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Real Return Bonds – Protection Against Inflation

In my 20 years in the financial arena, an asset class that almost none of my clients heard about prior to engaging us is Real Return Bonds. As the media talks non-stop about inflation and how basic goods that we buy every week are up in price 44% year over year, I thought a brief course on Real Return Bonds 101 should be provided.

Real Return Bonds in Canada are issued by the Federal government or a provincial government. Unlike traditional bonds that have a fixed rate of retun, Real Return Bonds provide a rate that adjusts quarterly with the Consumer Price Index (CPI). Therefore, if you believe that inflation rates are going to go up, these bonds are a good buy as they pay a rate that is currently about 1.6% above inflation.

They have low correlation to the stock market and can be considered a great way to reduce the volatility in a portfolio. Traditional bonds usually dont do well in an inflationary environment since the rate is fixed and they become less atttractive when rates go up.

As such, you may want to consider a 10% weighting in this area. There are several ways to buy Real Retun Bonds. You can buy an individual holding such as the Government of Canada Real Return Bonds maturing between 2021 and 2041. Alternatively, a low cost way to get diverisifcation is to look at the Ishares Canadian Real Retun Bond Index ETF (XRB). An easy way to get international exposure to this asset class is to look at the Standard & Poors International Government Inflation Protected Bond ETF that trades on the American Exchange (WIP-A). Lastly, the TD Real Return Bond Fund, will give you an actively managed portfolio which can have US, Canadian, and International exposure with the choice of interest income re-invested or paid out regularly.

Any questions on these types of investments or comments relating to inflation are more than welcome.


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