Many investors are avoiding the bond market completely, for a number of reasons.
A big one is a lack of yield. Negative yielding bonds are a huge story in places like Europe and Japan. Bonds in North America do have positive yields, but it’s easy for investors to get more income buying stocks.
Many investors also feel we’re in a bond bubble, with any increase in interest rates sending bond prices tumbling. A 5-10% cut in the price of a long bond really hurts when you’re only collecting 2% interest.
GICs have always been a popular choice for many retail investors looking for fixed income. It’s easy to see why, especially today. Government of Canada five- and 10-year bonds yield approximately 0.7% and 1.15%, respectively. Several companies are offering five-year GIC yields above 2%, with a select few even hitting 2.5%.
GICs don’t offer a lot of liquidity, but investors like the fact the principal is guaranteed.
How does this compare to bond ETFs?
Canada’s largest bond ETF is the iShares DEX Universe Bond Index Fund (TSX:XBB), which owns a vast offering of more than 1,100 different bonds. It has everything from secure government debt to higher-yielding corporate bonds.
Over the last 12 months, this ETF has paid out a dividend of 2.7%, which is a little better than the best GIC options. And with approximately 50,000 shares of the ETF trading hands every day, investors have enough liquidity to get in and out quickly, something GICs don’t offer. Shares are also quite stable, increasing a mere 2.03%.
