Best Fixed Income Investments

Best Fixed Income Investments
As an investor you want your fixed income investments to provide you with stable income. This is the part of your portfolio that you want to provide you with safety and generate slight amounts of income. In this portion of my own portfolio I hold Bond ETFs and one preferred share ETF. Right now as a retiree in my fund for retirement my allocation is 50% to fixed income. Here is what I find to be the best fixed income investments for my situation as a retiree. If you are still accumulating wealth for the day you need it for retirement then you can easily adjust this down to 40% and if you’re below 40 years of age, probably only 30% in fixed income.

You can read more about bonds here.

I am writing this as the US Fed has just announced an interest rate increase, markets have tanked on the day. What’s happening in Canada?

Who knows it’s all noise for us little guys and you can’t buy and sell on every news item you hear. Just try and ignore it and stick with your allocation n matter what. Our bank is unlikely to match what the Fed did today. It’s different here. The Canuck Buck is already weak having been labelled the petro dollar when oil prices were $140 a barrel. Not anymore. We have just been handed a tighter set of mortgage rules to save the lost souls of our over heated Toronto and Vancouver housing markets. We also have a thriving export market due to the low dollar s our bank is loathe to pencil in any rate rise in the future.



But looking out a long long way all the talking heads are chirping that rates are expected to rise. Here in Canada the newly elected have decided t plunge us into a massive deficit, borrowing money and expanding the money supply. Inflation will rear it’s ugly head sooner or later and as far as I’m concerned that’s probably their plan anyway. We’ve been in generational lows for interest rates and inflation for over a decade now so it would be no surprise for this to reverse.

XSB – ISHARES Canadian Short Term Bond Index ETF


What’s under the hood?

66.3% Government Bonds

33.7% Corporate Bonds

Total Bond Holdings – 455

Cost = .28% (MER) management expense ratio

Current Yield = 2.3%

The fund’s current yield is pretty high for bonds because a lot of them are trading above face value. Meaning, when the bonds mature you will lose money on the sale netting you a capital loss. The higher yield you will be collecting should (but may not always) offset that loss.



Always look at the yield to maturity, which you can find by visiting the company website. This fund has only a 1.27% YTM. It’s low but still higher than you’d get in TBills But maybe not in a GIC or HISA. This is why investing in fixed income and especially bonds, the rates are extremely low right now. We’re not investing here to earn a lot of money. It’s for safety of capital and to offset volatility in the growth part of our portfolio.

 

XBB – ISHARES Canadian Universe Bond Index ETF


What’s under the hood

72.6% Government Bonds

27.4% Corporate Bonds (lots of banks, industrials and utilities)

Total # of Bonds = 1,134

Cost = 0.34% MER

Current Yield = 2.7%

It holds a large number of long bonds which is why the higher yield than the short term XSB. It will be more volatile because of the long dates. Long Term bonds do not do well during times of inflation. There is a nice large mix of bonds in here.

 

ZPR – BMO Laddered Preferred Share ETF


I round out my fixed investments with a preferred share ETF. I like the laddered approach and I use the ETF to provide diversity. What’s under the hood?
1.9% – P1
71.3% -P2
26.7%- P3
Total Holding – 170
Yield = 5.05%
Cost = .50% MER

The fund uses rate reset preferred shares on a five year laddered structure. It is;

  • Designed for investors looking for higher income from their portfolios
  • Invested in a diversified portfolio of rate reset preferred shares
  • Lower interest rate sensitivity than the full preferred share market

I use this whole approach for my fixed income holdings. I’m able to juice my return to 3.35% for 50% of my retirement money. All 3 of these ETFs pay me monthly and the distribution will go up if the price of the bonds go down, which they will in a rising interest rate environment.

 

What’s The Mix


I use a 50/50 formula for my fixed income. Bonds/Preferred ETF

25% = ZPR

12.5% = XSB

12.5% = XBB

ZPR would payout $218 per month to me based on a 50K investment. Each unit right now pays 0.045 cents

XSB would payout $48.44 per month based on a 25K investment. Each unit pays 0.05 cents

XBB would payout $56.45 per month based on a 25K investment. Each unit pays 0.071 cents

Total Fixed Income Payout = $322.89

Minus MER in Dollars = $30

Based on today’s prices and costs, using an example of a 100K investment, the

Net Return = $292.89 per month


As a personal finance dummie I would never try and pick individual bonds or preferred shares. This is why the use of ETFs is perfect for this part of your portfolio. With these three funds you have access to 1,759 individual holdings broadly diversified over all time frames and across all industries. All this for a cost of .37% per year. That breaks down into real dollars of, on a 100K portfolio they would withdraw $30 a month. Pretty cheap considering everything you’re holding. You’ll never see it or miss it. To me, this is the real benefit of ETFs in a fixed income portfolio.  Broadly diversified at a very low and reasonable cost. What do you consider to be the best fixed income investments? I would love to hear from you.

Disclaimer


This blog post expresses my own opinion on various subjects including those related to retirement, finance and investing. I’m not a financial advisor, broker or securities dealer and you should always seek qualified advice pertaining to your own unique situation before investing any of your own money. I do not give out personal financial advice, nor should anything said on this blog or any statements that are made elsewhere be interpreted as advice tailored to your personal situation.

I provide this blog for informational purposes only and does not constitute an offer or solicitation to buy or sell any security discussed herein or in any jurisdiction where such would be prohibited.

All investments are risky. Know the risks before you decide to purchase any investment.

Any opinions, news, research, analysis, prices or other information contained on this website is provided only as general commentary and does not constitute investment advice.

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2 thoughts on “Best Fixed Income Investments

  1. I’m a real dummy in investment, but I find your page interesting and helpful, as I’ve been thinking of investing some of our unused income instead of just letting it lose in value in a savings account. I live in Asia, and the situation here is a little different, but I’m grateful for every piece of information that is written in a way that I (as a dummie) can understand.
    Good work, thanks!
    Regards,
    Ursula

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