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If you hate drama in your portfolio, GICs beat bond ETFs.

Guaranteed investment certificates have been their usual selves during the financial market turmoil of 2020, which means they paid interest on schedule and held their value. In the worst of it, back in March, some investors fretted about the risk of losing money if their GIC issuer became insolvent and deposit insurance proved inadequate or faulty. But these worries reflected a generalized anxiety, not an actual risk in the financial system.

Diversified bond exchange-traded funds had a bad patch in March before finding their footing. They fell in price for a brief period, partly because investors were selling everything in sight out of pure fear and partly because the corporate bonds they hold came under particular selling pressure. If you held a diversified bond ETF as a portfolio stabilizer, you were probably in shock for a short period of time.

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GICs certainly seemed the better choice at the worst of the financial market volatility. But if you look at the first four months of 2020 in total, you’ll see that bond ETFs have more than recovered from their earlier setback. Across the board, bond ETFs were up between 3 to 13 per cent on a total return basis, which means interest plus share price changes.

Your actual return from bond ETFs depended on what was in the portfolio. A diversified bond ETF holding government and corporate bonds with a mix of short, medium and long maturity dates would have made you about 5 per cent for the year to April 30. A diversified short-term bond ETF would have been in the 3 per cent range. A fund holding only government bonds would have delivered returns around 13 per cent.

Interest rates have been falling since late February, a result of central bank efforts to support the economy with lower borrowing costs and concern in the bond market about recession. When interest rates fall, the price of bonds and bond ETFs rises. This explains the sizable total return for bond ETFs so far in 2020. The interest portion is modest, but the share price changes have been strong.

GICs pay interest only and don’t change in price. On maturity, the principal you invested is handed back to you. If you’re a no-drama investor, this total predictability is exactly what you want.

Bond ETFs, as we’ve seen, cannot match GICs for predictability. But they made up for it by delivering better returns when rates were falling.

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