How investors can benefit from higher interest rates
Market data shows investors flock to Guaranteed Investment Certificates and High Interest Savings ETFs as rising interest rates make them attractive.
According to a CIBC Capital Markets note, fixed income ETFs saw a record inflow of $20.1 million last year in Canada. This was due to high interest savings and money market ETFs.
GICs are making a comeback. Royal Bank of Canada executives have revealed recently that $25 billion had poured into RBC GICs over the span of several months.
These are all “good options”, according to Brian Madden, Chief Investment Officer at First Avenue Investment Counsel. He is not a fan of High Interest Savings ETFs.
High Interest Savings ETFs invest at major banks in deposit accounts, and pay shareholders interest income. These investments are liquid and can be used to diversify a portfolio.
Madden, however, doesn’t believe that the individual should pay the trading fees and ETF holding fees if they can just open a savings account with high interest and save money.
He says that high interest savings accounts are the best for risk-averse investors and those with very short time horizons.
GICs are now offering returns in the middle-single digits.
Madden claims that the money is “ironclad”.
“Fixed Income ETFs are slightly different. These ETFs are a convenient way for small investors to gain exposure to the bond markets, regardless of which corner they wish to be exposed to. He stated that interest rates are generally higher across the entire bond market.
Bonds are not a substitute for a GIC. They are completely risk-free, principal protected, and guaranteed by a regulator. If you purchase low-quality credit, bonds can become insolvent and will fluctuate with market conditions.
He currently recommends that investors be exposed to quality, short-term bonds as they are currently yielding more than older bonds due to the inverted Yield Curve. An example of a conservative bond ETF is the iShares Core Canadian Short Term Bond Index ETF.XSB.TO), he says.
He cautions against entering the more risky part of the bond markets because of the possibility of a recession.
National Bank strategists state that fixed income ETFs contributed 54% to total ETF flows last year.
“After a decade of near-zero yields… Canadian aggregate bond index ETFs now provide average yields above 4%, a much more attractive entry point compared to the beginning of this year,” the strategists said in a Jan. 5 note.
Investors are choosing aggregate bond ETFs for their primary exposure. Another driving force behind fixed-income ETF inflows this fiscal year could have been the tax-loss sale of distressed individual bonds, particularly those with longer terms.
Madden recommends dividend stocks for investors who are willing to take on more risk.
Investors can then “reap the benefits of higher interest rates without necessarily taking a lot of risk,” he stated.
Michelle Zadikian, a senior reporter at Yahoo Finance Canada, is Michelle Zadikian. Follow her Twitter @m_zadikian.