Canadian ETFs Hit Record Inflows in June

[00:00:00] Welcome back to the Canadian Investor podcast, I'm here with Dan Kent. We are back for a Thursday episode. This one will be a bit different than our regular news and earnings because Dan is taking a well learned vacation so we are recording this one in advance.

[00:00:31] So today we will be focusing more on ETF flows that happen in Canada but also in the US. So I have talked about it before, National Bank comes out with this really interesting and pretty kind of complete obviously you can get a bit more granular if you wanted

[00:00:47] if you had access to either Bloomberg terminal or Y-Charts but I think they do a pretty good job at putting these together. So we will focus on that today and then at the end of the episode when Dan and I are done

[00:01:00] I will be having an interview with Mahima Podar from EQ Bank to go over some of their new products that they have including the notice savings account. So make sure you stay tuned in for the whole episode if you want to hear that as well.

[00:01:14] So before I get started, Dan how is it going today? Pretty good, yeah it sucks we couldn't get like the Y-Charts version they released later this week so we just missed it but these fund flows are pretty interesting documents.

[00:01:30] I think like every investor should read these when they come out every month. They don't take long to have a look like if there is a lot of charting, a lot of stuff

[00:01:38] so you don't really have to read all that much but it kind of just shows you where the money has been flowing over the last few months where for the most part major institutions are putting their capital but they're definitely a very interesting read.

[00:01:54] Yeah exactly so we'll get started we'll go over both the US, the Canadian and US one a little bit here and I will share the link in the episode description so make sure if you want to look at it

[00:02:07] and they come out with this every single month so it's really interesting to see the shifts and the trends so what's interesting about the June report for those who may still not fully realize

[00:02:19] and myself included that you know we're actually in the second half of 2024 right now I was going to say 2023 so just shows how well I'm doing here but it's interesting because you get an idea of

[00:02:33] how the first half actually unfolded and obviously is that going to continue going into the second half who knows but there's some good learning so according to the report we're at an all-time high in

[00:02:46] ETFs inflows for the month of June in terms of Canadian ETFs so it hit a all-time high the total was 9.7 billion that exceeded the previous record set in February of 2020 by 25% now before people get too excited about the all-time high here I think

[00:03:05] Dan you would also agree with that that you know ETFs are relatively young in terms of popularity so I don't think you know it's not like we're really looking back like 50 60 years now like I would say they've really gained in popularity probably in the last decade where

[00:03:24] they've really become popular as a whole yeah so I would I was actually doing some research on this a week ago there was in 2003 there was 297 ETFs and now there's like 9,000 globally okay there you go

[00:03:39] compound annual growth rate of I think what was it 18.1% which a lot of it coming in like the last like you said 10 years I mean they're just exploding in popularity and a lot of people are

[00:03:52] flowing out of you know higher fee mutual funds and into you know these cheaper cheaper ETF options so I don't see it slowing down anytime soon besides like the inevitable slowdowns when

[00:04:03] the market you know dips booms things like that yeah exactly so that's why I wanted to kind of caveat that because yes it's great that it's an all-time high but the popularity in investing in ETF really

[00:04:16] exploded I think over the I think the last decade but you know you when you looked at the data it was even the last two decades and it's just important to put some context here and

[00:04:26] 70% of the inflows were actually in fixed income ETF while 23% were equities which I did not expect that so I don't know what are your thoughts on that because it's actually and I'll talk about it a

[00:04:39] bit later when we go over the US one but for the US it's actually reverse where equities saw 63% of the inflows while fixed income saw 31% yeah so I think it's like obviously it's a lot of people

[00:04:55] or a lot of institutions probably trying to take advantage of maybe a decline in interest rates and you know getting into those fixed income ETFs like the mid to long term you know bond ETFs for

[00:05:08] the most part we've seen I believe these would be classified as fixed income ETFs but those like Heise ETFs like the high interest savings I know Purpose does one like Global X has quite a few

[00:05:21] those ones are actually seeing pretty big outflows just because I think the rate you know with rates inevitably coming down those funds are probably going to start yielding less so but they have

[00:05:34] started to see a pickup in money market funds as well which is interesting because those should also come down and yield as rates come down so it's a pretty interesting element I think

[00:05:44] I think it is a bit skewed to a point because they had there was a large ETF and an equity ETF from BMO that saw like a gigantic outflow from a institutional investor that pulled out so I

[00:05:59] think that kind of skews the data a little bit to the point where it's probably a lot more level than we'd think but that big outflow kind of makes it look like there's a lot of money

[00:06:09] dumping into fixed income when I think it's just it's a bit more it's not as heavy as it seems just first looking at it no I think that's good context because I wasn't aware of that so I

[00:06:18] think that's some really good context here and of course for more than half of this year total inflows in fixed income came in June so essentially most of the inflows for the whole year for fixed

[00:06:31] income were actually in June so there's even despite that there's still this kind of shift that we're seeing at least in Canada can't really explain it so even if we remove the equity part

[00:06:43] focus on a fixed income that is a bit strange and like you said it could be that people institutions are betting on the longer end of the curve kind of coming down as well so the further out you go in

[00:06:57] terms of duration for bonds and fixed income essentially what will happen is if interest rates start going down then the value will actually go up and then if interest rates start going up then the value of the bonds start going down which has been a pretty painful lesson

[00:07:14] I think for a lot of yeah you know fixed income investors for those who are looking at longer duration since pretty much 2022 they've been some of the worst performing assets which is interesting because most people you know they always perceive bonds as being safer than equities and we've

[00:07:33] been and you would hear this all the time I think people were just programmed into you know thinking that bonds would you know you'd just get capital gains over long periods of time because since

[00:07:45] the 1990s we've essentially seen interest rates gone steadily down since so I think a lot of investors were programmed that way yeah and I think there's an added element also of like purchasing an individual bond where the point where you know there's there's like especially

[00:08:01] if you purchase a high-grade bond there's there's virtually no risk like you're going to get your capital back at maturity whereas if you buy one of these you know broad mixed bond ETFs like they

[00:08:12] you know they trade a bit differently in price there is no like set you know capital you'll get back it's simply an ETF that trades up and down and they've gotten hammered over the last

[00:08:24] while I believe wasn't it in 2022 or 2023 the 6040 portfolio it was like the worst performance in a very very long time just that high bond exposure yeah probably 20 yeah yeah it just got thrashed and it's supposed to you know the 6040 portfolio is supposed to be you know a relatively

[00:08:43] conservative portfolio that that's a good point for yeah holding individual bonds I think the capital or the yeah the principle will be you know risk-free assuming that you know the company is solvent or obviously the high-grade bond high-grade bond so yes that is risk-free where there is some

[00:09:02] risk as you can you still have the opportunity to lose purchasing power right so if you don't keep up with inflation so just something to to keep in mind but when you look like you said

[00:09:13] when you look at bond funds there'll be you can see some capital appreciation or losses when it comes to the actual underlying value of the the bonds that make that ETF now in terms of the inflows

[00:09:27] for the first half they were 33.3 billion which is now on track to beat the records set in 2021 57% of inflows were into equities and 37 of inflows were into fixed income so I think yeah the context that you gave with that institutional investor I think that definitely helps that as

[00:09:47] well and then looking at the inflows from the first half of this year fixed income has led the way with 6.8 billion in inflows in June 75% of the inflows into fixed income went into Canadian fixed income government aggregate and corporate so obviously there is all different kinds of

[00:10:08] fixed income here in June again fixed income inflows were divided between money market funds short-term bonds which are essentially less than three years medium term five to ten years and mix a fixed income funds and when looking at equities the majority of the inflows were Canadian equities

[00:10:28] with the US actually seeing 432 million worth of outflows so I'm not sure if that's related to what you were saying earlier that last part I would say it is like I think this kind of paints

[00:10:41] a picture of you know people flowing out of US equities when in reality like there was a single fund that saw outflows of 1.82 billion so the assets under meant it was the BMO ESG fund so it's

[00:10:59] like a ESG fund for US names so it went from 1.96 billion and assets to 168 million and apparently it was just one you know large institutional client that just moved elsewhere so I think that would

[00:11:14] probably go on the books as like a large US outflow whereas you know if you looked at this report on the surface you would think that Canadians were selling us equities and buying Canadian equities when in reality it's probably a bit skewed because of that big one-time outflow

[00:11:31] I think I have it here right so I think it would be the ESG Y yeah yeah yeah so the ESG Y the BMO MS CIUSA ESG leader index ETF lost 98% of this it's asset under management so 1.8 billion in outflow

[00:11:50] and that was the top single ETF outflow by a mile the second one here was BMO Japan index ETF ZJPN the third one again BMO MSCI emerging markets index ETF ticker ZEM the global XUS large cap

[00:12:09] index corporate class ETF was number four and then NBI sustainable Canadian equity ETF that was number five in terms of outflows so it definitely lines up with what you were saying

[00:12:22] and I think earlier I said there was a fixed income led the way for the first half of the year was actually for the month of June it led the way in terms of inflows for 6.8 billion so just a

[00:12:33] little correction here and then in terms of the the most inflows for June again the top five funds so this one is pretty interesting because if you look at the inflows all but one were actually

[00:12:48] fixed income so I find that pretty pretty interesting yeah I mean you have Zag which is like an aggregate bond index so it's going to have you know a wide variety of maturities I think for the most part

[00:13:00] it's actually intermediate to long-term I'm not 100 sure on that but big inflows to there the the one thing I'm surprised like I said is the is the money market fund the ZMMK it saw some pretty big inflows when in reality I think the those money market funds

[00:13:14] will probably you know go down and yield so I mean maybe people are kind of transitioning out out of those you know hysa ETFs and into this it's it's kind of interesting it's it's pretty

[00:13:25] hard to tell what is yeah I mean actually going on I think it could be like I've been pretty vocal like I personally think you can you might be able to make the trade for longer duration

[00:13:39] maybe long duration bond yield actually go down and it increases the value but I just think the risk with what we're seeing in terms of government debt and also corporate debt being so high

[00:13:53] I just see a whole lot of risk the further out you go on the curve in terms of duration so personally and I've said it before I stay on the ultra short term and of duration with the

[00:14:05] one to three months treasury bill ETFs and I think it could be a reflection a lot of people feeling like a lot of investors feeling the same way as I do and kind of staying in that shorter

[00:14:16] duration through money market funds yeah I mean when you look at it outside of the money market funds it's pretty clear that other people and institutions are doing the same thing

[00:14:25] I mean the the number one you know non aggregate bond ETF would be the BMO short term corporate bond ETF which saw some pretty big inflows and then you have a midterm so there's no

[00:14:39] long-term bond ETFs that are on the top end of inflows the other surprising thing here why it's not all that surprising is if you look at the top five inflows they're all BMO funds

[00:14:49] yeah they are and BMO yeah like BMO saw some huge inflows on the month like they they made up quite a bit of ground on iShares which would be the largest provider but BMO's they're closing the gap pretty

[00:15:05] fast yeah I was looking trying to see here the providers I know they do there you go yeah so they do break it down in terms of provider and I think you're right so BMO is closing in on

[00:15:18] definitely way in front of Vanguard in terms of market share in Canada you have iShares with I guess they partner up with RBC for their Canadian products and then you have number three Vanguard

[00:15:33] and then rounding out the top five you got GlobalX and CI Gam I can't uh anyways so you have those five I mean GlobalX I'm familiar because I believe those are the U-bill and C-bill

[00:15:46] if I remember correctly yeah yeah yeah GlobalX has a lot of interesting ETFs like they have the corporate class ETFs where like you can own that they're um what can I not think of the name swap

[00:15:59] they're pretty much swap ETFs where they'll get into an agreement with an institution where the institution pays them their returns to the S&P 500 for a fee and that way there's no distribution okay so they're a bit more they're a bit more tax friendly they obviously have added

[00:16:14] risks in terms of counterparty risk things like that but those ETFs are becoming pretty popular but yeah we see like BMO had five times the amount of flows on the month as any other fund provider

[00:16:25] the next closest fund provider it's uh it's pretty crazy they're uh they're coming out with a whole bunch of new funds and I mean people are people are buying them yeah exactly and then you get

[00:16:36] into if you go down the list or just you know they're just very small providers but it's always I find it just interesting looking at that data so now if we anything else to add in

[00:16:47] terms of the Canadian content here before we shift over to the US monthly ETF inflows or flows I guess yeah I guess the the one thing that I would mention is they have a they have a section on new

[00:16:58] issues and I mean it's pretty obvious that like the passive income you know slash high yielding craze is just continuing to explode so they had 14 new issues on the month and uh I believe it

[00:17:09] was seven of them all have you know some idea of enhancing yield or split corporations so I mean I looked at the the average management expense ratio of the new issues that were not income

[00:17:22] focused so I just added up all of the of the MERS and came out with an average it was 0.25 whereas the average MERS of those income focus ETFs was nearly double 0.47 so I mean a lot of

[00:17:33] these income funds I mean they it's never a guarantee as to whether or not they'll under perform outperform or whatever but the one thing that is very common is they come with significantly higher fees than uh then an indexing option or like even even some actively managed

[00:17:50] funds like the income funds just always I mean I think to a certain extent they they just take advantage of that you know and investors need to you know generate that high yield and

[00:17:59] as a result investors are willing to pay more fees to own them but uh yeah lots of new income funds still coming yeah it's interesting that there's the ether staking ETF

[00:18:11] that was launched as one of those ETFs I can't imagine the yield on that thing yeah I mean it must be probably it's gotta be high yeah I use I mean actually I think ether staking is

[00:18:22] probably around four five six percent it's not that high so okay yeah so unless they're using some kind of other strategy and we've talked at length about covered call ETFs to generate more income I mean it's it's fine it's something I would not personally invest into because when

[00:18:38] I did the research starting back testing what you end up realizing is the downside protection that it gives you it it's not like yes you'll lose a bit less money if there's a correction because

[00:18:54] of the premiums that you're collecting by selling those covered calls but it does not make up any word near close to the cap that you're actually putting on your upside no so the and

[00:19:08] that's something just to remember yes you get the income if that's your focus that's fine but if you're looking for total returns they tend to vastly underperform because they are capping the upside so much more than they are helping your downside out versus the equivalent ETF that

[00:19:24] would not have a cover call strategy and then you also factor in the additional fees as well yeah so the one the one like prime example of this would be purpose when they release those

[00:19:35] cryptocurrency ETFs which I mean they've they've performed horribly I mean even so since from the inception of those covered call crypto ETFs if you look to like the max drawdowns so there was virtually no downside protection so at the bottom the purpose ether yield ETF total

[00:19:55] return lost 75% where the price of ethereum only lost 75 so I mean it actually underperformed ethereum and then you know over over the last year ethereum is up 82% while that covered call ETF has only returned 55 yeah there it's that cap right so there's the gap right there yeah just

[00:20:14] oftentimes the premium you collect on the covered calls it's you know it's a premium that's how they generate the yield but it off it just does not make up for that for capping that upside so

[00:20:26] yeah so I guess we'll move on anything else or we'll move on through the US ones here nope that's it okay so us monthly ETFs so for the first half there was 437 billion

[00:20:38] with a B in inflows which is on track to be the inflows of 2022 and 2023 well actually it is it did beat well actually no 22 and 2023 for the whole year they actually had just around 600

[00:20:53] billion in inflows so they are on track to beat it they don't have to do all that well this year in terms of inflows actually beat that the all-time high is 2021 which was at 946 billion

[00:21:05] so you know it's still possible that 2021 could be beat or equaled or coming close to it but the second half of 2024 would have to be extremely strong in order for that to happen

[00:21:19] now for June it was a bit of a different story here for June and I mentioned it earlier compared to Canada so in the US really equities saw 63% of the inflows but again I think if you caveat that with

[00:21:32] the BMO fund I think it's probably a bit closer when you compared Canada to the US and fixed income was 31% so for equity inflows 73% was US equity with the balance being in developed markets internationally that's important because emerging markets actually saw slight

[00:21:54] outflows during the period mostly led by China surprise surprise China has been definitely struggling and I haven't looked at the Chinese market recently in terms of equities I know I had a bit of a

[00:22:07] bounce back in the spring have you looked at that recently or I haven't looked at it no I don't really I never really plan to invest there so I don't really pay attention to it too much but okay yeah

[00:22:19] I haven't looked at it so recently anyways I'm just going on back on memory but I know obviously whether the market is doing well or not I think at the end of the day there's just a lot of

[00:22:29] investors that are reluctant to invest in things that have too much exposure to China there's just so much uncertainty around it myself included I used to have some China equity a couple years ago

[00:22:43] sold all of that just because there was just so much uncertainty and the fact that the CCP the Chinese Communist Party can just really make unilateral decisions that can impact pretty negatively investors without really much of a heads up like really snap of the finger if

[00:23:01] Xi Jinping decides something usually you know it will happen now for the top five ETFs by inflows they were equity ETFs and I'll kind of share my screen here again for people to

[00:23:16] on join TCI to be able to see the inflows here and the outflows so the top five inflows you're looking at the iShares, KORUS and P500 ETF what's interesting is this one saw 13.6 billion in inflows

[00:23:32] but the top outflow was 5.1 billion in outflows from SPY so I think you know there's definitely some money that went from that SPI to IVV I think we can all agree on that what percentage

[00:23:47] I'm not quite sure but they kind of offset each other they're the two biggest inflow and outflows respectively and then if you stay in the inflows so you have TLT that's the long duration 20 plus year treasury bond ETF that one saw 4.8 billion QQQ which is the NASDAQ ETF

[00:24:07] saw 4.3 billion in inflows IVW the iShares NP500 growth ETF 3.9 billion and IFG which is the iShares MSCEF AE growth ETF saw 2.7 billion but just double clicking here like I mentioned

[00:24:25] earlier I think a lot of people are betting on duration and the fact that TLT is second on the list I think it illustrates that pretty well yeah like a 20 plus year treasury bond ETF that's

[00:24:39] it's pretty interesting I would imagine the IVV versus SPY is just a fee thing I mean I know I'm pretty sure IVV is like a third of the fees it could be it could be an institutional player

[00:24:51] or a big player right that just decided to kind of trim its old thing and just just ended up owning SPY I'm not sure there could be a lot of different reasons but I thought that was interesting

[00:25:03] and to go back here on what I was saying for fixed income it's pretty interesting to break down you see different investors betting on different things here for fixed income so you have

[00:25:15] really I'll remove kind of broad slash mixed fixed income because that's going to be a mix obviously of different kind of duration when it comes to fixed income if you remove that one out there's two

[00:25:28] that really stand out so you have long term which is saw 6.3 billion in inflows and you have ultra short term which is less than a year in duration that saw 5.6 billions in inflow

[00:25:41] and then the next on the list is 2.7 billion with the mid term and then the rest of them are quite kind of small in terms of inflows but what are your thoughts on this it's almost like there's

[00:25:53] two parts of the market that are like or investors that seem to be I like me that want nothing to do with duration and then the other part seems to be betting that duration will perform well

[00:26:07] well the one the most interesting thing I find here is like you see long term in the US getting the most inflows whereas I'm pretty sure in Canada long term got like almost no inflows most of it

[00:26:19] was all you know mid to short term so obviously people are betting more on duration in in the United States I mean would this be the one thing I'd be curious about like this would be total

[00:26:30] this would be both government and corporate bonds yeah I would imagine yeah I would say like my guess would be that it would probably be most of it like US like federal government debt and

[00:26:42] you're seeing up here right so by type so yeah the most of it US government so I believe that's mostly US federal like the vast you know more than about 40% of all the inflows came from

[00:26:55] that and then you have US corporate aggregates so different kind of breakdown but definitely I would say a good chunk of it close to 50% is the US government yeah yeah I mean people just buying buying duration in in the hopes that the federal reserve

[00:27:14] lowers rates and prices go up I mean I would imagine that's that's the case here TLT yeah TLT that's the trade but so anyways the second one here in terms of outflows I said yeah SPY

[00:27:28] was the most second one is the iShare MSCI EFA value ETF saw 1.9 billion in outflows the iShare's global energy ETF saw 1.1 billion in outflows SPYD which is the SPDR portfolio S&P 500 high dividend ETF saw 0.9 billion in outflows and interesting I guess people are giving up on the

[00:27:52] equal weighted so RSP the I guess the most prominent equal weighted ETF of the S&P 500 saw 0.8 billion in outflows so yeah that one was interesting because you'd think I guess people

[00:28:08] are just you know what screw it I'll I'll just get invest in the market cap and at least I'll benefit from Nvidia going yeah because you would argue that I mean it's what the highest

[00:28:20] concentration in the S&P 500 history you would argue that more people might be interested in an equal weight over you know a cap weighted fund I mean the I'm not sure I mean though the one

[00:28:33] thing I guess I should mention this EA FE like a lot of people it's Europe Australia and the far east yeah so that's like mostly you know like international markets like that the energy ETF

[00:28:44] is pretty interesting it too back to the Canadian end but XCG like one of the biggest one of the biggest and one of the oldest energy ETFs in Canada they're on pace for their lowest demand

[00:28:56] in terms of inflows in their history this year so I mean there's just no love for while you're for energy companies right now you're so what you're saying is you're assuming that

[00:29:09] people will be contrarians and not go with what's been performing the past in the past like year and a half and unfortunately I think it's the I heard that somewhere I can't remember where but

[00:29:22] it's the neighbor test right so you may own a very balanced portfolio that's very you know we'll do eight to ten percent longer term but then your your neighbor has 50% of his money in Nvidia

[00:29:36] so you kind of go and look at your investments or talk to your you know in financial advisor and you say okay like what are we doing here my buddy my neighbor just doubled this money at this year

[00:29:47] with Nvidia so I think a lot of people end up I think it's as simple as psychology and FOMO people see the returns and they're like okay screw it like I've been in this equal weighted because

[00:29:57] I thought it was the best way to get diversified I'm getting crushed by the market cap weighted so I might as well you know join join the herd and just invest in what's been working chasing returns

[00:30:09] chasing returns and it's a huge thing like recency bias I mean a lot of people just want to invest in you know what has performed well over the last year or two and in reality

[00:30:20] you know what it's done in the last year or two has absolutely no waiting on what it does moving forward yet a lot of people will flow out of the equal way well it's never a guarantee

[00:30:31] that the equal weight will perform better but like you might hit a situation where you know a lot of people flow out of the equal weight and into the you know the normal S&P 500 ETFs and then

[00:30:39] if tech scales back a bit the equal weight will more than likely outperform so I mean recency bias chasing returns is a huge huge reason why you know a lot of a lot of retail

[00:30:52] investors even if they're indexing could end up underperforming because you can you can flip around on these indexes all you want well and you can argue that actually like you know the market cap

[00:31:04] weighted and the mag 7 and the performant it has you can really argue quite well that because of all the outperformance they'd have and the valuations being stretched at future returns are likely to be sub kind of historical standards than they have been while going forward then they

[00:31:25] have been over the last five ten years because there's been such a run up recently so but people I know a lot of investors and it's not just retail investors and it's institutional I mean

[00:31:35] a lot of them are seeing what's happening and it's just like okay like they kind of give up and then they just go with the herd and that's usually when it starts smelling like a bubble

[00:31:45] a little bit I'm not saying that when the late stages necessarily could go on for years before it pops but it's my feeling is that it will pop at some point whether it's a month or two from now

[00:31:58] a year or two three years I don't know that's why I stay invested but I try to hedge a little bit my exposure to not be fully inequities so I have some cash and I also have other assets

[00:32:10] because I see a lot of warning signs right now but that's a problem right things can go yeah the irrational exuberance can continue for quite some time yeah the market can stay irrational longer than you can stay solvent that's the that's the

[00:32:27] phrase I guess yeah I mean it's the same it's the same thing with all a lot of the small caps that I held like the last two years have been absolute painful but now you know in 2024

[00:32:39] like a lot of them are up 40 50 60 percent so you're laughing for a good week now yeah yeah exactly finally yeah finally but I think you know this was a fun little ETF let us know if

[00:32:55] you enjoyed this because I know Dan does a lot of work on ETFs as well I keep a good eye on it as well so if that's something that people are interested then we could potentially look at

[00:33:06] doing one of the Thursday episode every month look at these ETF inflows and outflows just see how the markets are doing maybe kind of sprinkle in a bit of news and earnings along with that but

[00:33:18] anyways Dan I hope you enjoy your vacation that's coming up well deserved thank you for everyone listening and now make sure you stay on because I have a great interview coming up

[00:33:30] with Mahima so um we'll switch on and go for the interview so I'm here with Mahima Podar from EQ Bank Mahima thanks for coming back it's great to have you again you always have some some really

[00:33:44] great insights when it comes to the product and services and just the knowledge in like for example in banking in general before we get started how are you doing how are things at EQ Bank yeah thanks you're going really well we're really excited about our recent

[00:33:58] notice savings account launch and it's always a pleasure to be here so thanks for having me back okay well we'll get right to it since you mentioned it so the notice savings account

[00:34:08] so we have talked about it before on the podcast but might be a refresher it wasn't probably not in great detail like you'll probably go over just now so for those who are hearing this

[00:34:19] for the first time can you just tell us like what it is how it works sure so the notice savings account is a new concept for Canada but it's quite common in the UK and so what it is

[00:34:32] is effectively a high interest savings account where the customer gets the benefit of a higher rate so for EQ that's up to 5% but they have to provide advance notice of withdrawing the funds

[00:34:47] so if they went into the account and wanted to withdraw the money it would take at minimum 10 days before they could access that money yeah and then the 10 days I think right now and obviously

[00:34:59] rates are subject to change but right now would be four and a half percent and then the 30 days notice it would be the five percent correct that's exactly right so we have two different products

[00:35:10] one has the 10 day notice period the other has the 30 day and as you mentioned the 10 days 4.5 percent right now and the 30 day is 5% okay yeah that's great and I have to say I have to admit

[00:35:22] I am using the 30 day one just because the way I see it is you know when you put I pay most things with a credit card and the way the bailing kind of happens I figure if I do need some extra cash

[00:35:34] typically I'll have enough time to incur the expense you know do the notice and then be able to get the fund and get that extra interest on it so I think it's a fantastic product and then

[00:35:45] you have the 10 day where you don't have to give as much a notice if you're willing to take a little bit of a haircut on the interest rate you know it's uh it's been really interesting

[00:35:54] because 70% of customers so far are in the same camp as you and they've chosen the 30 day notice period but before we launched I was having a big debate with our CEO because I was convinced

[00:36:06] that people needed a shorter term period and so I really thought there would be more attention on the 10 day but I'm glad to see that the product is bringing value for people regardless of which term they choose. Yeah and have you seen in terms of your

[00:36:23] customers like what's the kind of update you mentioned most people are kind of looking towards a 30 day notice but as the overall update for both notice savings account you have kind of some rough numbers or ideas of how customers are using it and the reception?

[00:36:39] The reception has been absolutely fantastic so we did ask me anything on Reddit and just the amount of questions and interest in the product is better than anything we've seen before. We have already blown through our annual targets for the product so we're talking about hundreds of

[00:37:00] millions of dollars in the accounts already and so we're really excited by the early interest in the product. Yeah and you mentioned earlier that this kind of comes from the UK

[00:37:09] I think there's a I was googling it because I think you know me I like to do some research and I'm kind of it bugs me when I don't fully understand things but I noticed there were a

[00:37:18] few other countries that have it as well so did you get a sense how popular they are in those countries or we can kind of zone in on the UK here because it's been I think a type of account

[00:37:28] for a couple years if I remember correctly on what I read so there must be some interesting data on what people over there and what uses you're making. Yeah absolutely so it's quite common

[00:37:39] in the UK and there's lots of banks that offer it over 200 actually that have notice deposit accounts. It's common in Australia, Westpac offers a Rabobank and then New Zealand it's fairly common as well again with Kiwi Bank, Westpac, Heartland Bank offering it as well as Rabobank again

[00:37:58] and then Japan has seen more uptake of these notice deposit accounts but just from the UK alone there's over 250 billion in notice accounts as of March 2024 so really kind of good interest

[00:38:15] and familiarity with the product in the UK and the other kind of trend that they have been seeing is since interest rates have been rising let's say mid 2022 the interest and notice deposits

[00:38:28] has continued to increase over that period. Yeah and I think it's a great I mean to me it's a great offering to give a bit of a hybrid between almost kind of you know higher rates like a GIC

[00:38:42] would give you but more flexibility and obviously more higher rates than just your regular savings account which I think I get 4% right now which is still quite high but you know if you know

[00:38:54] you won't necessarily needs the fund like you know on a given day I think it's a great option and which kind of brings me to my last question here and feel free if there's anything that we kind of

[00:39:05] missed that will be interesting for our listeners but you know I know banks decently well I would say and duration mismatch between deposits and loans is definitely one of the bigger risks for banks in a fractional reserve banking system and I'm assuming the notice savings account allows

[00:39:21] you know EQ Bank and banks in the UK and any other bank to that offers it to manage that risk a little better right because you know that whatever deposit you have there whether it's 10

[00:39:34] or 30 days if people give a notice it actually gives you a bit more flexibility to try and match up those those loans that you might have against those deposits so why aren't more banks

[00:39:46] offering that in Canada because to me it just makes logically a whole lot of sense to offer this kind of product but I'm just kind of confused it's not more widely offered here

[00:39:58] so I mean I think it's it's maybe the start of being more widely offered so we were more the first or among the first to launch the product but for us it wasn't really about duration

[00:40:10] because the term of our lending products for example are considerably longer than 30 days for us it was really around managing liquidity risk and so in a stress scenario the having the extra

[00:40:26] 10 days or the 30 days and this is like these are scenarios that are very unlikely to happen in the regular course of the existence of the bank but we have to protect against stress scenarios

[00:40:37] having that extra 10 days or 30 days is really valuable for any bank because you have that kind of guaranteed cash on hand if something extreme were to happen why I don't think it's that popular

[00:40:50] among the big banks is because you have this reality of too big to fail and so the the 10 days or the 30 days isn't really going to be a big driver for the RBCs and TDs of the world because

[00:41:08] human mentality is is unlikely to take money out of one of those big banks and put it into another bank because like where else are you going to go is kind of the way that people think about it.

[00:41:21] Yeah and they're probably more concerned about the interest margin hit that it would take I would think versus that that's just my words it doesn't have to be yours so that's just my words but

[00:41:33] that's probably the calculus that they're doing but I think that's some some really good context here before I let you go is there anything else that you think our listeners would need to hear

[00:41:44] that would be really useful regarding these types of the notice savings account or if there's any other kind of product that EQ Bank will be launching soon that our listeners would be interested

[00:41:54] to hearing about. So I mean I think if when you think about our impetus for launching the notice savings account it was based on customer research and insight that found that most people

[00:42:07] are still using checking accounts for their short and medium term savings and while EQ Bank is graded up to 4% in the checking account that's really not the checking account that people are using

[00:42:19] for savings and so we wanted to create a vehicle that gave them better returns but also had no minimum balances and no fees and what I would say is the difference between even what you see in a

[00:42:34] traditional high interest savings account like some of the banks that the rates are still like 0.8% or 1% is quite massive and then also even if you compare it against a 30 day GIC that the big

[00:42:48] banks offer this is considerably better and so it really is a much better vehicle for the short and medium term savings and I'm hoping that we can help kind of introduce the Canadian population to these better options because a lot of it is based on lack of awareness.

[00:43:07] Yeah and I think you touched on something that I will try to not go on the rent here but when I see high savings account and they offer like ridiculously low rates I just don't understand

[00:43:17] why regulators don't you know put some kind of threshold where you can't call a savings account a high savings account if you're you know a certain amount below the overnight rate or

[00:43:28] something like that it just baffles my mind but I will try to not go on a rent but it was a really good point. People open that account because they think they're getting 6% but then

[00:43:38] they don't recognize that the 6% is only for like three months or six months and then the rate goes down to 0.8% at best. Yeah that's it and that's why like I know Braden and I

[00:43:49] and Dan or other co-hosts are big on that is just sometimes the things that are misleading where people don't either read the fine print or don't really know what they're

[00:43:58] getting into. That's something I'm not a big fan of but I that's why I love EQ Bank because I think it's very straightforward. The platform is fantastic and I guess on that note Mahima

[00:44:10] I will just thank you and I know our listeners every time we have you on the podcast there's already always some very positive feedback so we'll definitely try to have you back maybe later

[00:44:21] on this year but thank you for taking some time out of your busy schedule to join us. I would love that and the small business account is in beta right now so we'll definitely have

[00:44:29] something to talk about next time. Okay perfect okay you got my curiosity because I think I've been asking you and a couple people when it's coming out so for business owners listening

[00:44:39] it's coming soon so I think you know if it's anything EQ Bank I'm sure it'll be a really good offering so thanks again Mahima and we'll get you on to the beta. Okay perfect thank you. Thanks so much.

[00:44:56] The Canadian investor podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.