What an investor earns on a bond fund is the yield to maturity (less costs, plus or minus the changes in interest rates over time. The lookback of the past six years may be a good example of what one can expect over the next six years, at best. Simple financial planning rules say that the older we get, the more safety of returns (read bonds) we should have in our portfolios. This, for most people, is delivered via high-grade corporate or government bonds. The XBB (iShares Core Canadian Universe Since Nov 2000) and XCB (iShares Core Canadian Corporate Universe Since Nov. 2006) ETFs are the oldest low-cost ETFs available in Canada that track the main Canadian bond market indexes. Since Nov 2006, XCB has returned an annualized 3.78 per cent and XBB 3.25 per cent respectively. Canadian consumer price index (CPI) has averaged about two per cent over that time frame, which offered a positive real return, but that has not generally been true for the past decade. In Nov. 2006, the government of Canada’s two-through-10-year yield was about four per cent.
In the past six years, the last time the yield to maturity of the market was near current levels (it’s about 0.5 per cent higher today at 3.7 per cent), those annualized returns were two per cent and 2.91 per cent respectively. To expect a high two, to low three per cent return in your fixed-income portfolio needs to be factored into your planning for the next decade. If inflation is going to be a bit sticky and higher than the two per cent average over the past 25 years, the real return (after inflation) might be closer to zero.
The average baby boomer (born between 1946 and 1964) today is about 69 years old. Based on standard life expectancy, a Canadian living today at 69 will likely live about 20 more years. For many investors (with less savings), they will likely need a real return (above inflation) of two per cent or more on their savings, so they do not run out of money in retirement. A traditional fixed income will very likely fall short of meeting this need.
So how does an investor meet these needs? Alternatives. I’ve said now for about a decade that bonds were broken and a traditional conservative balanced portfolio would not likely deliver. Private credit and alternative types of yield will go a long way to help investors reach their retirement goals. A diversified private credit portfolio access remains a challenge for many investors, but some solutions are coming. In the public markets, ETFs with options and volatility mitigation should be considered for many tax-efficient yield seekers. Receiving your yield from a dividend or a capital gain is a superior, after tax, return for investors compared to a traditional bond income in taxable portfolios.
Follow Larry:
YouTube: LarryBermanOfficial
Twitter: @LarryBermanETF
LinkedIn: LarryBerman
