The Safest Investments With The Highest Returns in Canada

Posted on February 21, 2024 by Dan Kent

2020 and 2021 were all about learning how to buy stocks and the stock market in general. However, as we enter an environment of higher interest rates, the stock market is no doubt going to be volatile over the short term, and investors are now looking for safer investments for their portfolios as a result.

Keep in mind there are relatively few investments that are truly "risk-free", not even money market funds. Virtually every investment except treasury bills or notes has risk attached to them. However, there is a varying degree of risk depending on what you choose to invest in.

Why now may be the time for lower-risk investments

Over the last decade, investors have gotten relatively little yield out of low-risk investments. This is because the banks will often issue these products and accounts reflective of whatever policy rates are at that time.

So as interest rates rise, risk-free products offer higher yields for Canadians and in return, start to become more attractive versus the stock market. This is because, during a time of rising interest rates and increasing inflation, stocks tend to struggle.

Since the financial crisis of 2008, many investors have turned to dividends to earn a passive income stream, as the payout has typically been much more than a low-risk investment.

However, the tables are quickly turning, and in this high-rate environment, many are starting to turn to some of the best low-risk investments with higher returns here in Canada. Let's get into them.

Keep in mind, depending on your trading app or brokerage you use, some of these may not be available.

What are the safest investments with high returns in Canada?

  • High-interest savings account
  • High-interest savings ETFs
  • Treasury Bills and Notes
  • Bonds
  • Preferred Shares
  • Mortgage Backed Securities
  • Annuities
  • Blue-chip stocks
  • Index funds

High-interest savings accounts

A HISA is typically one of the safest places to park your money and earn some interest. You can expect to earn more from one of these accounts if you seek out the highest rates outside of a major institution.

Major banks lack the overall interest they pay on their HISAs. When we look at institutions like Equitable Bank, they tend to offer higher rates due to lower overhead, as they are not a brick-and-mortar institution.

With this type of account, you can't expect to earn much, in the range of 0.5%-2%. It can be utilized by those who need to park some money they may need in the short term but it is not feasible when it comes to long-term investment.

Interestingly enough, some top-rated funds have come out in recent years that make HISA even more attractive, paying nearly 5% at the time of writing. These are called HISA ETFs, and I'll go over them below.

High-Interest Savings ETFs

A high-interest savings ETF is an exchange-traded fund that investors can buy on the Toronto Stock Exchange to quickly gain access to institutional savings account rates without having a large account balance.

ETFs

In the simplest explanation possible, these ETFs utilize a fund manager's access to higher savings rates at banks. They'll take investor capital, place it in these institutional savings accounts, and then pay out the interest to shareholders monthly via a distribution.

Before interest rates rose, these ETFs paid practically nothing. However, now you can get upwards of 5% on these virtually risk-free funds.

When I say virtually, that is because there is some risk with them. Typically, the CDIC (Canadian Deposit Insurance Corporation) would cover your funds on deposit accounts. If the bank were to go insolvent, your capital would be protected up to $100,000.

With these funds, this is not the case. Although most of the capital is held at institutions that are highly unlikely to go insolvent, like National Bank, CIBC, and Scotiabank, there is the possibility, so it needs to be mentioned.

These ETFs are entirely liquid and can be traded whenever the stock market is open. I've even stashed short-term emergency cash here and collected the monthly distributions until I need it.

You can read our article on HISA ETFs and the best options here.

Treasury Bills and Treasury Notes

Treasury Bills are often dubbed the "risk-free rate." This is because this is one of the only investments that are truly risk-free. That is unless you think the Government of Canada or the United States is going to default on your payment.

You may ask yourself what is the difference between a treasury bill and a treasury note. The difference is in maturity, the period in which the bill or note exists. A bill typically matures in four weeks to a year, while a note will mature between two and ten years.

Another critical difference is when you buy a treasury bill, you are doing so at what they call a discount to par value. When the bill matures, you will be paid par value. Whereas with a treasury note, you'll be paid a fixed rate of interest semi-annually until the note matures, and at that point, you'll be paid back your initial investment.

These are among the safest investments in the world, backed by the government, and because of rising interest rates, are actually providing some modest returns considering their lack of risk.

In fact, depending on the maturity term, you can easily earn anywhere from 4-5% on t-bills.

In addition to this, here in Canada, Horizon has created ETFs that can allow you to buy both Canadian and United States t-bills. They trade under the ticker CBIL and UBIL.U. Much like the HISA ETFs from Horizon's spoken about above, they pay a monthly distribution based on the capital and income they generate from the T-bills.

Guaranteed Investment Certificate

Much like HISA ETFs or T-bills, Guaranteed Investment Certificates become more attractive as interest rates rise. When policy rates increase, so do GIC rates. That makes them a desirable proposition in terms of overall investment returns at this moment in time.

GICs are guaranteed regardless if they're long-term or short-term, as you can tell by the name. Give the financial institution your money. They will pay you a fixed interest rate over the life of the GIC, and when it matures, you get your principal investment back.

Good things to invest in - GIC

If the institution were to go insolvent, you are still protected by the CDIC up to $100,000, meaning they'll honour your deposits up to that amount. Right now, getting upwards of 5% on a GIC from an institution is not uncommon. During the COVID-19 pandemic or even prior to it, you would be lucky to get 2%.

So, why buy a bond or invest in a HISA ETF when you can buy a GIC? One of the main downfalls of these investments is something they call liquidity. The more liquid something is, the easier it is to convert to cash. GICs are not liquid at all.

With a bond or HISA ETF, you can buy and sell them on the open market. So, you do have the ability to get your money back before maturity. With a GIC, your money is typically locked in until its maturity.

Some GICs could have early redemption penalties, but for the most part, you cannot touch it for one year if you give a bank your money for a 1-year GIC. If you give them your money for five years, your money remains untouched for five years. 

These are great investments for those who are very risk-averse. Look at alternative companies like Equitable Bank for the best GIC rates. They are often ahead of the major banks, and shopping around could earn you more money.

Bonds

Fixed-income investments like bonds generally have low risk, depending on what type of bond you purchase. Much like stocks, corporate bonds can pose different risks depending on the company you're buying, and they can range from virtually risk-free to exceptionally high risk. Government bonds, on the other hand, are much like a treasury bill and nearly risk-free.

A company with a AAA credit rating will typically pose less risk, while a "junk" bond from a smaller growth company will carry more risk. The key difference here is the coupon rate you will be paid on your bond. In layperson's terms, the riskier your bond, the more interest it will pay you.

Like most forms of fixed income, bonds have a maturity date, and a par value and pay the holder a fixed rate of interest every 6 months. If you purchase a 5-year bond yielding 5%, you'll be paid 2.5% every six months for five years. When the bond matures, you will be paid par value.

I won't get into it too much in this article, but the price can fluctuate on a bond which can bring lower/higher yields relative to the bond's coupon and can also mean capital gains/losses at maturity. But overall, these are very low-risk investments if you buy bonds from high-quality companies.

The main risk with bonds is default risk and inflation risk. Because they pay a set coupon, unlike something like a HISA ETF, which varies based on policy rates, inflation can eat into real returns. In terms of default, if the company were to default on its payments, you'd make nothing.

There are a multitude of different types of bonds, however. Some can be variable rates, which take away the inflation/interest rate risk.

Preferred Shares

Preferred shares are a more conservative, fixed-income-like approach to the stock market than common shares. They are like a bond in the fact that they typically pay out a set amount at specific intervals. 

In addition to this, preferred shareholders have priority over dividends before common stockholders are paid out. However, there are some key differences between a bond and a preferred share, and they do carry different risks.

For one, preferred shares typically do not have a maturity date. Sometimes, they can be "called back" by the company, but for the most part, you'll be able to buy these and hold them for the long term. Secondly, a preferred share pays dividends, while a bond pays interest income.

Dividend income is much more tax-friendly than interest income. So, in a taxable account, preferred shares may make more sense. One should always consider tax-sheltering an investment if it makes sense for them in a tax-free savings account (TFSA) or registered retirement savings plan (RRSP).

However, there are also a few more caveats regarding preferred shares. Although their price movements are not as drastic as common stock, they still do fluctuate more than a bond. In addition, you are lower on the totem pole than someone who owns a bond in the same company in the event of a company going bankrupt.

In a market crash, preferred shares can act like common stock and plummet in value. So although they offer more attractive return potential over a bond, they carry much more risk, which you'll need to consider.

Mortgage Backed Securities (MBS)

Mortgage-backed securities are a relatively simple investment product that is not only guaranteed by the Canadian government but provide reasonable returns as well.

Canadian Real Estate

When you buy an MBS, you are buying an interest in a pool of mortgages. Every month, you will receive an interest payment relative to your ownership of these mortgages.

As mentioned, they're backed by the Canadian Mortgage and Housing Corporation (CMHC), an Agency of the Government of Canada. So regarding safety, these are up there with a treasury bill.

The MBS typically have terms ranging from 1-10 years, and unlike illiquid investments like a GIC, you can buy and sell these at any point prior to the maturity of the MBS.


Annuities

Annuities are a relatively complex financial product, and this article will not aim to provide a detailed explanation of them but instead provide some insight as to what they are and why they're a relatively low-risk, reasonable-return investment.

Annuities are structured primarily for retirees. You'll pay the institution a lump sum upfront or periodic payments through the accumulation stage. After the annuitization period, you'll be paid a particular income for the remainder of your life.

If you are a younger investor, you will likely have no interest in these funds. They are illiquid and often have significant penalties for early withdrawal.

These annuities will typically be more attractive price-wise as interest rates rise. However, they are for a very specific niche of investors. So please, do your research on them and see if they're right for you.

Blue-chip stocks

Even though we have blue-chip, lower-risk companies on this list, this is arguably the highest-risk option here. Depending on your time horizon, even a blue-chip dividend-paying stock poses significant risks to the investor.

Someone with a 10+ year time horizon and who can withstand market fluctuations could consider this a low-risk, high-return investment. However, investing in common stocks can be disastrous for someone who may need the money in 1, 2, or even 3 years.

Why? Well, the stock market is simply unpredictable over this timeframe. Although it has proven time and time again to generate long-term returns in the high single digits, over a one-year timeframe, the market could drop to half the price it is trading at today. For this reason, if you're going to be buying stocks, even blue-chip dividend-paying stocks, it must be done with a long-term time horizon.

If this is your case, you'll likely find the stock market one of the safest investments out there and one that has provided some of the strongest returns out of any asset class in North America.

Index funds

For those who may not see the attractiveness of researching and picking individual stocks, index funds provide a healthy option for those with a long-term time horizon to buy the entire market.

An index fund, which can be a mutual fund or exchange-traded fund, is an investment vehicle that aims to track the broader market rather than individual holdings. For example, you could buy an index fund that tracks the entire Toronto Stock Exchange or one that tracks the S&P 500. You can even buy an index fund that tracks the global markets and gives you exposure to over 10,000 companies in a single click.

The drawdowns of an index fund? Like stocks, they have probably the largest volatility on this list, and the returns from these assets will be unpredictable over the short term. If you have any need for the money over the short term, index funds are a dangerous place to put it, as they could be trading at half the price in a year or double the price in a year. It is impossible to predict.

In addition to this, they do have management fees, or what is called the MER (Management Expense Ratio). You'll pay an annual fee to own one of these funds, which eat into rates of return. However, with the industry being highly competitive, these fees are reducing more and more each day.

In terms of brokerage commissions as well, a discount brokerage like Wealthsimple Trade will not only let you buy these index funds but often on a commission-free basis.

What has the highest risk-free return in Canada?

If you're looking for the highest level of returns for the lowest amount of risk, you'll likely look to treasury bills. These investments are guaranteed by the Government of Canada and are considered one of the safest investments on the planet. Depending on which type of treasury you buy, you will either be paid a set amount of interest semi-annually or paid a lump sum at maturity.

Treasury bills can be confusing and tricky for some to buy. So, there are ETF options that Horizon's has in CBIL and UBIL.U that allow investors to get exposure to short-term treasuries in a single click of a button.

What is the safest investment with high returns?

If your time horizon is long, the stock market is often one of the safest investments with the highest returns. If your time horizon is short, investing in the markets is not a good idea, as the returns are unpredictable. Because of rising interest rates here in Canada, fixed-income investments such as Mortgage Backed Securities, Guaranteed Investment Certificates, HISA ETFs, and even treasury bills provide very strong returns with relatively little risk.

All in all, it depends on your overall time horizon and risk tolerance to decide what you feel is a "safe" investment. From there, you can choose one that has the highest returns.

What gives the highest return on investment?

Historically, real estate and the stock market have given the highest return on investment over the long term. Both of these assets have proven to provide strong inflation-adjusted returns over the long term and increase an investor's net worth.

However, both of these asset classes are not without risk. Picking incorrect stocks or investing in poor real estate can often lead to negative returns and large losses. So, if you are looking to go down this path in terms of investing, you educate yourself and do so correctly.

What is the average return on a safe investment?

Suppose we establish that a "safe" investment means there is near zero risk of losing your initial capital at the time of writing. In that case, you can hope to achieve anywhere from 4-5% on a safe investment. This investment would be in something like a treasury bill, which has the backing of the Canadian or United States governments, who have never defaulted on their debt.

What is the safest investment currently?

Treasury bills are often utilized to establish the "risk-free rate" one can earn on an investment. This is because they are one of the safest investments in the world, backed by major governments that have never defaulted on their debt obligations. For this reason, treasuries remain one of the best safe investments out there for those who want to earn some interest on their money but want zero risk of losing their initial capital.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.