Bonds are an integral part of every Canadian’s portfolio for a good reason. Bonds hold the “promise” of fixed income with regular cash flows. But with interest rates moving to all-time lows, the pressure to make every penny count has never been greater. Creating such an exposure wisely can make all the difference in returns.
A portfolio for the average Canadian probably contains fixed income securities, otherwise known as bonds. Bonds are especially attractive to those retired or near-retirement investors as they seek to replace their regular and consistent salary with a similar interest income stream.
Unfortunately buying bonds in Canada is not as easy or cost effective as buying stocks. Unlike capital trading on an open stock market with fully transparent supply and demand, Canadian bonds must be purchased through a ‘trading network’ which effectively removes all the efficiency and transparency of a fully functioning liquid market. .
This is where it becomes uncomfortable for the retail investor. Compared to giant financial institutions investing billions of dollars in joint ventures, it is extremely challenging for the retail investor to buy a bond with similar efficiency to these large financial institutions.
The only thing that could be worse than buying bonds through Canada’s network of traders is buying a mutual bond fund. The average spending ratio in a Canadian bond mutual fund is close to 1.75%. In an interest rate environment where long-term yields hover around 3.5%, this is like splitting my hamburger with a stranger and he taking half of it in one piece. I do not think so!
How, then, can the retail investor get the fixed income exposure with a nice seniority and a tight supply of demand? The average investor should consider ETF Bond to create fixed income exposure in their portfolios.
ETFs are managed by large financial institutions and traded on any number of stock exchanges just like your preferred shares. The benefits for the average investor are numerous.
An ETF bond is essentially a bunch of different bonds grouped together in a portfolio and traded on the stock market. Unlike individual bonds themselves, there is more liquidity in bond ETFs, which makes for a narrower spread of supply demand. Basically, investors can easily get out of their position at any time without the cost of large transaction fees.
Only this advantage is that all retail investors need to convince themselves that bond ETFs are the most efficient way to gain exposure to the fixed income market. In addition, these ETF Bonds have large amounts of assets under management and have a superior purchasing power. For example, the total assets under management for major Canadian Bond ETFs is more than $ 2 trillion. Guess what – this gives these ETF companies a lot of power in negotiations with the best bond issuers. Not only are they able to trade in and out of bonds with much better spreads than you or I can ever get, but they also have access to the best issuers.
While the stock market is not very perfect, investors should always have the ability to buy and sell a security that is somewhat close to the current market price, in the bond market, this is not the case as the spread between supply and demand is in order. of size several times much larger. For the retail investor buying individual bonds is not only unfavorable but often risky. Using economies of scale and keeping the system complete, bond ETFs minimize transaction costs and ensure Canadian investors get better value for their dollars.