Investors seem way more stressed about bonds than stocks these days.
Readers of the Carrick on Money newsletter regularly ask questions these days about why bonds and bond funds have been falling in price, and whether it’s worth holding these investments at all when interest rates are in an up-trend. Rising rates depress bond prices, while falling rates send bonds higher.
Here’s a sample question from a reader who recently moved money from a mutual fund company to an online brokerage account where he’s invested in exchange traded funds covering Canadian, U.S. and international stock markets and, to a limited extent, bonds. “I still have about one-third of my portfolio in cash,” he wrote. “With rising interest rates would It be safer to stay out of bond ETFs and maintain my cash positions for now?
Holding cash in a brokerage account is certainly safe, but the returns are weak. Investment savings accounts – basically high interest savings accounts that trade like a mutual fund – offer 1.1 to 1.15 per cent these days. The cost of living rose 2.2 per cent in February, which means holding cash is a losing proposition on an after-inflation basis.
You can get an average 2.7-per-cent yield by building a five-year ladder of guaranteed investment certificates offered by lesser known banks (all members of Canada Deposit Insurance Corp.) and sold through online brokerage firms. The GIC ladder is a poor choice if you think you might need to sell before maturity. But if you’re comfortable buying and holding, the ladder protects you against price volatility in the bond market and gives you money coming due every year to take advantage of rising interest rates. If rates end up falling, the ladder limits your exposure.
Bond ETFs are fine to hold through a period of rising rates if you need regular interest income and are willing to overlook price declines ahead. When rates eventually peak and head lower, bond ETFs will rise in price. A GIC ladder is a more stable alternative with a decent yield by today’s standards that beats cash hands-down. If you’re stressed about bonds, consider the GIC ladder.
-- Rob Carrick, Globe Investor columnist
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Stocks to ponder
InterRent Real Estate Investment Trust (IIP.UN-T). Most investors buy REITs for their juicy yields and modest growth. Apartment owner InterRent Real Estate Investment Trust flips the traditional REIT model on its head: It yields a ho-hum 2.7 per cent, but the units have posted a sizzling annualized total return, including reinvested distributions, of about 14 per cent over the past five years – nearly three times the return of the S&P/TSX Capped REIT Index. InterRent’s secret? The REIT buys apartment buildings that have been neglected or managed poorly, invests heavily in suite upgrades, common-area improvements and cost-saving energy efficiency programs, then releases the suites at substantially higher rents. John Heinzl reports (for subscribers).
Facebook Inc. (FB-Q). Who knew Facebook Inc. had perfected such life-like androids? Mark Zuckerberg’s oddly robotic performance before congressional inquisitors spawned a new genre of Twitter humour, but also went some way toward reassuring Wall Street that his company would be able to navigate its latest scandal without lasting damage. Now attention turns to a more mundane question: Is Facebook stock a buy? The social-network’s shares have fallen 14 per cent from their high earlier this year because of the Cambridge Analytica scandal, in which data on millions of Facebook users were shared without their knowledge. But after the Zuckerbot’s carefully crafted answers to U.S. legislators, the threat of aggressive new legislation appears to be diminishing. Maybe, just maybe, it’s time to consider jumping in. Ian McGugan takes a look.
Should you buy and sell pot stocks based on analyst ratings? We’re handing out their grades
If you’re wondering how to invest in Canada’s nascent marijuana sector, following the professional recommendations of financial analysts must look like a good place to start. Unfortunately, these recommendations can be laughably inaccurate – too often analysts encourage investors to buy shares when they should be selling, and hold shares when they should be buying − reflecting not only the volatile nature of the marijuana sector but also the challenges of pegging value on stocks that resist traditional valuations. David Berman gives out some grades for the analyst recommendations.
As Zuckerberg testifies, fresh warnings emerge that investors should be wary of tech stocks
Mark Zuckerberg, the Facebook Inc. billionaire who looks like your neighbourhood barista, has finally stowed his customary T-shirt and squeezed himself into a suit and tie. It’s one telling sign of the tech sector’s sudden lurch into middle age. The industry that has always projected an image of endless youth is now being forced to acknowledge it can no longer function as a perpetual adolescent. Mr. Zuckerberg’s testimony before the U.S. Congress this week may set the stage for firmer regulation of the online giants, from Facebook and Alphabet Inc. to Amazon.com Inc. and Netflix Inc. Ian McGugan reports (for subscribers).
Horizons axes two Canadian ETFs that offered play on market volatility
One of Canada’s largest exchange-traded fund managers is winding down two small ETFs that offered investors a way to play volatility in equity markets. Horizons ETFs Management (Canada) Inc. announced on Tuesday it will terminate the BetaPro S&P 500 VIX Short-Term Futures 2X Daily Bull ETF, which had net assets of $25.6-million, and the BetaPro S&P 500 VIX Short-Term Daily Inverse ETF, with assets of $16.9-million. Andrew Willis reports (for subscribers)
After a rough stretch, it’s time to make some changes to this balanced portfolio
Gordon Pape takes a look at his balanced portfolio and how well it has performed over the last six months. It’s had a tough go and now it’s time to make changes, he says.
Tide turns for bonds – volatility brings the spotlight back to fixed income
After 30 long years, the tide has finally turned for the bond market as central banks in Canada and the United States signal their intention to raise interest rates to more normal levels. But fears of a bond bear market may be overblown, especially in Canada, bond fund managers say. Bond markets already have discounted the central bank moves to some extent, so there’s still money to be made in bond ETFs for investors who choose carefully, they argue. Dianne Maley reports.
No stomach for see-saw trading? Focus instead on a financial plan
You certainly can’t blame investors for being a little shell-shocked. The recent market volatility has been gut-wrenching for anyone watching the fluctuations in stocks – and the resulting damage to their portfolios. However, volatile periods are often the best time to invest. As the old saying goes: “The time to buy is when there’s blood in the streets.” But with the violent ups and downs of the market, many investors may find themselves frozen in fear. For some guidance, we spoke to three investment managers about overcoming fear and indecision, and making smart decisions in these uncertain times. Terry Cain reports.
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Ask Globe Investor
Question: I hold units of Canadian Real Estate Investment Trust (REF.UN) in my tax-free savings account (TFSA). What are the tax implications assuming Choice Properties REIT (CHP.UN) completes its proposed acquisition of Canadian REIT?
Answer: There would be no tax consequences for an investor who holds Canadian REIT in a TFSA (or other non-taxable account such as a registered retirement savings plan). For an investor who holds Canadian REIT in a non-registered account, the answer is a bit more complex.
Canadian REIT unitholders can elect to receive cash or Choice shares for their units. Because the amounts are subject to proration, some investors will likely get both. For the cash portion, Canadian resident unitholders “will generally be considered to have realized a capital gain or capital loss equal to the amount by which the cash consideration received … exceeds or is less than the adjusted cost base of such units,” Canadian REIT says in the management information circular for the deal.
For an investor who receives shares, the merger qualifies as a “tax-deferred rollover” for Canadian residents, meaning there would be no capital gains tax, at least not immediately. However, the adjusted cost base (ACB) of the Canadian REIT units being exchanged would become the ACB of new Choice units received, so the capital gain (if any) would be captured for tax purposes when the Choice units are ultimately sold.
The merger requires two-thirds approval of votes cast, in person or by proxy, at a special meeting of Canadian REIT unitholders on April 11 in Toronto.
-- John Heinzl
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
Ian McGugan will provide us with three reasons to be happy about this market (and two reasons not to). And Scott Barlow will have some cautionary words for those believing the upcoming earnings season will bring clear sailing.
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Compiled by Gillian Livingston