Fixed Income

Treat fixed income investing like equity investing
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Fixed Income Investing Using ETFs

ETFs allow investors buy fixed income on the exchange. ETFs bring an over the counter (OTC) asset class to the stock exchange providing liquidity, transparency and diversification. The traditional approach of selecting individual bonds based on sectors, credit ratings and maturities can be time consuming, costly and inefficient.

Why use ETFs for fixed income investing?
  • Efficient exposure – Rather than build a fixed income portfolio using a large number of individual bonds, fixed income ETFs provide investors with access to diversified bond portfolios in a cost effective and timely manner. Unlike equity markets which are generally more liquid and transparent, buying individual bonds OTC is difficult. The bond universe offers a diverse spectrum of risks, returns and credit qualities. With fixed income ETFs, investors can easily gain broad exposure or target specific credit qualities, durations, sectors and maturities. Depending on the mar[1]ket environment, time horizon and personal risk and return preferences, fixed income investors can choose specific fixed income sectors and maturities for their portfolios.
  • Pricing – In the fixed income ETF world, investors get the added benefit of institutional pricing. A bond’s bid-ask spread is the difference between what the buyer is willing to pay and what the seller is willing to accept. The implicit savings are derived from the narrow ETF spreads. Further, the process of bond trading is often inefficient because the information necessary to make a sound investment decision is not easily accessible. Fixed income ETFs are traded on stock exchanges which provide investors with pricing transparency.
  • Liquidity – Fixed income ETFs democratize fixed income investing. They provide an efficient channel to fixed income securities that were previously constrained for individual investors. ETFs provide liquid access to fixed income asset classes that are difficult to access such as real return bonds and high yield bonds. Fixed income ETFs can be easily traded at anytime while markets are open.
Things to Consider
  • Issuer – Federal, provincial and municipal governments all issue bonds when they need to raise money. So do large and small corporations in different industries. However, there is a significant difference in the risk profile of government and corporate bonds. Most government bonds are typically less volatile than corporate bonds of similar maturities. Within the government bond sector, federal bonds are considered to be the most secure in terms of their ability to pay coupons and to repay principal. Therefore, they tend to fluctuate less in value than provincial or municipal bonds.
  • Credit rating – A bond’s credit rating is an indication of the quality of the issuer and reflects the likelihood that bondholders will receive interest payments on schedule and get their principal back at maturity. Credit rating agencies, such as Standard & Poor’s and Moody’s, have different credit rating systems. As a general rule, investment grade bonds are rated BBB and above, whereas bonds that are considered below investment grade are rated lower than BBB. These non investment grade bonds are referred to as high yield debt. Typically, investment grade bonds have a higher credit quality and lower probabilities of default than high yield debt.
Fixing Your Bond Portfolio
Quarterly Fixed Income Strategy

This communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

Commissions, management fees and expenses (if applicable) all may be associated with investments in BMO ETFs and ETF Series of the BMO Mutual Funds. Please read the ETF facts or prospectus of the relevant BMO ETF or ETF Series before investing. BMO ETFs and ETF Series are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs or ETF Series of the BMO Mutual Funds, please see the specific risks set out in the prospectus. BMO ETFs and ETF Series trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

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