There’s good news from the bond market for anyone seeking returns of 5 per cent with minimal risk.
Yields in the bond market are one of the biggest influences on returns from guaranteed investment certificates, which present virtually no risk of losing money thanks to deposit insurance. Since the Bank of Canada rate announcement on Wednesday, bond yields have ticked higher.
For borrowers, it would have been ideal if the central bank indicated imminent rate cuts. The bank did leave the door open to cuts in June or July, but its overall tone suggested inflation hasn’t yet been subdued enough to make rate cuts a slam dunk. The Bank of Canada’s view on things was supported by the latest inflation number in the United States, which was disappointingly high.
Investors in the bond market latched onto these U.S. and Canadian developments and sent bond prices lower. Lower prices mean higher yields, and vice versa. Bond yields didn’t rise enough to sustain hopes of an immediate wave of GIC rate increases. But they create room for better GIC rates from banks and credit unions that want to attract money for mortgage lending as we head into the spring home buying season. The way to do that is to offer a better GIC rate.
Many alternative banks and credit unions currently offer one-year rates of 5 to 5.4 per cent for one year, and several offer 5 to 5.3 per cent for a two-year term. The best three-year rates were just a tick below 5 per cent at 4.75 to 4.9 per cent. For four and five years, the best rates topped out around 4.75 per cent.
Five-year GIC rates climbing to 5 per cent or higher would mean rising pessimism in the bond market about inflation and rate cuts. We likely won’t get to that point, but there’s enough concern about inflation right now to provide a firm floor for one- and two-year GIC rates of 5 per cent or more.
If you can’t get that rate from your bank, don’t settle. Look elsewhere.
-- Rob Carrick, personal finance columnist
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The Rundown
The 2024 Globe and Mail ETF Buyers Guide, Part Four: International equity funds
More than ever, your portfolio needs diversification into stock markets outside North America. The S&P 500 is 30 per cent weighted to technology stocks these days, and there are seven dominant stocks within that sector. The case for international investing is that you get exposure to markets beyond Canada and the United States, without a big tech presence. For help in picking an international equity fund, check out Rob Carrick’s fourth instalment of the 2024 Globe and Mail ETF Buyer’s Guide.
Is BCE’s high dividend yield scaring you? Two reasons why it shouldn’t
No one wants Canadian telecom stocks right now. That may be their most attractive feature, argues David Berman.
Unraveling U.S. rate cut bets spur investor portfolio shifts
Expectations for how much policy easing the Federal Reserve can deliver are falling rapidly as one strong economic report after another suggests inflation could come creeping back if the U.S. central bank lowers borrowing costs prematurely. The fading prospect of rate cuts presents a dilemma to market participants who piled into stocks and bonds over the last few months in hopes of a policy easing, leaving some of them scrambling to readjust their portfolios. Reuters tells us more about how fund managers are reacting.
Also see, from Reuters’ Mike Dolan: If Fed hikes spurred rent inflation, markets should relax
Here’s how to squeeze out more yield from your bond portfolio - if you’re brave enough
The sovereign debt crisis that many have been warning about has yet to materialize, but it will eventually, says veteran bond fund manager Tom Czitron. But that doesn’t mean all investors should stay clear of having exposure to bonds in emerging markets. With the right approach and risk tolerance, he says allocating a small weighting of one’s portfolio in countries with below-investment-grade credit ratings could be quite profitable.
Bulls jump deeper into copper amid supply challenges, AI-fueled demand
Copper’s bull run should continue for at least the next three years, fueled by global supply challenges and hot demand for the metal to power energy transition and artificial intelligence technologies, industry analysts say. As Reuters reports, the outlook is an optimistic harbinger for Freeport-McMoRan, BHP and other producers as decarbonization and technological shifts fuel copper’s latest demand wave after China’s rise powered a similar one two decades ago.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: Five conglomerates with potential to unlock ‘holding company discounts’
Number Cruncher: 13 mutual funds and ETFs that are overweight in the Magnificent Seven
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Monica Rizk: Bullish on Nucor Corp.
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Ask Globe Investor
Question: I own the BMO S&P 500 Index ETF (ZSP-T) in my registered retirement income fund and tax-free savings account. Can you explain the withholding tax implications of holding ZSP in these accounts, and whether there is a better way to get exposure to U.S. stocks?
Answer: It’s a bit complicated, but I’ll try to make the explanation as straightforward as possible.
If you own a Canadian-listed exchange-traded fund such as ZSP that invests in U.S. stocks, the ETF will be subject to a 15-per-cent U.S. withholding tax on the U.S. dividends paid to it by the underlying companies. The withholding tax applies regardless of the type of account – registered or non-registered – in which you hold the Canadian-listed U.S. equity ETF.
Canadian investors can avoid withholding tax on U.S. dividends by investing in U.S. stocks directly or through a U.S.-listed ETF. However, to qualify for a withholding tax exemption under the Canada-U.S. tax treaty, the U.S.-listed stocks or ETF must be held in a RRIF, registered retirement savings plan or other account that specifically provides retirement or pension income. (Sorry, a TFSA doesn’t count.)
Still, investing in U.S.-listed ETFs or individual U.S. stocks has its own drawbacks. Unless you already have sufficient U.S. cash on hand, you’ll need to convert your Canadian dollars into U.S. dollars to make the purchase. This can be expensive, as brokers typically charge exchange rates that could cost you 1.5 per cent or more on each transaction.
When I checked with my broker on Friday, for example, converting $10,000 into U.S. dollars, then back into Canadian dollars, would have cost about $315, or more than 3 per cent of the principal amount. That’s a hefty price to pay just for currency transaction costs.
Most Canadian-listed U.S. ETFs, on the other hand, trade in Canadian dollars, eliminating the need for investors to purchase U.S. dollars. The ETF itself handles currency conversions to purchase U.S. shares, but the costs aren’t nearly as onerous because ETF companies deal with large sums of money and get access to institutional exchange rates not available to the general public.
It’s also important to keep the withholding tax issue in perspective. The S&P 500 Index currently yields just 1.4 per cent. Subtracting withholding tax of 15 per cent would reduce the net yield to about 1.2 per cent – a loss of about 0.2 percentage points.
That’s not a big deal. Based on a $10,000 investment in ZSP, the annual drag from withholding tax would be about $20. At that rate, it would take about 15 years for the accumulated withholding tax to equal the currency transaction costs for buying and selling a U.S.-listed ETF that is not subject to withholding tax in a retirement account.
Bottom line: Don’t let a small amount of withholding tax stop you from investing in a Canadian-listed S&P 500 ETF and holding it in your RRSP, RRIF, TFSA or any other account.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
Will the ETF revolution eventually mean the death of mutual funds? Tim Shufelt will explore the topic.
Consumers, votes and earnings: World market themes for the week ahead
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
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Compiled by Globe Investor Staff
Rob Carrick