Undoubtedly, the interest rate hikes have had a significant impact on bond funds and exchange-traded funds (ETFs). And while there’s no telling whether more such rate hikes are on the way (I wouldn’t rule it out, as food inflation and affordability are still major concerns), I still think investors looking for a safe and stable yield above 3% might want to take a second look at a government bond-focused ETF.
Of course, government bonds can be safer than, for example, a corporate bond ETF or a diversified ETF with a good mix of government and corporate bonds. While the added basis points of return may be worth it for some, I think investors who want to prepare for a bit of a rainy day may want to become holders of a government bond fund.
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Government bonds are excellent places for risky investors to hide
At this moment, iShares Core Canadian Government Bond Index ETF (TSX:XGB) is intriguing for risky investors looking to re-examine the risky portion of their portfolios. The return isn’t huge at 3.1%, but at the same time it’s not terrible either, especially considering that risk-free returns are in a rather unrewarding position at the moment!
While it’s usually never a good idea to time a stock market crash or correction by converting some of the returns from your stock portfolios into bonds, I do think it may make sense to move from GICs and cash (especially since savings rates are well below the rate of inflation) to the more liquid Treasury ETFs, especially if you want to move more cautiously as broad stock market valuations continue to rise and several risky parts of the broad markets are starting to show some signs of recovery to display. dented.
Either way, bond ETFs don’t look too bad, especially compared to five years ago, when prices were higher and yields were lower. Of course, the broad basket of bonds has bottomed out over the past four years.
But the win was difficult to achieve. But at least there is a decent return. In any case, the big question for investors is whether they have enough dry powder on the sidelines. As always, bond ETFs are low-return, low-risk investments. And if inflation remains a problem, the total returns of such funds are not even guaranteed to deliver a real return (that is, a return after inflation has been taken into account).
Bonds aren’t for everyone, but the future could be brighter for this asset class
While I’m not the biggest fan of bonds and bond funds for investors who are not yet near retirement (at least a decade away from their expected retirement), I do think that government bonds are becoming quite interesting for those who fear that the AI revolution will lead to massive job displacement and significant disinflation or even deflation.
Such an environment could lead to further rate cuts, and bond ETFs could be a source of capital gains and returns over the next five to 10 years. The future is uncertain, but it is important to be prepared for anything, including a market shock.
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