Fear and loathing in the bond market would be a good title for a summary of investing so far in 2021. And yet, money flows into exchange-traded funds holding bonds were strong last month. Are investors doing the wrong thing? Far from it. In fact, I’d argue that maintaining exposure to bonds is one of three smart investing trends that emerge from the April, 2021, sales data for ETFs.
Strong bond ETF sales
Bond ETFs took in $717-million in April, making them the second most popular asset class after Canadian equity funds and crypto assets.
Now is not the time to overweight bonds, by any stretch. Bond yields have risen sharply since the turn of the year, which means bond prices are down on a year-to-date basis. So are bond ETF prices. Yet with stocks on a tear, it’s smart to maintain some exposure to bonds to hedge against a sharp decline for stock markets.
Investors were putting money into pretty much all types of fixed-income ETFs, with the exception of those holding mid- to long-term bonds and cash alternative ETFs that keep your money in savings accounts. With rates on the rise, it’s best to stick to short-term bond ETFs, so avoidance of longer-term debt makes sense.
Cash alternative ETFs are a perfectly good parking spot for cash in your investing account, but most brokers charge commissions to buy and sell them. This cost works against the modest yield of these funds.
Rotation to Canadian from U.S. equity funds
U.S. stocks have outshone Canadian stocks in recent years, but results for the first four months of the year have shifted the focus a little. The S&P/TSX Composite Index was up 11 per cent over this period on a total return basis, while the S&P 500 was up 7.8 per cent in Canadian dollars. The U.S.-dollar gain for the S&P 500 was up 11.8 per cent, but a rising Canadian dollar cut that back unless you own a U.S. equity ETF with currency hedging.
If inflation advances as the pandemic recedes and economic growth picks up, the resource-heavy Canadian stock market could benefit more than the U.S. market. So there’s a decent case for adding money to Canadian equity ETFs, possibly by taking profits from your U.S. equity funds. In fact, there was net selling of U.S. equity funds in the amount of $125-million, while Canadian equity funds took in $1.5-billion.
Strong crypto asset sales
Let’s agree that investing in crypto ETFs is about speculative fun and not adding a core buy-and-forget building block to a portfolio. In that context, using ETFs to invest in cryptocurrencies makes some sense. Investors are right on this theme – they put a net $1.3-billion in crypto asset funds in April.
You can trade crypto in a tax-free savings account via ETFs, and registered retirement savings plans as well (though crypto and retirement saving seem ill-matched for now). Crypto ETFs basically turn bitcoin and ethereum to stocks, which means accessibility through familiar brokers and trading apps, with none of the usual storage issues for crypto assets – the easiest way to play with crypto as a speculative investment.
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