ETFs can also help investors better understand the underlying investments and the level of risks they are taking. This is a key element for building portfolios in any environment, but especially in times marked by high volatility and uncertainty.
Exhibit 4 – Select RBC iShares short-term bond ETFs
| Name | Ticker | MER 1 |
|---|---|---|
| iShares Floating Rate Index ETF | XFR | 0.14%2 |
| iShares Core Canadian Short Term Bond Index ETF | XSB | 0.10% |
| iShares Core Canadian Short Term Corporate Bond Index ETF | XSH | 0.10% |
| RBC Canadian Discount Bond ETF | RCDB | 0.17% |
| iShares 1-5 Year U.S. IG Corporate Bond Index ETF (CAD-Hedged) | XIGS | 0.16% |
| RBC Target 2024 Corporate Bond Index ETF | RQL | 0.28% |
Source: BlackRock; Data as of 12/12/2023.1 As reported in the fund’s most recent Semi-Annual or Annual Management Report of Fund Performance. MER includes all management fees and GST/HST paid by the fund for the period, and includes the fund’s proportionate share of the MER, if any, of any underlying fund in which the fund has invested.