Yahoo Finance Beyond GICs: How investors can take advantage of higher interest rates
Fixed income ETFs saw a record net inflow of $20.1 billion last year in Canada
Market data show investors are flocking to Guaranteed Investment Certificates (GICs) and High Interest Savings ETFs, among other fixed income investment vehicles, as rising interest rates make them attractive again.
Fixed income ETFs saw a record net inflow of $20.1 billion last year in Canada, thanks mostly to the growing popularity of High Interest Savings and Money Market ETFs, according to a CIBC Capital Markets note.
Meanwhile, GICs have made a big comeback. Royal Bank of Canada executives recently revealed that $25 billion had poured into RBC GICs over the span of several months.
These are all "good options" for investors looking to play the rising rate environment, says Brian Madden, chief investment officer at First Avenue Investment Counsel, even though he's not a big fan of High Interest Savings ETFs personally.
High Interest Savings ETFs invest in deposit accounts at major banks and provide interest income to shareholders. These investments are liquid and can help diversify a portfolio.
However, Madden doesn't see the hype when the individual can just open a high interest savings account themselves and skip paying the fees associated with trading and holding an ETF.
High interest savings accounts are best suited for risk-averse investors or those with extremely short time horizons, he says.
GICs, which now offer returns in the mid-single digits, are also an option for those with a low risk tolerance because they're issued by regulated lenders and have Canada Deposit Insurance Corporation protection up to $100,000.
The money is "ironclad," Madden says.
"Fixed income ETFs are a little bit different. They're a more convenient way for a small investor to get exposure to the bond market, whatever corner of the market they want exposure to. Broadly across the whole bond market, interest rates are higher," he said.
"But bonds are not necessarily a perfect substitute for a GIC, which is totally risk-free, principal-protected and guaranteed by a regulator and then a deposit insurance program. Bonds will fluctuate with the market and can default if you buy lousy-quality credit."
He currently recommends exposure to good quality, shorter-term bonds because they're currently yielding more than longer-dated bonds due to the inverted yield curve. A good example of a conservative bond ETF would be the iShares Core Canadian Short Term Bond Index ETF (XSB.TO), he says.
He warns against wading into the riskier part of the bond market because of the potential of a looming recession.
National Bank strategists say fixed income ETFs accounted for an outsized 54 per cent of total ETF inflows 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.
"This could be one reason investors are still choosing aggregate bond ETFs as the core vehicle of exposure; another driving force behind fixed income ETF inflows this year may have been tax-loss selling of beaten-up individual bonds, especially those with longer durations."
For investors who can tolerate more risk, Madden suggests dividend stocks, such as financials or telecoms.
That's where investors can "reap the benefit of higher interest rates without necessarily incurring a lot of credit risk," he said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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