I know, fixed income is more boring than your grandpa’s stories about the 1940s. I wrote that last sentence 20 minutes ago, and then fell asleep due to extreme boredom. There’s no time to spice things up. Let’s just power on through and then on Friday we can have fun things. It’s the blog equivalent of eating your broccoli before you can have your dessert. And let me tell you, the dessert will be delicious. Not poontang pie delicious, but still pretty good. Maybe ice cream mixed with brownies.

Anyhoo, you’ve gotta have some fixed income in your portfolio. It protects you when markets go down, helping to smooth out returns. Fixed income returns are predictable, since debt is generally less risky than equity. Diversification is, generally, a good thing, and you should diversify your portfolio across various asset classes, whether they be debt, equities, real estate, or exchanging all your money for purebred hamsters. On second thought, don’t do that last thing.

In Canada, there are essentially two ways for an investor to play fixed income. You can either buy the individual bonds or you can buy an ETF. Most investors will just go with the ETF, since buying an ETF with about 400 different bonds is a great way to get really easy diversification. But what if there was a different way? It turns out there is, and that’s buying GICs instead of bonds, or term deposits from Rabodirect.

For my Americano readers, a GIC is the same as your CDs. The bank locks up your money for a period of time and pays you an inflated rate of interest for the privilege of doing so. At this point, the best 5 year GIC rate in the country is about 3%. How does that compare to XBB, the largest bond ETF in the country? After a recent sell-off, XBB yields 3.2%. Don’t look now kids, but bonds are starting to roll over.

Assume you have $10,000 you want to put towards fixed income. If you don’t already have a brokerage account, you’d have to open one before you could buy XBB. That would take time and effort, things we generally avoid around here. Plus, the value of XBB can go down, like it’s been doing over the last month. Is $22 extra per year really worth the extra work and risk involved? Maybe that’s why you’d buy GICs instead of bonds.

GICs have other advantages too. They’re really liquid, meaning you could go to your bank and walk out with your cash in about 5 minutes. (7 if you flirt with the cute bank girls) You can easily build a GIC ladder, which is just when you split your amount invested into equal increments and invest each of those increments over different time lengths. That’s exactly what you’d do if you’re thinking interest rates are going up soon.

So what should you do? I don’t know. GIC rates will, most likely, continue to be right around the rates you can get from good quality corporate bonds. Sure, you can more further up the risk spectrum by looking at junk bonds or high yielding stocks, but that kinda defeats the point of moving a portion of your portfolio into safer assets anyway.

So yeah, it’s a possibility. I guess most of the decision would come down to what you need the money for. If it’s a long term investment, maybe a bond ETF is the best choice. And if it’s the the down payment on a house you intend to buy sometime soon, than liquidity and convenience are going to trump a little higher return.


Tell everyone, yo!