PSA:CC - How to Shield Your Portfolio From the Impact of Soaring Interest Rates
2023-11-09 20:00:00 ET
In its recent October 25th decision, the Bank of Canada (BoC) made a noteworthy announcement: it held its target for the overnight interest rate at 5%.
The “overnight rate” is essentially the interest rate at which major banks borrow and lend funds among themselves for one-day periods.
A higher rate could indicate that borrowing money is becoming more expensive, which could slow down spending and investment, and thus quell inflation.
Furthermore, the BoC is continuing with its policy of “quantitative tightening.” This sounds technical, but it essentially means the central bank is taking steps to reduce the amount of money in the economy. Again, this is done to control inflation and stabilize the economy.
Due to these measures, Canadian stocks remain in negative territory for the year. This downtrend is largely due to the TSX’s significant proportion of bank stocks, which can be sensitive to interest rate changes.
That being said, there are viable ways to shield your portfolio right now. Here’s my personal favourite exchange-traded fund (ETF) for doing so.
Cash is the only winner
For many investors, diversification often means a mix of stocks and, to a lesser extent, bonds. However, there’s another asset, often overlooked, that has silently been proving its worth: cash.
It might come as a surprise to some, but cash is the only true risk-free asset available to investors. While it’s true that the purchasing power of cash can be chipped away by inflation over time, it remains insulated from the immediate and direct fluctuations of the market.
In the current economic landscape where interest rates are on the rise, the allure of cash becomes even more pronounced.
Think about it this way: if cash yields are hovering around 5%, one might wonder, why venture into the potentially turbulent waters of dividend stocks or REITs to chase a similar yield?
The risk-to-reward balance starts to shift. Presently, some Guaranteed Investment Certificates (GICs) are even offering returns close to 5.75%.
Holding cash or cash-equivalents in a diversified portfolio can therefore provide a safety net during uncertain times.
Why I like this cash-like ETF
When it comes to seeking a balance between safety and return, many investors turn to GICs. However, one significant downside of GICs is their lock-in period.
This lack of flexibility means that if an unforeseen need for liquidity arises or a golden buying opportunity presents itself, the funds in GICs aren’t readily accessible.
This is where the Purpose High Interest Savings Fund ( TSX:PSA ) has caught my attention. Presently, this ETF is offering a compelling net yield of 5.29%.
But beyond this attractive yield, there are other features of PSA that make it stand out. For one, it can be held in both a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).
Moreover, the fund pays out monthly interest income, ensuring a consistent stream of earnings. And the cherry on top? This comes with virtually no risk, which is a rare combination in the investment world.
For those looking for the safety of cash with a competitive yield and the flexibility to move funds when needed, PSA ticks all the boxes.
The post How to Shield Your Portfolio From the Impact of Soaring Interest Rates appeared first on The Motley Fool Canada .
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 .
2023