For long-term savings: Short-term Bond ETFs vs High-interest Savings Accounts

Question

In the Summer 2015 edition of MoneySense magazine, the article Value Hunter (Cash cows for your portfolio) by Norm Rothery, recommends replacing High-interest Savings Accounts (HISAs) with Short-term Bond ETFs (STB ETFs).

[This article seems to exist only in print; please edit this if you find the online version.]

However, this article from 2012 supports the opposite allocation:

[David Sherlock, a portfolio manager and director of product development for Calgary-based McLean & Partners Wealth Management] recommends putting about 10% of your savings into a corporate bond fund to get that extra yield and dump the rest into a high-interest savings account.

“What that does is bring the net return of the net yield up and it’s still relatively safe,” he says.

I ask this question for a commoner who struggles with choosing where to store long-term personal savings. He seeks a higher rate of return than HISAs, but worries about higher risk from STB ETFs.

So how do they compare? What are their relative risks and returns?

Answer 1

HISA is pretty safe, so unless your bank defaults, you'll most likely to get your money back. The risk level of corp bond ETFs depends on which debts the ETF is holding. The more high yields the ETF is holding, the riskier the ETF is.

Your saving account should be used for emergency purposes(job loss, medical issue, etc), and the rule of thumb is to have 3-9 months of expenses, depending on how stable your income is. (a government official may only need 3 month coverage, whereas a serial contractor might need 9 month). So it shouldn't be a huge chunk of your asset. And having 10% of your saving in corp bond, even in the highest yield, isn't going to bring up the overall performance of your saving account by that much. Thus it's rather trivial to diversify your saving account, unless you have egregious expenses.