Since the start of the year, CAD$10 billion has been invested in Canadian-listed fixed income ETFs and almost US$172 billion has moved into fixed income ETFs globally.¹ This is amidst a generational rise in inflation and tighter monetary policy that has resulted in sharp price declines for many bond benchmarks.

Below we discuss why many investors are using fixed income ETFs to reposition their portfolios and how fixed income ETFs help them navigate today’s challenging market environment.

1. Repositioning for rising rates and inflation. Below we discuss why many investors are using fixed income ETFs to reposition their portfolios and how fixed income ETFs help them navigate today’s challenging market environment.
   
   
2. Harvesting tax losses. In 2022, both Canadian and U.S. bonds experienced the worst year-to-date performance in decades, falling 11.8% and 14.6%, respectively.

Worst U.S. bond returns

Worst Canadian bond returns

Source: Morningstar Direct; Data from 1/1/1980 to 9/30/2022. U.S. bond universe represented by the Bloomberg U.S. Agg Bond TR . Canadian bond universe represented by FTSE Canada Universe Bond Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Historically, on average, returns have been positive over the next 12-month period following a major bond market drawdown.

Returns following the top negative H1s

Source: Morningstar Direct; Data from 1/1/1980 to 9/30/2022. U.S. bond universe represented by the Bloomberg U.S. Agg Bond TR . Canadian bond universe represented by FTSE Canada Universe Bond Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Many investors may be seeing the market value of their bond portfolios decline. A common strategy is to ‘harvest’ or crystalize these losses to offset any capital gains in that tax year. Investors can then reallocate the proceeds to other products, like fixed income ETFs, to maintain market exposure. Of course, it is important to remember the superficial loss rule when doing so.

3. Capturing higher yields while managing costs. This year’s selloff has increased the yields on most bond categories. For example, Canadian government bond yields have risen from 1.7% to 3.8% YTD, and the yield of high yield corporate bonds has reached 9.7%.² Fixed Income ETFs allow investors to access the bond markets efficiently, as they tend to have low management fees and low transaction costs, with these savings helping contribute to investors keeping more of what they earn.

Bond yields have increased in 2022

Source: BlackRock as at 9/30/2022. Core Bonds represented by iShares Core Canada Universe Bond Index ETF (XBB), Government Bonds represented by iShares Core Canadian Government Bond Index

A trajectory for further growth

The current environment is unique and challenging, but the fact that investors are turning to fixed income ETFs does underscore why the industry is growing even faster than we expected.

It took 17 years for global bond ETF assets to reach US $1 trillion. In 2019, as the industry approached this milestone, we forecasted that the market would double by the end of 2024. Recently we upgraded our outlook and project that assets in fixed income ETFs will reach US$2 trillion in 2023 — 18 months early — and grow to US$5 trillion by the end of 2030.³ If anything, we believe the challenges associated with high inflation and rising interest rates will attract more first-time ETF investors and prompt existing investors to find new ways to use these versatile investment tools.

Managing your fixed income allocation with RBC iShares

RBC iShares offers a variety of fixed income ETFs across core, credit, floating rate, ESG and inflation-linked strategies. The transparency of ETFs helps investors understand the portfolio characteristics and the risks they are taking — a key element for building portfolios in any environment, but especially one marked by high volatility and uncertainty.

Inflation, and as a result, the threat of additional rate hikes, are both likely to weigh on bond returns over the short to medium term. Consider customizing your bond holdings to seek protection against these forces.

Source: BlackRock. *A full suite of target maturity bond ETFs is available with target maturity years of 2023 (RQK), 2024 (RQL), 2025 (RQN), 2026 (RQO), 2027 (RQP), 2028 (RQQ), and 2029 (RQR).

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