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Parking USD in the short-term

45K views 198 replies 18 participants last post by  humble_pie 
#1 ·
Hello everyone,

I've been sitting on a lump sum of cash for a few months now watching the US equities break new records every day. I might be naïve and doing this all wrong but I feel like after Trump's election the rise in equities' prices has not been backed by enough real economic growth and fundamentals but instead promises by a person who might not implement them fast enough or at all.

Anyway, I am looking for a strategy to park a large sum of USD for "the time being" until a correction occurs and I was wondering what more experienced investors would do if they were me (short of just investing it in equities and stop trying to time the market :) ).

Currently this cash is sitting in an iTrade Cash Optimizer account (taxable) with 0.35% interest.

Goals and wishlist:
1. Relatively short term. Period of ... say up to 1 year
2. Maximum principal preservation
3. Maximum inflation compensation (keep in mind it's in a taxable account)
4. Liquidity

I realize all of the above might not be fulfilled at once, especially with the coming rate increases by the Federal Reserve but those are my guidelines.

What would you do?

Cheers,
JC
 
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#9 · (Edited)
I keep USD in ATL5500 that gives 0.55%
Thanks for the suggestion. I haven't tried to purchase a mutual fund through my Discount Brokerage account. I assumed it would be similar to ETFs/stocks except that it's in a separate "Mutual Funds" section in Scotia iTrade. When I tried to Buy the fund I got:

The Fund Symbol entered may be invalid or is not available for online order entry. Please re-enter the Fund Symbol or select Symbol Search to find the correct symbol. For assistance, please contact Scotia iTRADE at 1-888-872-3388 or your Investment Executive.
While it does find the ATL5500 symbol (Renaissance U.S. Dollar High Interest Savings Acct) it seems like I can't just buy it online.

How did you buy yours?

Cheers
 
#3 · (Edited)
That ATL5500 at 0.55% is actually a pretty high rate. Beware that there is no CDIC insurance for this. It's a totally uninsured deposit.

For cash, SHV is a good option with 0.45 duration and 0.6% yield after fees. That's a bond fund, so it doesn't guarantee this return but 0.6% is a good estimate of what you'll get with it. SHV is also very safe because it's entirely treasury securities which are backed by the US govt.

If you're willing to hold for longer, BSV is a good option. It has more like a duration of 3 so you'll want to aim to hold it at least a couple years. It yields around 1.7% but can experience more volatility due to its longer duration. I hold quite a bit of BSV, but I wouldn't treat it as cash. BSV is the American equivalent of XSB/VSB.

As far as timing the market, I would commit yourself to a predefined schedule that takes away the temptation to time the market. For example, I will be deploying more money into stocks in June and December.
 
#5 ·
Apparently Hubert has finally got EFT working on their $USD account, so you can transfer in and out from other Canadian-domiciled USD accounts without having to do wire transfers. They are paying 0.75%.

That ATL5500 isn't CDIC-insured only because CDIC doesn't insure USD deposits. But otherwise it's a deposit at CIBC (their CIBC Asset Management subsidiary), so it probably shouldn't keep one up at night worrying.

For SVH, is that 0.60% just the distribution? If the treasuries held are yielding 0.75 minus 0.15% MER, that 0.60% might be offset by a decline in the share price due to the treasury values going down. iShares' info page shows a hypothetical forward distribution yield of 0.48%, a previous 1-year total return of 0.43%, and 3-year average annual total return of 0.14%, so I'm not sure where one should expect around 0.60%.
 
#6 · (Edited)
That ATL5500 isn't CDIC-insured only because CDIC doesn't insure USD deposits. But otherwise it's a deposit at CIBC (their CIBC Asset Management subsidiary), so it probably shouldn't keep one up at night worrying.
Ah, didn't realize that was under CIBC. Sounds quite good!

If the treasuries held are yielding 0.75 minus 0.15% MER, that 0.60% might be offset by a decline in the share price due to the treasury values going down.
Within a 6 month period the portfolio is replenished so there is no risk of price decline as long as your horizon is at least 6 months. This ETF gives you exposure to the 6 month t-bill yield.

iShares' info page shows a hypothetical forward distribution yield of 0.48%, a previous 1-year total return of 0.43%, and 3-year average annual total return of 0.14%, so I'm not sure where one should expect around 0.60%.
The 0.48% distribution yield, like all bond funds, is irrelevant because this just extrapolates from the current distribution and that's never a good way to evaluate forward returns.

The right way to understand forward returns of a bond fund is to look at the yield to maturity, today, of what it's exposed to.

The 1 year and 3 year past returns were the returns of current t-bill rates at the time. Here is the chart showing the last 3 years of the 6 month t-bill, which is the security that SHV is a proxy for. Whatever the t-bill yields is what you get:
http://stockcharts.com/h-sc/ui?s=$UST6M&p=D&yr=3&mn=0&dy=0&id=p13002477176

You can see from the chart that in the last 3 years, the 6 mo t-bill averaged a yield of about 0.25%. Subtract the MER and that's where the 3 year past total return of 0.14% came from -- pretty simple.

Here's the 6mo t-bill chart for the last year:
http://stockcharts.com/h-sc/ui?s=$UST6M&p=D&yr=1&mn=0&dy=0&id=p62469544296

You can see pretty clearly on this chart that the t-bill yielded about 0.45% ... and SHV returned even higher than expected after fees, but that's where the 1 year total return of 0.43% comes from.

TODAY the 6mo t-bill yields a whopping 0.84% which is considerably higher. Additionally, the SHV page shows the critical piece of information -- the "Average Yield" (called average yield to maturity on Canadian iShares pages) of 0.80%. Subtract the 0.15% and you arrive at an estimate of 0.65% of forward return.

For SHV, a forward return of 0.65% to 0.70% is just about guaranteed as long as you're holding it for at least 6 months. If you hold it less than that, there may be a (tiny) hit to performance due to bond volatility. If you hold it longer, you simply get the returns of whatever the 6-month treasuries yield at the time -- your returns will track that
 
#8 ·
That ATL5500 isn't CDIC-insured only because CDIC doesn't insure USD deposits. But otherwise it's a deposit at CIBC (their CIBC Asset Management subsidiary), so it probably shouldn't keep one up at night worrying.
Exactly!
I personally prefer ATL5500 with 0.55% rate over SHV with 0.6% :), Unlike ATL5500 , SHV can fluctuate.... to buy and sell it you need to pay commission (and you may want to sell it in chunks).
I like ATL5500 becouse there is no any trading fees, I can buy/sell even multiple times during a day... When I want to place US trade, I don't even need to sell ATL5500, as CIBC IE system will realize that I hold enough money in ATL5500,so I need to sell it only when my other US trade is executed
 
#18 · (Edited)
a brief cruise among USD hi-yields shows that US money market funds are yielding slightly higher than USD bank account products:

  • highest yield i saw on this cruise is royal bank's RBF 305, yielding .91% according to some data bases & requiring a minimum $100k initial purchase.

  • other data bases show the above fund yielding .64%, so the truth remains to be seen. It might be that the .91 yield is only for RBC clients buying a particular series either at roybank discount broker or else at dominion securities. It might be that other investors buying through 3rd party brokers can only purchase rbf 305 in a series with lower yields.

  • for purchases less than 100k, roybank has RBF 261, reportedly yielding .51% (reported yields may vary depending on the data base.)

  • tddi offers TDB 166 with a yield ranging from .44 to .52%, depending on the data base.

  • td previously offered a premium USD MFF with a higher yield, but it's currently being re-orged, is not available to new investors.

  • BMO clients might be interested in the house USD high-interest product AAT780, presently yielding .50%.

  • ATL 974 is a renaissance investments USD MMF yielding .68%. Among basic USD MMFs with low minimum purchases, this one is a high-yielder. Renaissance is owned by cibc.


folks buying any USD MMF should look at the list of total holdings in recent financial statements to get a sense of the individual fund manager's taste & style. While all of these MMFs contain some unknown & possibly dodgy products - these are the products that deliver the higher return, while US t-bills are paying zip - the ratio of dodgy to stodgy but better-rated holdings varies from one fund company to another.


.
 
#19 ·
TDDI offers TDB8152 ($US investment savings) -- yielding 0.40%
Tangerine has $US GICs with yields in the 0.45% (1Y) to 2.0% (5Y)

For bond funds, I would have a think about tax efficiency. Holding a premium bond fund in a taxable account may leave you worse off than keeping the money under your pillow.
 
#21 ·
An investor should be honest with themselves about how long they want to keep the money as cash. It seems that many people say they want cash liquidity but then keep the money sitting there for years on end, say 5 years or more. They are forfeiting a lot of return in these cases.

BSV is a fund I like, and ultra low fees from Vanguard. It has 3 year avg maturity and currently yields around 1.7% which is really excellent for something that's almost as good as cash. It kicks the pants off of any "money market fund" or bank account earning zero point tiny interest. BSV is a bastion of my American 401(k) retirement plan.

And of course if you're actually keeping the US cash sitting there for many years on end, you should probably be invested in a bond fund like AGG which is now yielding over 2.5%. Your long term return in a bond fund like AGG is likely to exceed cash/money market returns. However this is only suitable for investment time horizons of the 10 year+ time scale. Since my time horizon is shorter than that, I stick with BSV.
 
#22 ·
An investor should be honest with themselves about how long they want to keep the money as cash. It seems that many people say they want cash liquidity but then keep the money sitting there for years on end, say 5 years or more. They are forfeiting a lot of return in these cases.
james, it's not really possible :) , there are many events in life that can change your time horizon ... and better be save then sorry :)
 
#23 ·
I agree gibor, life events keep changing. But I still think the short term bond funds (VSB in Canada and BSV in US) are a good middle road, because even if you get out prematurely you really won't be facing any significant losses. They are good for almost cash like storage.

Many people on these forums use XSB for the same idea
 
#24 ·
That's the catch in my case too, isn't it? I don't really know how long I would be comfortable waiting for a correction in the equities market. For now I am giving myself 1 year but hoping a buying opportunity comes up much sooner. For now I think I am leaning towards BSV.

Thank you everyone for chiming it. Really appreciate it!
 
#26 ·
today Fed chairman Janet Yellen told the executives club in chicago that the Fed will likely raise rates at its policy-making meeting scheduled for later this month. Yellen added that the Fed expects to raise rates two additional times during 2017.

also earlier today, Fed vice chairman Stanley Fischer gave the same message to a new york city conference. Rate increases coming this month, Fischer said.

would not these raises likely hammer three-year bond funds in the short term & be a particular pitfall for investors who are looking to merely stash USD cash for shortish periods of time - less than a year - in no-brainer applications? why get involved with bond funds & the prickly task of out-guessing the US federal reserve system, when one is only talking safe haven for US cash for 30-360 days?

imho a reputable USD MMF appeals because easy, simple & relatively risk-free. IMHO discussion of whether investors "should" keep cash or "should" invest surplus funds in bonds - or in GIC ladders or any other type of investment vehicle - belongs properly to discussions of portfolio allocation, not discussions of cash stashing.

https://www.nytimes.com/2017/03/03/...n-region&region=top-news&WT.nav=top-news&_r=0

.
 
#28 ·
Right, CDIC only insures Canadian dollar deposits. I don't think brokerage CIPF insurance would cover these HISA vehicles either.

CIPF coverage would insure a cash balance sitting in the brokerage account. But when you buy ATL5500 or another HISA, you are holding something like a mutual fund (it's a pooled deposit held centrally by the brokerage) and I don't see any reason that would be insured by CIPF.
 
#30 ·
humble_pie is right. CIPF is about protecting against broker insolvency.

If a bond fund suffers harm and collapses, that's not insured.
If a stock crashes, that's not insured.
If a pooled money deposit (HISA) collapses, that's not insured.

For example if you hold a GIC and the issuing bank collapses, CIPF doesn't help you out there. That becomes a CDIC insurance claim, for deposit insurance. That's why a non-CDIC eligible HISA deposit is at risk and won't be covered by CIPF or CDIC insurance.
 
#31 · (Edited)
jargey & others. You may also want to check out MINT. This one is interesting in that it's actively managed, so the managers have the freedom to vary the duration as they try to adapt to Fed policies etc. They have done an excellent job so far, and this thing has had almost the stability of cash while providing a higher return. The price has been more stable and cash-like than BSV.

http://canadianmoneyforum.com/showthread.php/113121-MINT-for-high-yielding-US-cash

I still hold BSV. Here's a chart (in total return) over the last year. You can see that it was volatile due to the Fed rate hikes:
http://stockcharts.com/h-sc/ui?s=BSV&p=D&yr=1&mn=0&dy=0&id=p60524255202

Here's the chart of MINT, much steadier and less volatility. This is more like owning an ISA, with higher yield:
http://stockcharts.com/h-sc/ui?s=MINT&p=D&yr=1&mn=0&dy=0&id=p69558044843
 
#44 ·
jargey & others. You may also want to check out MINT. This one is interesting in that it's actively managed, so the managers have the freedom to vary the duration as they try to adapt to Fed policies etc. They have done an excellent job so far, and this thing has had almost the stability of cash while providing a higher return. The price has been more stable and cash-like than BSV.

Here's the chart of MINT, much steadier and less volatility. This is more like owning an ISA, with higher yield:

http://stockcharts.com/h-sc/ui?s=MINT&p=D&yr=1&mn=0&dy=0&id=p69558044843



MINT's real name is Pimco Enhanced Short Maturity Active ETF.

pimco is a good name. We hear that a hotshot new manager has replaced bill gross & because of his genius, cash is now pouring into pimco in torrents.

but y'll know how i am interested in shadowy derivatives holdings in ETFs that substitute for named securities, or are used to enhance performance, or both. So i'm wondering what that word "enhanced' in MINT's title means. What kind of derivatives might be "enhancing" this out-performing vehicle?

once again, merely reading the annual or semi-annual complete list of holdings will not answer this question. Regulators in both the US & canada evidently do not require funds to publish their derivative holdings.

it's only by scouring the prospectus that one can find language permitting an ETF to hold futures, interest rate swaps, options & other synthetic derivative products. The prospectus will also state whether a fund engages in representational sampling instead of holding the actual investments named in the published lists.


.
 
#34 ·
Precisely. This is the part that really got me thinking hard. I intent to keep the funds in USD after withdrawal. So I might get better return with SHV or even MINT, but the tax I might have to pay on the "fictitious" gain in CAD might well offset the whole gain.

Having said that the only way I can think of avoiding the USD to CAD conversion of the principal for tax purposes is to keep the money in USD savings account. If anyone else has any better suggestions - please do share.

Cheers,
JC
 
#36 · (Edited)
Agree with HP here. CRA is pretty clear in its various responses that USD is suject to cap gains/losses when eventually used in a transaction (conversion to CAD, purchase security, etc). Doesn't matter where that USD is held, e.g. in a MMF or simply cash account. Albeit CRA allows the first $200 of gains to be non-reportable.

As I wrote elsewhere though, I think re-invested distributions (not the original capital) could be 'converted' to CAD at the annual forex rate (at least in theory) rather than forex of the day. Simply because CRA allows 'recurring income' via a T5 for example to be converted at the annual forex rate. That may be a complicating factor though in keeping track of ACB because one could not 'update' their ACB until at least January for the prior tax year (after BOC publishes the annual forex rate). Then one has the new ACB for the coming year...rinse and repeat.

Added: None of this was much of an issue (with CRA) when the loonie was trending upwards since one's failure to report a cap loss is of no consequence to the taxpayer. But the last 5 years with the decline of the loonie, the problem is real. See 5 or 10 year chart here http://www.xe.com/currencycharts/?from=CAD&to=USD&view=10Y Anyone holding USD $10k in 2012 would have a big cap gain if those funds were used recently.
 
#37 ·
As I wrote elsewhere though, I think re-invested distributions (not the original capital) could be 'converted' to CAD at the annual forex rate (at least in theory) rather than forex of the day. Simply because CRA allows 'recurring income' via a T5 for example to be converted at the annual forex rate. That may be a complicating factor though in keeping track of ACB because one could not 'update' their ACB until at least January for the prior tax year (after BOC publishes the annual forex rate). Then one has the new ACB for the coming year...rinse and repeat.

i thought about all that. Sounds like a great big bloody fat PITA. Much easier to strip off the distributions when paid, get em declared as foreign income. Leave the capital intact. Then report gain or loss when capital - or a portion of capital - is sold.

i observed that the CRA bulletin specified that every buy/sell of every USD security is to be reported as an individual gain/loss transaction in CAD. For stocks, i've always been doing that. IE if one sells a stock in USD, that's a taxable event. Does not matter whether one next buys a different stock in USD, one still has the gain/loss on the first sale to report in CAD.

i'm treating the core capital of a USD MMF holding the same way as a stock, for tax reporting purposes. If some day i start posting from the bordeaux jail, y'll will know that i shall have been proved wrong

.
 
#38 ·
Before I retired we established a USD side to our TDDI trading acc, bought some US stock dividends, some US-pay Cdn stocks, a US bank acc and US credit card. All with the intention of generating US income and spending significant time traveling through the US and other US-denominated places. Circumstances over the past 3 yrs have required us to stay in Canada to deal with family issues.

These same issues have pointed to the prudence of simplifying my tax and accounting requirements rather than risk leaving them to my spouse.

The most complicated aspect of our finances is this damned USD stuff (T1135, Fx). I find it a pita and my spouse would be lost trying to deal with it. I'm going to begin unwinding our USD income souces and accs, and take our lumps with fx when & if we need the greenback for travel.

This is not to say we won't have any US or international exposure. We will, but it will be in registered accs and/or tax-slip etfs.
 
#39 ·
me i believe that if you hold an inventory of US stocks, USD-dividend canadian companies, etc, then you should not really have any problems. Each security gets treated individually, it the cost base is the cost in CAD as of the date one bought the security, the proceeds are the proceeds in CAD as of the date of sale, the resulting gain or loss in CAD therefore includes any appreciation or depreciation in the currency. The currency fluctuation is co-mingled with gain or loss in the security itself, but to canadian tax authorities all gains are the same.

i was a bit stumped when i got this USD thingy as it's 6 figs. However i've figured it out now. You know what? i was greatly helped by discussion of how-to-report currency gains/losses here in cmf forum!

good luck with the seasonal pruning of the portf. When you're done i hope there will be enough left over for a dream trip in USD. You've mentioned how you are caring generously for elderly not-so-fortunate relatives, so you deserve such a trip.

.
 
#41 ·
Hmm, now that I read this over and over again I think I am mistaken indeed. What you are saying is that in fact I have to treat the savings account as an investment after all, eh?

So do I use BoC noon rate of the date when I first put money in the savings account to start the ACB? With subsequent transfer out (say for buying US-traded ETFs) and the BoC noon rate of the withdrawal forming the other end of the capital gain calculation?

Then the new US security that I buy will form a new ACB of its own using the settlement date of the transaction.

Please confirm
 
#46 · (Edited)
Yes, a savings account in USD is indeed an investment, i.e. it is capital. USD savings will have its ACB based on the CAD equivalent when you put it there, e.g. the CAD equivalent disposition value on the sale of a USD stock, based on day of settlement. I believe it is the Noon BoC rate (the only one that will exist long term I believe....closing rate is disappearing....or is it the other way around?). When you use that USD in savings to buy a USD ETF, you then have a CAD equivalent disposition of USD cash based on the BoC rate on the date of settlement for that US ETF purchase (T+3). That forms the CAD equivalent ACB of that US ETF you just bought.

If you have added USD interest to that USD savings account (or MMF) during the course of the year, you can use the annual forex rate. Indeed, that income will be on a T3 or T5 in USD for tax purposes, in which you convert using the annual forex rate. Brokerages often give the wrong advice in these matters. They sometimes think that capital acquisitions and dispositions can be done at the annual forex rate... just like recurring income can be converted at the annual forex rate. Nothing is further from the truth. CRA has actually lmade a concession to taxpayers allowing them to use annual forex rate for recurring income. Otherwise it would be a ruddy mess converting that $20 in USD interest on that T5 at 12 separate forex rates.
 
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