Canadian ETF Strategies: Why A Canadian Bond ETF Is Better Than Investing In Individual Bonds


Bonds are an integral part of every Canadian's portfolio for good reason. Bonds carry the "promise" of fixed income with stable and steady cash flow. But with interest rates steadily declining, the pressure for every penny to be counted has never been greater. Smartly creating such exposure can make all the difference in the returns.

A portfolio for the average Canadian probably contains fixed income securities, otherwise known as bonds. Bonds are particularly attractive to investors who are retiring or about to retire, as they seek to replace their regular, stable salary with a similar flow of interest income.

Unfortunately, buying bonds in Canada is not as easy or as profitable as buying shares. Unlike stocks that trade on an open stock market with fully transparent bid and ask prices, bonds in Canada must be purchased through a "network of brokers", which removes all the equity. 39 Efficiency and transparency of a fully functional liquid market.

It is there that it becomes unpleasant for the retail investor. Compared with the gigantic financial institutions that invest billions of dollars with pooled assets, it is extremely difficult for the retail investor to buy an obligation of similar efficiency to that of these large institutions. financial.

The only thing that could be worse than buying bonds from the Canadian dealer network, is to buy a bond mutual fund. The average expense ratio of a Canadian bond mutual fund is around 1.75%. In an interest rate environment where long-term returns are around 3.5%, it's like sharing a hamburger with a stranger and taking half of it in one bite. I do not think so!

So, how can a retail investor get exposure to fixed income securities with a good seniority and a tight tender offer spread? The average investor should consider bond ETFs to create fixed income exposure in their portfolios.

ETFs are managed by large financial institutions and trade on any number of stock exchanges, just like your favorite stocks. The benefits for the average investor are many.

A bond ETF is fundamentally a group of different bonds grouped in a portfolio and traded on the stock market. Unlike individual bonds themselves, bond ETFs have much more liquidity, which reduces the gap between offers and offers. Basically, investors can easily leave their position at any time without the high transaction fees.

This benefit alone is one that all retail investors should need to convince themselves that bond ETFs are the most effective way to expose themselves to the fixed income market. In addition, these bond ETFs have huge amounts of assets under management and higher purchasing power. For example, total assets under management of major Canadian bond ETFs exceed $ 2 trillion. Guess what – this gives these ETF companies a huge leverage of trading with the best bond issuers. They are not only able to exchange bonds at much better spreads than you and I, but they also have access to the best issuers.

Although the stock market is far from perfect, investors should always have the opportunity to buy and sell a stock somewhat close to the current market price. In the bond market, this is not the case, the gap between supply and demand being in the order of magnitude many times much larger. For the retail investor, the purchase of individual bonds is not only unfavorable, but often dangerous. By leveraging economies of scale and maintaining the system as a whole, bond ETFs reduce transaction costs and provide Canadian investors with better value for their dollar.

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