Bond ETFs are the top investing horror story of 2022 so far, while GICs are a surprising success.
Should you cut loose those exchange-traded funds holding bonds and put the money in guaranteed investment certificates? That’s the question a 69-year-old reader asked recently. She has some bond ETFs in her registered retirement savings plan and a non-registered account and they’re down between 9.4 and 15 per cent. “Is it wise to sell [these ETFs] to make up the loss with GICs, low-volatility ETFs or blue-chip stocks?”
Let’s quickly dispense with low-volatility and blue-chip stocks. Moving money from bond ETFs into these investments would add risk, not subtract it. Bonds have fallen hard, but they may be nearing the end of their decline. Stocks have been weak lately, but we haven’t seen the kind of correction that can take major indexes down 20 per cent or more in a few weeks. Low-volatility stocks and blue chips might fall less than the indexes, but painful losses are definitely possible.
Selling bond ETFs to buy GICs is tempting because GIC returns are as high as 3.55 to 4.25 per cent for terms of one through five years, and there’s no risk of losing money if you stay within deposit insurance limits. But selling bond ETFs today means locking in sizable losses that could shrink in the months ahead.
Bond prices have fallen hard in 2022, but there’s been a bit of a turnaround in May. For the time being at least, investors seem to think interest rates have hit a peak. Rising interest rates in 2022 have hurt bond bonds; if rates stabilize or decline, the price of bonds and bond ETFs would recover some of this year’s losses.
This reader mentioned that she needs income from her retirement investments. It’s important to note that while the price of bond ETFs has been falling, there have been no interruptions in the amount of interest paid. None should be expected, either. The bonds held in conventional bond ETFs are of medium to high quality and default on interest payments are rare.
If this reader had new money to invest, GICs could make sense over bond ETFs as long as she didn’t need liquidity. Bond ETFs can be sold anytime, while GICs are basically locked in unless you buy a cashable version. Expect significantly lower returns if you do that.
Investors are pretty familiar with the concept that you don’t sell stocks and equity funds when they’re down because you lock in losses that will later give way to renewed gains. The same applies to bond ETFs.
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