The big idea behind owning bonds is unravelling in 2021.
Bonds are supposed to provide stability, with minimal drama. What we have now in the bond market are sizable year-to-date price declines and a one- to two-year outlook for more of the same. Although bonds rallied Friday amid weak jobs reports, the economic rebound is expected to gather steam in the months ahead and may add upward pressure to bond yields, weighing on prices.
Most investors need some degree of fixed income exposure for protection against a serious stock market decline. The challenge right now is to pick the right type of bond exposure to provide this portfolio insurance while offering some degree of predictability as rates rise.
For help on this, we’ve put together a chart to help investors find the most comfortable fixed income fit for their portfolios. Five bond options are evaluated in the following areas:
Generating yield: Even in today’s low rate world, bonds still generate a flow of income.
Managing sensitivity to rates: Some fixed income options are less sensitive to rate changes than others.
Fees: Bond funds have fees that reduce returns.
Predictability: Some fixed income investments mature and return your capital to you, while others do not.
Liquidity: Some fixed income options can be sold during bond and stock market trading hours, others must be held to maturity to avoid a redemption penalty.
The bond options under consideration here are actual government and corporate bonds, exchange-traded funds that hold bonds, bond mutual funds, guaranteed investment certificates available through online brokers and GICs available in the wider market (they may offer higher rates). The bond and bond ETF examples used here include government and investment-grade corporate debt, which means companies that have strong to stable financials.
We’ll assume you’re a DIY investor with $10,000 to invest in fixed income, a term that includes bonds, GICs and, to some investing industry people, preferred shares as well. I think preferreds are equity – stocks, in other words. They do pay reliable income, but the price is too volatile to compare with bonds and GICs.
Here’s a definition of the terms you’ll find in the chart that follows:
Market price: Bond prices are quoted per $100 of par value, which is the amount you get at maturity. Many bonds these days trade at prices above their par value. Bond ETFs trade like a stock, which means current pricing is available on any stock quote website; with GICs, you simply pick how much principal you want to invest – some issuers may have minimums of $3,500 to $5,000 and up.
Cost of buying: The full cost of buying bonds includes a commission and accrued interest, which is interest owed by the buyer of a bond to the person selling.
Maturity: Bonds and GICs mature on a specified date, while bond ETFs and mutual funds fluctuate in price over time according to interest rate cycles and never mature.
Yield: For bonds, yield is a calculation based on the coupon (the interest rate on a bond when issued) and the market price; for bond funds, overall yield is based on the holdings in the portfolio and the fee (fees reduce yield).
Duration: Expressed in years, duration shows you the percentage decrease/increase in price that a bond or bond fund would experience if interest rates rose/fell one percentage point. If interest rates rise by one percentage point, the price of an ETF with a duration of five years would fall 5 per cent; a lower duration means less sensitivity to rate changes.
Liquidity: How easy is it to sell a fixed income investment if it no longer suits your needs or you want to rebalance your portfolio? Bonds and bond funds are easily sold and thus offer full liquidity. GICs allow redemptions only with severe penalties. Cashable GICs are available, but with lower yields.
Fees: Bonds cost nothing to own on a continuing basis, and neither do GICs. Bond ETFs have fairly small management expense ratios, while bond mutual funds have much larger MERs. The MER is taken off the top of fund returns, which are reported on a net basis to investors.
Commissions: Included in the price a broker quotes for a bond and generally much larger than commissions for buying stocks; with bond ETFs, you pay a brokerage commission of up to $9.99 to buy; bond mutual funds and GICs are widely available with no commissions to buy or sell.
Five ways to make a $10,000 investment in fixed income
You have $10,000 to put toward building up your portfolio's fixed income holdings. Here are some ways you can go about it, with details on pricing, yield and risks related to rising interest rates.
Your bond choices are:
Recent market price ($)
The cost of buying $10,000 worth of these securities
What you get at maturity
Yield (%)
Sensitivity to changing interest rates as measured by duration
Liquidity
Ongoing fees you pay as an investor
Commissions to buy and sell
Bonds
Canada 1.5% 01JUNE26
103.69
$10,433.01
$10,000 + any remaining interest payments
0.76
4.8
Full
nil
The broker selling these bonds quoted an estimated buy commission of $85 - it's folded into the price charged for the bond.
Telus Corp. 2.75% 08JUL26
105.51
$10,639.60
$10,000 + any remaining interest payments
1.60
4.7
Full
nil
The broker selling these bonds quoted an estimated buy commission of $85 - it's folded into the price charged for the bond.
Crombie REIT 3.7% 26AUG26
108.19
$10,888.21
$10,000 + any remaining interest payments
2.00
4.6
Full
nil
The broker selling these bonds quoted an estimated buy commission of $85 - it's folded into the price charged for the bond.
Notes: Canada 1.5% 01JUNE26 means a Government of Canada bond that paid 1.5 per cent interest when issued and matures June 1, 2026. The cost of buying bonds includes the dealer's commission and accrued interest (a payment of interest owed to the seller of a bond). For variety, a AAA-rated federal government bond is included here along with lower rated corporate bonds from Telus Corp. and Crombie REIT. The yield differences between these three bonds are explained by their credit ratings.
Pros: A reliable flow of interest income and minimal risk of default with bonds having a strong credit rating. On maturity, these bonds repay their par value.
Cons: Bonds are a profit centre for investment dealers. The more you pay for a bond, the lower your yield. Also, there's the drama of watching bonds in your account fall in price as rates rise.
Bond ETFs
iShares Core Canadian Universe Bond Index ETF (XBB-T)
31.53/ unit
$10,000+/-
n/a
1.6
7.8
Full
MER of 0.10%
from zero to $9.99 per buy and sell transaction, depending on your broker or trading app
Vanguard Cdn Short-Term Corp. Bond Index ETF (VSC-T)
24.82/unit
$10,000+/-
n/a
1.1
2.9
Full
MER of 0.11%
from zero to $9.99 per buy and sell transaction, depending on your broker or trading app
Notes: Yield is calculated as an ETF's yield to maturity minus fees. Learn more about core bond ETFs for your portfolio in the 2021 Globe and Mail ETF Buyer's Guide (tgam.ca/ETFbuyersguide2021).
Pros: The companies that offer bond ETFs get better pricing than individual investors when they purchase bonds, which means a better yield. Given the huge variety of bond ETFs available, you can micromanage your holdings to tilt to short-term, corporate, floating rate bonds and more.
Cons: Brokerage commissions may apply when you buy and sell, but the big negative is that these ETFs never mature like actual bonds. This highlights their suitability for long-term investors willing to ride up and down interest rate cycles over the decades.
Bond Mutual Fund
PH&N Bond Series D
10.42/unit
$10,000
n/a
1.2
7.7
Full
MER of 0.6%
nil
Notes: Look for Series D funds, which have much-reduced management expense ratios to reflect the fact that they're designed for DIY investors who don't receive advice.
Pros: No commissions to buy or sell. Bond funds are an area where active management (as opposed to the index-tracking of most ETFs) can, in some cases, deliver value.
Cons: Even in Series D versions, fees for bond funds dig deeply into returns.
GICs from an Online Broker
Home Trust Co. 5-year
10,000
$10,000
$10,000 principal + interest
1.90
n/a
poor
nil
nil
Notes: Online brokers usually offer third-party guaranteed investment certificates, but typically exclude GICs from financial institutions with the highest rates.
Pros: The convenience of having GICs sitting in your investment accounts along with all your other holdings.
Cons: The yield sacrifice and terrible liquidity. GICs are for money you won't need to access before maturity.
GICs from Shopping the Wider Market
Oaken Financial 5-year
10,000
$10,000
$10,000 principal + interest
2.10
n/a
poor
nil
nil
Notes: The highest yielding GICs are often sold by companies you have to deal with directly.
Pros: Very competitive rates with virtually no risk as long as you stay within deposit insurance limits. GICs can pay interest monthly, annually or at maturity.
Cons: You have to hold your GICs directly with the issuer, which means they're not side by side with your other holdings.
Source: Rob Carrick; Online brokers; ETF, mutual fund company websites; HighRateSavings.ca
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Rob Carrick