For decades, a balanced portfolio was a combination of stocks and bonds. Now there seems to be a shift to stocks and GICs.
A recent catalyst has been the record plunge in bond prices over the past year due to accelerating inflation. This unnerved many investors, especially those using bond ETFs. Many had their faith shaken in the role of bonds as a portfolio stabilizer that could offset bear markets in stocks. It also seemed to some that the bull market in bond prices of the past three decades was coming to an end.
By comparison GICs are much easier on the nerves: they don’t have any volatility since they don’t trade in markets or have quoted prices. Plus they are guaranteed by the Canada Deposit Insurance Corp up to certain levels.
Moreover, GIC annual rates are also now much better. Currently, a five-year GIC ladder (basket of five GICs with maturities from one to five years) has an average yield to maturity of 4.8%. The average yield to maturity is 4.0% on the iShares Canadian Universe Bond ETF (XXB) tracking government and corporate bonds averaging 10.3 years to maturity.
However, GICs lock up money during their terms, which, with the rigidity of GIC ladders, make it hard to rebalance a portfolio. If stocks go down, it will be difficult to shift money into them, as required by asset allocation targets.
If some bond ETFs (and/or cash equivalents) are held alongside the GICs, they can be used to do the rebalancing. So, it can be advantageous to hold both bond ETFs and GICs in the fixed-income component of portfolios.
Justin Bender, portfolio manager at PWL Capital, talks about this approach in his Bond ETFs vs. GIC Ladders video posted online. It begins at the 7:13 minute mark.
Staying with a portfolio of stocks and bonds may still be OK too, if volatility can be tolerated. The history of business cycles reveals that declines in bond prices are transitory. They usually recover when central banks tighten to cool off inflation - as they are doing now.