The Best Short-Term Investments in Canada for April 2024

WRITTEN BY Dan Kent | UPDATED ON: April 6, 2024

The Best Short-Term Investments in Canada

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The opportunity of setting aside money for the future is not a luxury everyone can afford. Imagine you're planning to purchase a vehicle, a property, or even just squirrelling away funds for unforeseen emergencies or for a secondary income source. We currently have access to some incredibly appealing short-term interest rates for our money, which makes it financially unwise to simply hold onto cash.

You likely know this already, as you've landed on this post. So, in this piece, we'll cover not only the concept of short-term investing but also the best short-term investments for an investor.

Understanding short-term investments

Short-term investments are options designed to be held for a short period, typically less than a year. However, they certainly can be held for longer. These investments are often chosen by investors who want to earn a return on their money without committing to a long-term investment.

Depending on your objectives with the money, you may or may not have use for a very important feature of short-term investments: liquidity. Liquidity is how easily an asset can be turned into cash. Some short-term investments are highly liquid, while others are not at all. Liquidity may or may not be a concern depending on your time horizon and need for the cash.

Another essential factor to consider when choosing a short-term investment is stability. While short-term investments are generally considered less risky than long-term investments, risk is still involved in some methods. Investors should look for investments that offer stability that meets their needs and risk tolerance.

For example, the stock market can be considered short-term in nature. Although it's been proven that money is best made in the markets over the long term, you can hold stocks for a matter of seconds with a brokerage account like Qtrade. This can lead to large swings in price either to the upside or downside over the short term.

A GIC, on the other hand, is a product that provides you with a rate of interest and guarantees your principal.

When considering short-term investment options, it is important to weigh the level of risk against the potential return. While some short-term investments offer higher returns, they may also come with a higher level of risk.

With that said, lets go over some basic short-term investment options here in Canada.

What are the best short term investments in Canada?

  • Savings and Chequing Accounts
  • High interest savings ETFs
  • Treasury Bills/Treasury Notes
  • Guaranteed Investment Certificates
  • Bonds and Bond Funds
  • Exchange-Traded Funds
  • Robo-Advisors
  • Stocks

Savings and Chequing Accounts

Savings and chequing accounts are Canada's most common types of bank accounts. They are both great options for short-term investments as they provide easy access to cash and offer low-risk investment opportunities.

Savings accounts are designed to help individuals save money over time. They typically offer a low-interest rate, which is still higher than the interest rate on a traditional chequing account, that being zero. 

Online banks and financial institutions that may not have brick-and-mortar locations, like EQ Bank, offer high-interest savings accounts that provide a better rate than many traditional financial institutions.

It is possible to unlock even more value by taking advantage of short-term promotions by many of these institutions that can give you access to higher rates for a shorter time.

Chequing accounts, on the other hand, are designed for everyday transactions such as paying bills and making purchases. Many traditional banks do not offer any sort of interest on the cash balance of a chequing account. However, I earn interest on my Equitable Bank account and get cash back on my purchases.

Nowadays, if you're not getting paid for your money to sit in a bank, you're likely at the wrong bank. There are too many options for Canadians to choose from in this high-rate environment to sacrifice earning returns on their cash.

Overall, both of these accounts are going to be earning money on the balances inside of your accounts for everyday spending. I wouldn't necessarily call them "investments, "but they certainly can be, depending on your chosen financial institution.

I hold only the absolute necessities in these accounts. Money I need for day to day spending, to pay the mortgage, etc. Outside of that, there are much better options for Canadians.

High interest savings ETFs

For Canadian investors looking for a low-risk, short-term investment option, High-interest savings ETFs (HISA ETFs) may be a good choice. These ETFs invest in various high-yield savings accounts at banks.

Many of these major fund managers have access to institutional-grade savings accounts. For this reason, you can get much higher interest rates than you would seeking out an account yourself. If you've ever noticed how your rate of interest rises as the amount of money you hold in the account rises, you'll likely understand how this works.

Many of these funds have billions of dollars in assets and are offered the best rates of return because of this.

Additionally, these ETFs can be easily bought and sold on the stock exchange, providing investors with liquidity and flexibility.

High-interest savings ETFs are generally considered low-risk investments, simply pooling your money inside savings accounts.

However, it is essential to note that HISA ETFs are low-risk but not without risk. There is always the possibility of default by the bank in which the money is held. In this situation, your money would be lost because these institutional-grade savings accounts are not eligible for CDIC protection.

HISA ETFs can be a good option for Canadian investors looking for a low-risk, short-term investment option with higher returns than traditional savings accounts. 

Treasury Bills/Treasury Notes

Treasury bills (T-bills) and Treasury notes (T-notes) are short-term investments issued by the Canadian government. T-bills have a one-year or less maturity, while T-notes have a maturity of one to ten years.

You'll often hear Government of Canada Bonds being thrown around in conversations. These will typically be government-issued with longer maturities.

Investing in T-bills and T-notes can be a good option for those looking for a low-risk, low-return investment. However, in our current rate environment, they're starting to provide desirable returns due to their risk-free nature.

They are the safest investments available because the Canadian government backs them. In the case of US treasuries, they are backed by the Federal Reserve.

T-bills and T-notes can be purchased directly from the Bank of Canada or a broker. They are sold at a discount to their face value, and the difference between the purchase price and the face value is the investor's return.

For example, suppose an investor purchases a T-bill for $9,800 with a face value of $10,000. In that case, they will receive $200 when the bill matures.

Guaranteed Investment Certificates

Guaranteed Investment Certificates (GICs) are Canada's popular short-term investment option. They are low-risk investments that offer a guaranteed rate of return over a set period. You can even find GICs that are cashable and allow you to redeem early.

GICs are offered by various financial institutions, including but not limited to the Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada.

They are also insured by the Canada Deposit Insurance Corporation (CDIC), meaning your investment is protected up to $100,000 if the financial institution fails.

Suppose you're looking to invest more than that. In that case, spreading your money out over multiple institutions may be wise to broaden your insured capital.

GICs come in different forms, including cashable and non-redeemable GICs. Cashable GICs allow you to withdraw your money before the maturity date without penalty. In contrast, non-redeemable GICs do not allow early withdrawals. The GIC rates on both of these investments will vary.

Typically, to unlock the best interest rates, you'll need to lock your money up over a set period, which removes liquidity. For this reason, you must consider your timeline with the money you're looking to invest before deciding to invest in a GIC.

One strategy for investing in GICs is to create a GIC ladder. This involves investing in multiple GICs with varying maturity dates so that you have access to some of your funds at regular intervals.

When comparing GICs, it is essential to consider the interest rate, the term length, and any features or restrictions. Some financial institutions offer higher interest rates for longer-term GICs. In contrast, others may offer special rates for new customers or larger investments.

Like savings accounts, you'll typically find much better GIC rates at non-traditional financial institutions like Equitable Bank or Tangerine.

Overall, GICs are a safe and reliable short-term investment option for those who want to earn a guaranteed return on their money without taking on any risk.

Bonds and Bond Funds

Investors looking for short-term investments in Canada may consider bonds and bond funds. Bonds are a fixed-income security type that pays the investor interest at a predetermined rate.

One warning for those looking to invest in bonds as a short-term investment. Holding an individual bond to maturity, meaning you collect all your interest and get your initial capital back, has very little risk, especially when you purchase high-grade bonds.

However, purchasing a bond fund that constantly sees new bonds mature and be removed and added to the portfolio creates a situation where your initial capital could go down.

There is plenty of volatility over the short term in bond prices. They typically offer better rates than a savings account or GIC to compensate for this. But as a short-term investment, you need to figure out if they fit within your risk tolerance.

Several types of bonds are available for investment in Canada, including corporate bonds, municipal bonds, and treasuries. 

Corporations issue corporate bonds and offer higher yields than government bonds and treasuries, but they also come with higher risks. 

Local governments issue municipal bonds to help raise capital locally.

Treasuries, or government bonds, are issued by the Canadian government and are considered the safest type of bond.

Exchange-Traded Funds

Exchange-traded funds (ETFs) are investment funds traded on stock exchanges. They are similar to mutual funds but trade like stocks due to their structure. 

ETFs are a popular investment option for many Canadians because they offer low-cost diversification and are easy to buy and sell.

Low-cost ETFs are particularly attractive to investors because they have lower management fees than traditional mutual funds And are more liquid. 

This means that more of the investor's money is invested in the underlying assets rather than paid to the fund manager. In addition, when they want to exit, they can do so quickly.

One word of caution, however, for those who are looking to invest in ETFs for the short term. These funds expose you to the market (and other things we'll talk about below) and can undergo significant levels of volatility.

Suppose you need the capital in the short-term. In that case, taking on higher-risk investments like equity ETFs is generally unwise. There could come a time when you must liquidate to pay for your down payment, car, furnace, whatever it may be.

Over the short term, the fund could be 30% higher or 50% lower. You just never know. If you're forced to sell, it can get particularly nasty.

In addition to Canadian equity ETFs, some offer exposure to other asset classes, such as bonds, real estate, and foreign equities. These ETFs can be an excellent way to diversify a portfolio and reduce risk.

Robo-Advisors

Robo-advisors are digital platforms that use algorithms to provide automated investment advice and portfolio management services. They have gained popularity recently due to their low management fees, ease of use, and accessibility.

One of the most popular robo-advisors in Canada is Wealthsimple. Although Wealthsimple is more known for offering commission-free trading on stocks and ETFs, many don't know that it started out and continues to operate as a Robo-advisor. 

This means you can put your portfolio on auto-pilot with the company, which will charge you a small fee to manage. The platform also offers a range of investment options, including socially responsible investing and halal investing portfolios.

Robo-advisors typically charge management fees, which are lower than those set by traditional investment advisors. Wealthsimple, for example, charges a management fee of 0.5% for its basic service and 0.4% for its premium service. However, it is essential to note that management fees can vary among robo-advisors, so investors should compare costs before choosing a platform.

In addition to low management fees, robo-advisors can offer other benefits such as tax-loss harvesting and automatic rebalancing. Tax-loss harvesting is a strategy that involves selling losing investments to offset gains and reduce taxes owed. Automatic rebalancing involves adjusting a portfolio's asset allocation to maintain a desired level of risk and return.

Again, a Robo-advisor may not be for you, depending on when you need the money. You are exposing yourself to market risk here. If you're forced to liquidate at a loss to provide the funding you need, it isn't an investment; it's a losing proposition.

Stocks

Investing in individual stocks can be a lucrative short-term investment option for those willing to take on a higher level of risk. Just know that as a short-term investment, it's the highest level of risk on this list. I would not put any money into stocks I needed over 1, 2, or even three years. You simply have zero idea where the market is headed over this period.

Stocks are shares of ownership in a company. Their value can fluctuate based on various factors, including the company's financial performance, industry trends, overall market conditions, and, if we're being honest, which direction the wind blows that day.

The stock market can be volatile, so thorough research is vital before investing in individual stocks. It is also essential to diversify your portfolio to mitigate risk.

Investors should monitor market trends and company performance to make informed decisions about buying and selling stocks. Understanding the company's financials and industry trends is essential before investing.

Overall, investing in individual stocks can be a high-risk, high-reward, short-term investment option for those willing to research and take on some volatility in the stock market. But it's also the one that will most likely leave you in a sticky position over the short term.

Investment strategies and considerations

Risk tolerance

When considering short-term investments, assessing one's risk tolerance is important. This refers to the degree of uncertainty or potential loss an investor is willing to tolerate in pursuit of higher returns. 

Conservative investors may prefer low-risk investments such as GICs or high-interest savings accounts. In contrast, more aggressive investors may be comfortable with higher-risk options such as stocks or ETFs.

Inflation and purchasing power

Investors should also consider the impact of inflation on their investments. Inflation can erode the purchasing power of money over time, meaning that a dollar today may not be worth as much in the future. Short-term investments with low-interest rates may not keep up with inflation, resulting in a loss of purchasing power. 

This isn't as much of an issue in the current high-rate environment. With inflation consistently in the 3-4% range, high-interest savings accounts by online banks and even GICs or HISA ETFs are now providing positive real (inflation factored in) returns.

We haven't witnessed this in a long time, and it is a glass-half-full way to look at the harsh conditions.

Consider investing in inflation-protected securities or other investments that offer a higher rate of return to offset the effects of inflation.

Investment goals

Investors should also consider their investment goals when choosing short-term investments. 

Are they saving for a specific purchase, such as a down payment on a house or a vacation? Or are they looking to build an emergency fund or supplement their income? Understanding one's investment goals can help select appropriate short-term investments.

If you're saving for a vacation, maybe you can take on a bit more risk and delay the vacation if you don't have the results you want when the time comes to need the cash. On the other hand, if you're saving for a vehicle because your old one is nearly breaking down, you don't want to be put in a challenging situation where you are forced to liquidate an investment because you need the money now.

Overall, having a clear investment strategy that considers risk tolerance, inflation, research, and investment goals is important. Investors can make informed decisions about their short-term investments in Canada by carefully considering these factors.

Insurance and annuities

For the most part, when it comes to insurance products and annuities, I wouldn't look at them as strong short-term investments. However, many investors ask me about them, so I figured I'd speak on them. I think many investors get confused by the cash-flowing aspect of these products and believe they are somehow short-term in nature.

Still, even the shortest-term annuities will often be over several years and can extend up to decades.

Insurance companies offer a variety of investment products, including term life insurance, whole life insurance, and universal life insurance. These products provide a guaranteed death benefit to the policyholder's beneficiaries upon their death. They also offer a savings component, which allows policyholders to accumulate cash value over time.

Premiums for these policies can vary depending on the policyholder's age, health, and lifestyle. I feel these products are often pitched by advisors who do not have their client's best interests at heart. Can they be valuable investments for some? Absolutely. But I know just as many people who have been coaxed into them who don't need them.

On the other hand, annuities are investment products that provide a guaranteed income stream for a set period. They are typically purchased from insurance companies and can be fixed or variable. Fixed annuities offer a guaranteed rate of return. In contrast, variable annuities allow for investment in various funds, with returns based on market performance.

Both of these options are relatively low risk. Still, they do lack the liquidity to, in my opinion, be considered for any sort of short-term investment.

Tax considerations

When considering short-term investments in Canada, understanding each investment option's tax implications is important. Interest income from GICs is very tax inefficient. In contrast, dividends or capital gains from stocks can be some of the most efficient taxable income you'll have.

If you want to buy investments for the short term and avoid paying taxes, consider tax sheltering them in these accounts.

Tax-Free Savings Account (TFSA)

The TFSA is a popular investment option for short-term savings. The contributions made to a TFSA are not tax-deductible. Still, the investment income earned within the account is tax-free. This means that any gains made on investments within the TFSA are not subject to capital gains tax, and any income generated from investments inside is not subject to tax either.

Registered Retirement Savings Plan (RRSP)

The RRSP is another popular investment option for Canadians. Contributions to an RRSP are tax-deductible, meaning they can reduce your taxable income. 

The investment income earned within the account is also tax-free. However, withdrawals from an RRSP are subject to income tax.

The RRSP is generally not an account in which I'd look to hold short-term investments unless it was for a First Time Homebuyer Plan or Lifelong Learning Plan. This is because you'll be taxed when you pull RRSP money out (HBP or LLP).

Nonetheless, it is a tax-sheltered account and a valuable one at that.

Overall, most short-term investments are going to provide you with poor tax options.

Mostly, the safer short-term investments like GICs, bonds, HISA ETFs, etc., will be relatively tax-inefficient. You will pay interest income, which is often the poorest level of taxable investment income.

However, that doesn't mean you should avoid buying short-term investments. In today's high-rate environment, we're being offered outstanding rates for our cash, and it would be a mistake for investors with an appropriate time horizon for the investment they choose not to take advantage of.