Money Market Funds in Canada

WOWA Simply Know Your Options

A money market fund in Canada is either a Canadian mutual fund or a Canadian ETF, which allocates at least 95% of its assets in Canadian-dollar-denominated debt securities with maturity shorter than one year. Though ETFs and mutual funds are both investment pools, they have some technical differences.

It is interesting to see how much money is invested in the money market funds of Canada. The bar chart above shows Canadians parking just under $30 billion in money market mutual funds and just under $10 billion in money market ETFs. It can also be seen that over the past year, the investment in money market funds is increasing.

In Canada, money market funds often have share prices close to $10 (for some funds $1) at the beginning of the month. Usually, their net asset value (NAV) and thus their price rise during the month. At the end of the month, money market funds payout the assets accumulated during the month.

Money market funds often invest in high-quality securities of low credit risk. While the short duration of their assets almost eliminates the interest rate risk. Money market funds are a great choice in an environment of rising interest rates. In a falling interest rate environment it would be beneficial to invest in bond ETFs instead.

For example, as of June 30, 2022, the largest holding of Counsel Money Market was the Province of Ontario, 9.50% 07-13-2022, which was 7.7% of its assets. This was a bond issued by the Province of Ontario, which paid its holder an annual interest of 9.5% and was redeemed on 13 July 2022. A bond, in essence, is a promise by its issuer to make specified payments at specified dates to the holder of that bond.

Ontario 9.50% 07-13-2022 bond was issued years ago and, at the time, was not suitable for a money market fund. Debt which is supposed to be paid in the medium or long term (years in the future) is riskier than short-term debt, which is supposed to be paid in less than a year. Ontario 9.50% 07-13-2022, which was a medium-term debt instrument, became a short-term debt instrument in July 2021, and thus it became suitable for money market funds.

CI High Interest (Mutual) Fund is different in that instead of using money market instruments; it invests all its assets in CI High-Interest ETF. CI High-Interest ETF, in turn, invests its assets in savings accounts with CIBC, National Bank, Scotiabank and BMO. These banks can give higher interest rates to this fund than what they pay to their retail customers because they do not need to insure this funds deposit. In contrast, for retail customers, they have to insure the money in a savings account through Canada Deposit Insurance Corporation (CDIC).

Evolve High Interest Savings Account ETF is similar to CI High Interest Savings ETF in this regard. It deposit its assets with Canadian Imperial Bank of Commerce, Bank of Montreal and Scotiabank.

List of Canadian Money Market Funds

List of funds from Canadian Investment Funds Standards Committee.

Note that money market funds have low risk, low reward and high liquidity, just like high-interest savings accounts. They also share their low risk and low reward profile with Guaranteed Investment Certificates (GICs), but money market funds and GICs differ in their liquidity profile. Liquidity refers to the ease and speed with which investment is cashed out.

Here we compare Canadian money market funds to see which is the best Canadian money market fund. For this purpose, we would gather data about and compare the TD money market funds, RBC money market funds, CIBC money market funds, Manulife money market funds and BMO money market funds in addition to Canadian money market funds with the greatest yield over the past year.

Best Canadian Money Market Funds

Data from morningstar.ca, as of 16 September 2022.

As mentioned earlier, a money market fund can be either a mutual fund or an ETF. The following pie charts show how much of that money is in mutual funds (MF) vs. ETFs at present vs. a year ago.

It is also informative to consider changes in the distribution of money invested in Canada money market funds among ETFs and mutual funds. The share of ETFs in money market funds has risen from 18% to 24% over one year. This is consistent with the general trend of ETFs taking market share from mutual funds.

It is also noteworthy that, total assets under management (AUM) in money market mutual funds at the end of July 2022 have increased by 16% annually and by 4.3% monthly to reach $38.6 billion. This increase is happening while for long-term funds, AUM shrank by 6% annually while increasing by 4.4% monthly to reach $2,129 billion.

The trend of rising AUM for money market funds and falling AUM for long-term funds is a direct consequence of a 20 months trend of increasing rates. We can use either Canada’s 5-year bond yield or Canada’s 10-year bond yield as a measure of the risk-free rate of interest.

Most financial assets like stocks and bonds are valued because of their future cash flow. As interest rates rise, the value of this future cash reduces at present. As a result, bond prices have been falling since the end of 2020, while stock prices have been falling since the end of 2021. This trend resulted in long-term funds AUM falling.

For this analysis, it is best to use S&P 500 as a proxy for stock prices and not the S&P/TSX Composite. Because in the S&P/TSX Composite, resource stocks have a significant weight and resource stocks had a bull run in the first half of 2022 due to the war in Ukraine.

While rising interest rates are causing long-term funds to lose money, they materially increase the return earned by money market funds. Thus there has been a sizable flow of cash into money market funds over the past year.

Money Market Accounts

Money Market Accounts have a name similar to money market funds, but the similarity ends here. Money Market Accounts are a kind of bank account in the United States similar to savings accounts. But they are generally more liquid (it is easier to withdraw money from them) than savings accounts.

Should I Invest in a Money Market Fund?

It is always advisable to have some cash reserves for your personal needs. And also, any well-diversified investment portfolio contains some cash. Three good options for keeping this cash are money market funds, savings accounts and redeemable GICs. We suggest you compare the interest rates you can receive on each one of these options and choose the one with the highest return for keeping your money. When interest rates are close savings accounts and GICs are preferable as they are safer options.