Let’s suppose the Bank of Canada cuts interest rates by another quarter of a percentage point this month or in the near future. If you hold a Canadian bond, you will see an immediate capital gain. And typically, investors will sell their bonds to realize that gain. But does that also mean you should sell your bond ETF holdings to realize the capital gain? Not necessarily. Here’s why.
Bond ETFs and mutual funds do not have a maturity date, so the dynamics that affect the prices of individual bonds do not apply to them – although, of course, the bonds within a portfolio will be affected.
In the case of actively run mutual funds, the managers will rarely hold a bond to maturity. Rather, they will often trade aggressively to take advantage of market movements. ETFs, which are passive investments, track an index, and the assets in the fund at any given time will reflect the composition of that index.
The bottom line is you should not expect a fund to function in the same way as an individual bond.
Courtesy Fundata Canada Inc. © 2016.Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder andThe Income Investor newsletters, available through his BuildingWealth.ca website. This article is not intended as personalized advice.
