Bond ETF Strategies for Difficult Markets

The Canadian bond market is down 15.1% year-to-date through Oct. 21, Stephenson said. The fall is three times more severe than the worst calendar year return for Canadian bonds since 1980, at -4.3% in 1994.

“Many investors have never experienced these types of returns in their fixed income portfolios,” Stephenson said. And because bonds have not served as ballast for the stock market decline, the pain is all the more pronounced.

However, despite the market returns, fixed income ETFs have seen around $9 billion in inflows year-to-date, with around half in high-interest savings account ETFs.

Stephenson called it a a flight to safety, as the only areas of fixed income that have seen positive returns are high interest savings accounts and money market ETFs, floating rate notes and short-term tax increase financing.

With inflation in Canada at its highest level in 40 years, the The Bank of Canada suffered an abrupt tightening cycle, pushing rates up from 0.25% to 3.75% since March, with further hikes expected before the end of the year. This has led to a significant repricing in fixed income markets, Stephenson said, as bond yields have risen significantly since the start of the year.

“In this environment, the has has been a plot of repositioning in the short end of the curve,” he said.

Investors have built inflation protection into their portfolios through floating rate notes, Stephenson said, because they are less sensitive to interest rate increases. Unconstrained fixed income is another possible strategy due to its flexible mandates and ability to seize opportunities as they arise in different sectors. And single-note fixed-income portfolio solutions can also help investors navigate today’s markets, he said.

“The focus is on risk-adjusted returns and the flexibility to take advantage of tactical opportunities as they arise,” he said.

However, although demand has focused on cash and ultra-short duration ETFs, Stephenson said there is a silver lining for investors.

For many years, investors have referred to TINA, or There is no alternative to stocks given the low yields. As a result, investors seeking to achieve certain return targets had to assume a fair amount of risk. But now, Stephenson said markets were seeing some of the highest fixed income returns since before the Great Financial Crisis in 2008.

With investors being overweight cash, he said this helped preserve capital for future buying opportunities and portfolio repositioning.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without the contribution of the sponsor.

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