The first is the pitiful yield offered. Investors used to be able to get 5%, 10%, or even higher from a diverse basket of bonds, including government bonds. These days, anything much more than 3% is considered high-risk. It’s easy to find stocks that pay dividends of more than 3%.
The other reason is because bonds have done so well over the last 30 years. As rates have gone down, the price of bonds has rallied. This has led to long-term returns that have rivaled stocks. Many investors don’t think such returns can continue.
But even after saying that, bonds play an important part in a portfolio. They provide cheap insurance as well as ready capital that can be put to work in a market correction.
Take Canada’s largest bond ETF, the iShares DEX Universe Bond Fund (TSX:XBB). When Canadian stocks were tanking back in January, the value of the ETF actually increased as nervous investors switched their asset allocation. This protection is important when looking at overall portfolio returns.
XBB is also quite liquid, with approximately 50,000 shares per day trading hands. This would enable an investor to easily sell bonds when stocks are doing poorly, and then channel the proceeds towards buying undervalued stocks.
A smart investor still holds bonds today. Not only does XBB offer a higher yield than most other fixed income investments at 2.76%, but it also provides a way to protect capital that could prove very important during the next crash.
