A couple stand on the banks of the River Moskva across from Moscow City, the new financial district of Russia’s capital. Envisioned as a hub of emerging market finance, the district now is one-third vacant even as more skyscrapers open.James Hill/The New York Times
A thought for adventurous investors seeking 5-per-cent yields: Look to emerging market bonds.
With Russia's economy staggering as a result of plunging oil prices and slower growth in China, emerging markets have been volatile lately. TSX-listed exchange-traded funds tracking emerging market bonds are down 4 to 6 per cent or so in the past six months, which tells you a couple of things. One, these bonds are a whole lot riskier than your basic Government of Canada and provincial bonds. Two, yields are starting to get interesting.
Price declines for bonds mean higher yields. The BMO Emerging Markets Bond Hedged to CAD Index ETF (ZEF) had an after-fee yield to maturity of close to 5 per cent as of Jan. 8, while theFirstAsset Morningstar Emerging Markets Composite Bond Index ETF (EXM) had a net yield to maturity of 4.3 per cent as of late November. EXM should be higher than that now, after the market turbulence in December and so far in 2015.
Consider ETFs like this as a total-return play. You'd get some capital gains if unit rise as a result of optimism about emerging markets, and you'll have that near 5-per-cent yield locked in. By comparison, the iShares Canadian Universe Bond Index ETF (XBB) has a net yield to maturity of 1.8 per cent and minimal capital gains potential. That said, emerging market bonds are in no way a substitute for Canadian government and corporate bonds. Think of emerging market bonds as either a complement to your core bonds, or lump them in on the equity side of your portfolio.
Why treat emerging market bonds like stocks? In a severe stock market correction, panicky investors will treat these bonds like stocks and dump them. Money flows into the bonds of economies like the United States and Canada in troubled times, not India, China, Russia, Brazil and South Africa.
ZEF and EXM are both hedged, so you won't get any benefit if the Canadian dollar declines further. At the same time, you're protected if the dollar rebounds from the drubbing it has undergone in recent months. Fees aren't cheap with ETFs like these at between 0.5 and 0.6 per cent. But with yields on the rise, adventurous investors can still nail something close to 5 per cent.
Rob Carrick