The Canadian Investor - Everything You Need to Know About Fixed Income

Episode Date: October 13, 2025

In this episode, we cover a variety of fixed income options for your portfolio. From savings accounts and GICs to T-Bills, bonds, and corporate credit—this episode is your one-stop overview of fixed income. Simon and Dan break down how each fits into a portfolio, the trade-offs between yield, liquidity, and risk, and what investors should watch for as rates move. They also touch on preferred shares, inflation-linked bonds, private credit, and structured products like principal-protected notes. A timeless explainer for anyone looking to better understand the “steady” side of investing. Tickers of ETFs discussed: CBIL, UBIL, ZTM, ZMMK, ZJK. Check out our portfolio by going to Jointci.com Our Website Our New Youtube Channel! Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.  See omnystudio.com/listener for privacy information.

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Investing is simple, but don't confuse that with thinking it's easy. A stock is not just a ticker. At the end of the day, you have to remember that it's a business. Just my reminder to people who own cyclicals. Don't be surprised. there's a cycle. If there's uncertainty in the markets, there's going to be some great opportunities for investors. This has to be one of the biggest quarters I've seen from this company in quite some time. Welcome back to the Canadian investor podcast. We are back for another episode. Now, this one is recorded in advance. It's September 24th. We are preparing like we've mentioned on some recent episodes. Dan becoming a dad in the next month.

month or so. So we're just recording some episodes in advance to make sure that Dan doesn't have to record when he becomes a dad and that you have some fresh content. So this one is an episode that was a inspired by a request from Join TCI. So just a shout out to Mary that was saying she'd love to understand a bit more about fixed income because there's a lot of different kind of fixed income. It can be a bit complex at times too. So we're doing a full episode on that. I think it's going to be a good one, hopefully useful for people as well. Yeah, I think this is one that is probably going to stand the test of time. Like a lot of these products will have been around for a long time, will be around for a long time. And there is a lot

of different types of fixed income. And I think when a lot of people think of investing, they automatically think of stocks, which is, I mean, pretty reasonable. Obviously, historically stocks have returned much more. But depending on your individual situation, a lot of these options, make a lot of sense. Yeah, yeah, exactly. So basically fixed income, like I said, it's a very large category. It does include a lot of different types of investment. Not all of these investments are creating equal.

Actually, some of them are quite different, but they all kind of fall in that fixed income category. Be fair, some, they may not fully be considered fixed income, but are we still including them to this because they're, in my view, in a pretty similar category. And I think it's pretty timely. We saw the Fed and obviously, keep in mind when we're recording this, started to cut rates in the U.S., so the market is currently pricing two more cuts from the Fed by the end of this year

and placing a 35% chance or so of three cuts, of course, if you're looking at the Fed Watch Tool, as you're hearing this, if you're hearing this in mid-October, probably around the time that you'll be hearing it based on the information that Dan has provided me. It may be a bit different in terms of, of what the market expectation, right, depending on what the economic data comes out, what Jerome Powell says. So just keep that in mind. But when we say a cut here as well,

we need a 25 basis point reduction. So typically if you say one cut, but it's a 50 basis point reduction, it's kind of two cuts in one. So that's usually what they'll say. But let's start off here and then feel free to chime in as we go over these. So a savings account. So best way I think that's kind of cash, right? Just keeping cash in a savings account. Some people, like I said, may or may not consider this fixed income, but I decided to include it nonetheless. At the end of the day, you're getting interest, you're getting income on that cashier. It's probably not the highest rates right now, especially if you're keeping that in Canadian cash because rates have gone done pretty substantially and obviously what the Bank of Canada

does will have a direct impact on. on what the banks are willing to pay in terms of cash. But the advantage is here you have extremely liquid and accessible. So when you need your cash, I mean, you'll usually be able to get it very quickly from a bank. It is insured by the CDIC up to $100,000 per account. The downside is the interest you'll get will be at the very bottom of all fixed income options. It's unlikely to keep up with inflation over long periods of time. And interest rates are variable.

So like I said, you know, you may not get all that much. It may go up or down depending on what of the Bank of Canada does. And just a shout out here to our sponsor, EQ Bank. They tend to have some of the highest rates available for keeping money in the banks. So definitely worth a look. If you're not banking with them, I would highly recommend it. Because if you're looking to get at least something on your cash, EQ Bank is definitely up there.

Yeah, especially their notice. savings accounts where you kind of you give up a bit of liquidity I guess they have a seven day and a 30 day the 30 day will obviously pay more because you're locked up a bit longer but you give up a bit of liquidity but you get much higher rates and I think this is like before banks like EQ came around you could probably give a good reason to just kind of not include these cash accounts in a fixed income conversation but now that rates are so much higher It kind of makes sense because a lot of the big traditional banks don't pay anywhere near this for savings rates. So, I mean, sometimes nothing at all for the most part.

I remember, well, this probably would have been a while ago, 10 years ago or so, but I was earning like 10 basis points on my savings. Whereas, I mean, now you can get, obviously, at the time of recording, you can get, you know, 3% on a 30-day notice savings account. So they're definitely in the conversation now just because rates are so much higher. Yeah. And the notice, for those not familiar, the notice savings account is basically you put the money in the account. And when you want the money, basically have to give them a notice of whether it's 10 or 30 days. Oh, 10 days? Yeah. Yeah. So there's a 10 days or 30 days depending on which one you choose. And typically the 30 day will be a higher interest rate. So that's how they work. So it's definitely not as liquid as adding it in just a bank in a regular savings account. But it tends to give you a a higher interest rate. Now, next on the list here, we have treasury bills. Now, this is a government issued debt or sovereign debt. It kind of falls into that bucket. Now, there's all different type of sovereign debt. So we'll be talking about a whole different ones. Typically, the main differences, and there are other types, and we'll touch about the inflation protected ones in

the U.S., but typically it's going to be depending on the duration. So it could be a Canadian Treasury Bill, U.S. Treasury Bill or another country, they'll be less than one year in maturity. My preferred way of investing in those, so there's, for those who have been listening for a while and are familiar with my portfolio, so there's a couple that I really like in terms of these, so there's C-Bill and U-Bill from Global X. The reason C-Bill is Canadian government debt, so Canadian government treasury bills, and U bill here is the same thing but for the U.S. So I tend to keep a decent chunk of my cash

because right now you're getting a higher interest that you would be able to get from a savings account, for example. So that's the reason I like those. They're extremely liquid and accessible. There's higher interest rates than most savings account. They're backed by the government issuing them. Downside, it's unlikely to keep up with inflation over long periods of time.

Their variable interest rates, of course, if the central bank raises or lower rates, it will affect the interest you're getting. It won't affect the principles since the maturity is extremely short. And we'll talk a bit more about the principle because once you start looking at buying government bonds or even corporate bonds, when they're starting to get two plus years in terms of duration, then you have some interest rate risk that start happening because the value, underlying or the principal value could actually fluctuate depending on what interest rates are. So we'll talk a bit more on that for the next one, but anything else you wanted to add.

And actually, there's all different kinds of options. So I'm mentioning the Global X, but whether you look at Black Rock, I think Vanguard probably some, I'll talk about some for BMO ETFs as well. So they have some, but I don't think they have any on the super short duration, but they do have some money market corporate funds as well there. Yeah, I guess the only thing I would say on the treasury bill side of things is like usually when people think of fixed income, like if you buy a bond or or even like a treasury bond, like they have a par value, you buy it at par and then when it matures, you get your money back

with with treasury bills, the way they structure them, they don't, they don't pay a coupon. So you buy them at a discount to par and then they just mature at par. Yeah. So that would be if you're, and with the ETFs available, I don't know why you'd ever do this, but that would be if you're going and buying treasuries directly. This is what is happening in a fund like C bill or you bill. You just don't see it obviously because it's on the, you know, you're just buying the unit. But yeah, it's kind of an interesting thing about treasury bills.

They kind of work much differently. I don't know why they do this, but they do it. You'll buy it at a discount to bar. and then it matures at par, you get your money, but it still counts as interest income, even though it doesn't pay a coupon. I'm pretty sure about that. Like, it's not like a, you would think, like just on the surface, it would be a capital gain. Obviously, you're buying it at a discount.

It's maturing. It should be a capital gain, but they do still count it as interest. I'm not exactly sure why they structure these like this, but they do. Yeah, yeah, exactly. But the reality with those is they also constantly roll over. They're very liquid, but keep in. mind, especially if you're using an ETF like I'm using, whether you want to call that ETF for money market fund, whatever.

They're kind of very similar money market funds, usually more like mutual funds, but they work essentially in the same kind of fashion. The one thing you have to keep in mind is they may not be as liquid. They won't be as liquid as a savings account because you have to sell the ETF, wait for that to settle, transfer the money out to your bank account. So there could be, they're very liquid, but it could be like a three, four day delay until you get the money. So that's the downside, I would say, in terms of liquidity versus a savings account. Yeah.

I mean, savings accounts are going to be the most liquid. Even if you look to like high interest savings, ETFs, that's kind of the same thing. You have to buy the unit, wait for it to settle. When you sell it, you got to wait for it to settle before you deposit, sorry, withdraw. So cash is obviously the most liquid, but you don't give up a ton of liquid. of liquidity buying these types of ETFs, but you do give up some. Yeah, exactly. In this kind of market, I like having some cash on the sidelines.

It gives me the flexibility to jump on opportunities when the right stock goes on sale. But just because the cash is waiting, it doesn't mean it shouldn't be working for me. That's why I use EQ Bank. They offer some of the best interest rate among Canadian banks, so my money's still earning while I wait. You can even get a boosted rate by setting up direct deposit for your payroll and depositing $2,000 or more per month into your EQ Bank account. Your cash stays liquid and ready to go when it's time to invest. And if you're not in a rush to access your funds, EQBanks notice savings accounts and GICs are great ways to grow your returns even more.

It's a smarter way to park your cash. Visit EQBank.ca to learn more and keep your money earning even while you wait. Want to buy a stock, but don't want to shell out hundreds or even thousands for a single share? With QuestTrade's new fractional shares, you can invest any dollar amount and build a diversified portfolio instantly. No delays, no trade fees, no excuses. Want to put $10 into a stock trading at $100? No problem. Quest Trade has you covered.

They're the first broker in Canada to offer real-time commission-free trading. for U.S. fractional shares in ETFs. It's simple, powerful, and finally available in Canada. Head to quest trade.com to open and fund an account. Use code TCI, and you get $50 to get you started. One of my favorite trips this year was a cottage stay on Airbnb less than an hour away from Ottawa. Every morning, my daughter would run straight to the lake,

sometimes splashing, other times poking at the water with her little pink net, trying to catch frogs. Getting her out for dinner was always a challenge, but after days like that she went down so easily at bedtime. That gave my wife and I the chance to finally unwind in the hot tub and watch a sunset together. Having a cozy place to come back to made the whole trip feel effortless and special. It also got us thinking about our own place. If someone else's home could be such a a perfect fit for us, maybe ours could be for another family too. Hosting our home on Airbnb would let them make their own memories in our beautiful neighborhood while giving us a little extra money to put towards our next trip. And the nice thing is the flexibility hosting provides

so we can decide when it makes sense to host our home. Your home might be worth more than you think. Find out how much at Airbnb.ca. slash host. So now moving on to Treasury Bond So treasury bonds are government-issued debt, so sovereign debt, that is two years or greater in duration. In the U.S., two to ten years would be called treasury notes and ten-plus years is bonds. But for the purpose of this segment, we'll just call anything two-plus years treasury bonds. A key difference here between treasury bills and bonds is that the principle can fluctuate as interest rates move. So, for example, say you have five-year Canadian treasury bond for $1,000, that pays. 5% coupon, so 5% interest annually when you buy it.

After year one, the yield goes up to 10%. So the five-year bond for the Canadian bond actually goes up to 10%. We won't go into the mechanics. It's just an example. Well, now that bond that you bought a year ago will be worth much less, the par value will be worth much less than $1,000 that you paid for if you wanted to sell it on the open market. However, if you just held on to the bond to maturity, you would still get your full principal back.

So it just becomes an issue if you have to sell the bond because what the markets is saying is, well, you know, tough luck for you that you bought it as a 5% coupon. But right now we can buy some fresh bonds that are paying 10% coupons. So we'll buy yours, but we'll give you less. So it kind of matches that interest that we could be getting for fresh bonds. But on the flip side, if rates go down during that same period of time, the 1K invested would go up in value. So it's the opposite side where the market for fresh bonds would be getting, let's say, 2%, and you got 5% on yours. So the price would go up to kind of match that. So there is obviously some potential risk and upside when buying bonds compared to treasury bills.

Yeah, I think the most important thing is like the coupon doesn't change, but the, yield will change. So they'll kind of, yeah, they'll, they'll adjust the price of the bond to kind of stay competitive, because as you mentioned, the market price. Yeah. Yeah. So your par value will be returned, but that doesn't necessarily mean the value of your bond right now is worth that power value. And, um, yeah, obviously you mitigate a lot of that risk if you hold it to maturity. But if you, if you do buy a bond and you ended up needing to sell it at that point, you're, you're talking about a bit a rate risk there overall. And yeah, I mean, a lot of people will buy ETFs for the most part.

Like I don't know of anybody who, if they're buying bonds, they're not just buying a bond fund, which I mean, this kind of, it's still happening in the underlying bond fund portfolio, I guess, but it's not necessarily the same as buying an individual one and the fact that you get your principal back. It's your money back. These bond funds can kind of fluctuate a little bit, you know, more volatile than that. So it's not necessarily a guarantee. Yeah, exactly. So I'm just showing here the five-year chart of ZTM, which is the BMO midterm U.S. Treasury bonds. So it holds five to 10-year

U.S. Treasury bonds. And I think this is just a good example to see what happens. Obviously, I chose five years because if you go back at 2021 interest rates were extremely low, and then as interest rates started rising on the longer end of the yield curve, or the midterm, if you want to call it, you saw that these bonds actually started going down in value. And what happens is the TS has a whole bunch of different ones with obviously different maturities between the five and ten years and a lot of them will roll over,

but the market value will be adjusted to reflect that. If you hold one bond, that's like 10 years then. As long as you hold onto it and you don't sell, that's fine. You'll get the principal value back plus the coupons. if you buy a bond fund, you really need to be aware of that, that the value can fluctuate so it can go up or down. So if you're buying it because you want something that's a bit safer in your portfolio, I think a lot of people realize that bonds were not necessarily as safe as they thought, buying them in 2021, 2020, and then they looked in 2022, 23, and they were sitting

on losses. Yeah, well, what was that financial company that bought a bunch of of the bonds. So we can Valley Bank. Yeah, they bought a bunch of treasuries in like 2021, 2021, 2022, and then when interest rates went up, yeah, that was, yeah, I mean, there's definitely risks there from that perspective, especially if you look to, like, this is what, a five-year fund? Five to ten year. Oh, yeah.

I mean, just as an example of it was just solely a five-year, if you would have bought the bond at the start of this chart here, you would have got your principal back today, whereas if you bought the fund, you're down 10%. right so it's there's a lot of different funds kind of sorry a lot of different fixed income products like rolling through these so again different maturity dates it's not it's not as cut and dry as buying an individual bond yeah exactly and if if you compare so if we go back to you bill here i'm trying to find quickly and you'll see the difference in terms of returns right u bill essentially keeps the the same value or very close to it the only fluctuation is when there's the interest payment and air quote, obviously, well, you know, you'll understand what we talked about. And then you bill like kind of goes up in value because the part value doesn't really change. And then if you add in the total returns, it actually goes up because the interest is just added. So there's definitely less risk in terms of interest rate risk.

Obviously, there is some where if interest rates go down, I mean, you'll just get less interest. But your principal won't be affected there. Yeah, with that because they're rolling them over, what, it's a zero to three month fund? Yeah, every day there was, yeah, they're constantly being rolled over. So it's, yeah, it doesn't have as big of an impact. Yeah, exactly. So some of the advantages here, it's very liquid. So the bond, bond, Bonds and just the bond markets, especially if you're talking about U.S.

Treasuries, it's very liquid, very liquid during market hours, likely higher interest rate than a savings account, likely a higher interest rate for the most part than what you could get from Treasury bills. too, although we saw that being, you know, distorted a little bit in past years, but typically that's what's going to happen because the yield curve will typically be sloping, so lower on the front end, higher on the back end. It's backed by the government issuing them. There is possible capital gains if rates go down, like we just mentioned. On the downside, the opposite possible capital losses if rates go up and you need to sell, especially when you're talking about a bond ETF, but the same thing would be in actual, if you own the bond itself, if it's a 10-year maturity and you have to sell at gear 3 for whatever reason at whatever the

market price is, you can still be looking at capital gains or losses. There's increasing soft or hard default risk with governments as deficits get larger and larger. Government debt gets larger and larger. So a hard default means that the government decide to not pay its full debt back. So you could say you get 70 cents on the dollar because they're just saying like that's what they're doing is they're doing a default so bondholders will be taking the hit unlikely when you can for lack of better words print the currency because governments will typically choose to just inflate their way out and that would be a soft default would mean higher inflation so the government lets inflation go higher to devalue its debt so

the nominal value of your bond is not affected but you're losing money on a real basis meaning that you're losing purchasing power, even though that you put $1,000 in that 10-year bond, and then at the end you got $1,000 plus all these coupons, well, if inflation rate was, you know, twice as quick, then the actual interest that you got on there, then you're losing purchasing power. And at the end of the day,

that's a whole goal of investing, is at least keeping your purchasing power or increasing it. So that is the big downside with a government bond. Yeah, real returns, like a lot of the time, yeah, well, that's kind of what we were saying when interest rates started to go up in 2022 and you could get 5% on a savings account when inflation is 9%, well, what was, yeah, it was 9% for almost a year, wasn't it? 7, 8, 9%. I mean, obviously, you know, you're still losing purchasing power. I mean, 5% on a, you know, absolute basis is pretty solid for a risk-free investment. but I mean the focus should be on on real returns and bonds have kind of struggled for quite a while now to actually provide any any kind of that but uh well I mean for me I think it's pretty simple if you're not making money on real returns you're losing money yeah you are if not you're basically doing mental gymnastics and looking at the nominal value but if you're buying less with that amount than you were five years ago you've lost money so that's that's the way I think everyone should be looking at investing because what's you know for what do we use money for yeah yeah exactly so if not you might as well just buy stuff right now yeah that's kind of it's kind of the way I see it but the next here is corporate debt so like government debt corporate debt can be short term

or long term so commercial paper is short term corporate debt usually under a year corporate bonds they're longer data debt obligation so typically a year to 30 you'll you won't see as high as 30 unless the company is like really solid and has a really long track record. I think Bell has some like these pipelines. Pipelines. Like stable companies will tend to have longer dated debt. The yield vary depending on the issuers credit quality. Obviously there's also credit spreads that come into account. So the difference between what you can get from government bonds and then the corporate bonds. So higher risk will typically mean higher yield. You can access. corporate debt directly so you can buy individual bonds or commercial paper or indirectly

through ETFs or money market funds. They'll usually yield more than the government debt here. So obviously depends the type of government debt if you have emerging markets or something like that where it's super high risk, you're going to get more yield on that than you would for corporate debt. But one example of it would be not ZTM, it would be the BMO money. market fund here. I'm looking at that. ZMMK, I think you're right. I think I had the wrong one. It was a mutual fund, not an ETF. I think you're right. ZMMK. So I share the wrong one, but that's

all right. So money market funds, they'll usually be able to get you a bit more yield if you're using the corporate ones. The advantage is it's also liquid during market hours. If held through an ETF, as long as the ETF has a decent amount of liquidity, it should be good. for capital gains if interest rates fall, especially on the obviously same reasoning as the government debt here. So for bonds, you have that potential for capital gains if interest risk fall. Capital losses if interest rates rise. So same thing as the bonds, the government bonds. There's default risk. So unlike government's companies cannot print money. So there's definitely default risk. When you hold the fund, you're kind of mitigating that default risk a bit

because you're diversifying across different companies. So that is something to keep in mind where if you own just U.S. government debt, you're just, you know, your risk is just towards the U.S. government. So obviously they'll likely print, but that soft default risk is still real. And liquidity risk, so smaller, lower rated company bonds may be a bit harder to sell if you're holding the individual bonds than, of course, government securities. Yeah, these are, I mean, I think the default risk. risk is one of the the main differences. And I mean, we saw, obviously, companies with higher credit

ratings will often be able to issue fixed income at the lower rates. I mean, we saw that with BC, they got downgraded, I think, pretty like one step away from junk. And obviously, I mean, junk bonds are kind of, it's kind of a harsh term, but they're like companies with lower credit ratings, you'll typically get higher yield, but you'll also kind of amplify that default risk. But yeah, obviously when credit ratings of these companies get lowered costs more to finance, you'll probably get more yield on these bonds. But they, I mean, obviously it's it's kind of associated with more risk. And I think BMO does have a pretty good set of corporate bond funds. Like I think you can actually, they have like a short, mid and long term.

So if you're actually looking to kind of build out a particular type of bond portfolio, you don't really need to buy an all in one. you can kind of segment segment it away depending on, you know, the length of maturity you want. There's a lot more bond funds these days than there was prior. Even over the last like five years, they've come out with a ton more to kind of create a bit more flexibility. But yeah, I mean, if you go to the corporate side, you're looking at higher interest or sorry, higher yields, but you're also looking at higher risk. Although in like in the grand scheme of things, risk when you compare it to equities is still

much lower if you're investing in in high grade bonds at least yeah yeah high grade bonds i was going to say yeah depending on yeah you can get into some shady situations for sure so looking at here some like uh z jk the bMO high yield u s corporate bond index so that would be junk yeah anytime you see high yield it's usually junk bond so that's a synonym so whatever you see that just keep that in mind yes you can get more yield but then you get a higher risk profile as well and then And I would say sometimes equities are probably high quality equities are probably safer than some of the junkie bond funds. So that's an example.

But of course, you get rewarded with higher yields. So it is something to keep in mind. There's a bunch of them out there, obviously, BMO is a show sponsor. They have some great sponsor. They have some great ETF. So have a look for what they're offering. But there is all different kinds of them out there, whether it's the Canadian or U.S. market. Obviously, there's going to be more when it comes.

to the U.S. market if you're looking to invest in U.S. dollars. Anything else you want to add before we move on here? I guess I'll just quickly mention, and I just look this up on GTP as we're recording. So don't hold me to this data, but yeah, in terms of junk bonds, they have an annual default rate of around 4 to 5 percent, whereas if you look to a AAA bond, they have a cumulative 10-year default rate of less than 0.1%. So that kind of shows you the difference in, You're talking about a 5% annual default to a 10 basis point cumulative default. Yeah, exactly. In this kind of market, I like having some cash on the sidelines.

It gives me the flexibility to jump on opportunities when the right stock goes on sale. But just because the cash is waiting, it doesn't mean it shouldn't be working for me. That's why I use EQ Bank. They offer some of the best interest rate among Canadian banks, so my money's still earning while I wait. You can even get a boosted rate by setting up direct deposit for your payroll and depositing $2,000 or more per month into your EQ Bank account. Your cash stays liquid and ready to go when it's time to invest. And if you're not in a rush to access your funds, EQBanks notice savings accounts and GICs are great ways to grow your returns even more. It's a smarter way to park your cash.

Visit EQBank.ca to learn more and keep your money earning even while you wait. Want to buy a stock, but don't want to shell out hundreds or even thousands for a single share? With QuestTrade's new fractional shares, you can invest any dollar amount and build a diversified portfolio instantly. No delays, no trade fees, no excuses. Want to put $10 into a stock trading at $100? No problem. Questrade has you covered. They're the first broker in Canada to offer real-time commission-free trading.

for U.S. fractional shares in ETFs. It's simple, powerful, and finally available in Canada. Head to quest trade.com to open and fund an account. Use code TCI, and you get $50 to get you started. One of my favorite trips this year was a cottage stay on Airbnb less than an hour away from Ottawa. Every morning, my daughter would run straight to the lake, sometimes splashing, other times poking at the water with her little pink net, trying to catch frogs.

Getting her out for dinner was always a challenge, but after days like that, she went down so easily at bedtime. That gave my wife and I the chance to finally unwind in the hot tub and watch a sunset together. Having a cozy place to come back to made the whole trip feel effortless and special. It also got us thinking about our own place. If someone else's home could be such a perfect fit for us, maybe ours could be for another family too. Hosting our home on Airbnb would let them make their own memories in our beautiful neighborhood while giving us a little extra money to put towards our next trip. And the nice thing is the flexibility hosting provides so we can decide when it makes sense to host our home.

Your home might be worth more than you think. Find out how much at Airbnb.ca. slash host. Now, the next type here, I know you're probably not as familiar with this, so a little bit because when I took the Canadian securities course, obviously you go over these quite a bit. So I know a bit, but I mean, I would need a hard refresher for sure. Okay, so an annuity is a contract with an insurer where you provide a lump sum in exchange for regular payments over a set period of time. It could be for the rest of your life or for a fixed term. an example. And this is just an example. I'm not saying you'd get this amount with a lump sum like this. So example, you give an insurer 100K and they guarantee you $500 for the rest of your life. So some of the advantages here, it's regular predictable payments. It provides stability.

You can add features or bells and whistle like survivor benefits, guaranteed minimum payout period. So you're guaranteed to have a payment for 10 years even if you pass away within that period. So your beneficiaries, say you pass away after five years, well, they would still get five years worth of payment. Pretty common as well for pension plan. So you'll get like five or ten year guaranteed payment periods. So if someone retires and they pass away for a defined benefit pension plan after a year, then they might get like four years worth of payment. Their beneficiaries would get that or their estate.

You can also pay more for inflation and taxation. Those are all the example. you can get some longevity protection payment. You have longevity protection, so payments continue no matter how long you live if you have a life annuity. So if there's not a fixed term. So there's definitely some advantages here, but the downsides here are pretty significant. So inflation risks, so fixed payment may lose purchasing power over time if you don't have your annuity index in some fashion. And even then it may not keep up with inflation, especially if it's indexed to like the CPI, because we've talked.

before. CPI, unfortunately, it's just a kind of basket approach. It doesn't necessarily mean that it reflects the personal inflation rate that you're feeling. Extra features reduce your starting monthly payments. So any of those features that I mentioned, while, you know, the more features you add, the lower the monthly payment will be because you're paying, like it's an additional risk for the insurer to provide you for those features. So they want, they'll charge you more for them. There's a loss of liquidity. So once you buy, you're typically going to be locked in. So if you run into an event that requires a large sum of money, you won't be able to get it from your annuity as a lump sum. You'll just keep getting those payments, those monthly payments.

There's still a counterparty risk if the insurer fails, although there is some insurance. So Assuris is a industry insurance for annuity, but you would only get a percentage. And I think it's a fairly high percentage. I think it's like 90%. If I remember correctly, it could be a bit off there. But there is also a cap to the amount. So keep that in mind. So there is some counterparty risk. Anything else you wanted to add here for annuities? So if you bought a life only annuity with no protection and you died after a couple of years, like the insurance company just keeps the rest? Is that how it works? Yeah. Crazy. But usually, you know, again, you could, I think a lot of them will come with survivor benefits. So if you have a spouse,

you'll get, your spouse will get like 66%, stuff like that. So I think that's pretty typical. But yeah, that's where the guaranteed payment would get in. I think I haven't shopped myself for it, but I can just speak with my parents ended up getting a small annuity because my, that's what they valued. So they wanted stability. So, and it's not an all or nothing. I think that's important for people to remember is just, you know, let's say you have a million dollar retirement portfolio. maybe you use like a quarter of it or 10% or 50% you buy an annuity with that amount and then

you invest the rest right like there's ways to like you don't have it doesn't have to be an dollar or nothing but my parents really valued that stability even though the payments are not an index but for them that worked and they have a pension and they also have investments so it kind of balance things out for them yeah well said I have nothing more on annuities like I said, I kind of learned about them a bit, but I haven't looked at them in quite a while. Yeah. So now inflation linked securities. So these are bonds where payments are adjusted for inflation. So these will be government bonds. And they're protecting your purchasing power over time. Unfortunately, in Canada, those were called real return bonds. There's probably

still some in the system that haven't matured yet. But back in 2022, the government announced it would stop issuing those. A lot of institutional and pension plans were not happy about that announcement, but it is what it is. It hasn't been reverted. In the U.S., they are called TIPS. So Treasury Inflation protected security. So the principle of a TIPS goes up with inflation and down with deflation. And when a TIP's mature, you get either the increase inflation-adjusted price or the original principle, whichever is greater. You never get less than the original principle. So it is a good way to hedge against inflation. It protects you against inflation, so your income and principal move up with the CPI if it goes up.

It's government-backed. Useful for long-term savers or retirees worried about losing purchasing power. The downs is the yields are usually lower than regular bonds as you're paying for premium for that inflation protection. It can be less liquid than regular government bonds in secondary markets and hard. There's also that hard and solved default risk that we. talked about earlier. So a solved default, for example, in this case, could be that government would change how the CPI is calculated. For example, I guess. Yeah. Yeah, that's always possible. That basket can change and be less advantageous for you and more for the government. Yeah,

they, I'm starting to wonder why Canada got rid of these. I mean, maybe they just weren't popular enough. I don't know why they would do that. I think that's what they quoted. They weren't popular enough. No, it's, yeah, I mean, at the end of the day. maybe that's the official reason and then there's a different reason in practice. Convenient to do it in 2022, I guess, but yeah. Yeah, exactly. Yeah, that's right. I didn't think about it that way.

Let's put a tinfoil out on it. But maybe they knew what was coming in terms of interest rates. And now, obviously, when you talk a fixed income, you've probably seen that there is a pretty common theme here is, for the most part, you're buying debt. Like, that's pretty much what you're doing. Like bonds are debt, bills are debt, the savings account, they're not dead, but for the most part you're buying that. So there's other type of debt products.

So there's loans, private credit, mortgage rates, these are just examples. There's other type of products, but I wanted to just kind of cover those just quickly. This category covers lending that's done outside traditional banks in capital markets. So instead of buying a bond, you're effectively lending to a company. project or pool of mortgages. So private credit or direct lending. There are non-bank lenders provide loans directly to businesses, often mid-sized firms that can help, that can't tap public markets. Some platform will offer this to retail investors. So we were talking about that. So well, it's simple. Does have that product, which I've been pretty critical of in

the past. So private credit specifically. So you're looking at this. So one of the issues, with private credit that I have is you're starting this being, you're starting to see this being offered more and more to retail. And whenever I see a product that was predominantly institutional shifting over to being offered more to retail, my spidey sense goes off. And I always feel like there's the potential of Wall Street trying to offload bad investments to Main Street or to the retail investors. Or there's, there's typically, yeah, there's a reason they also make really good fees on it. So Wall Street is very well known or Bay Street as well. Like, you know, they, they make their fees and whatever they can kind of charge high fees and they're great at

marketing. So I'm just here showing Weld simple. And one of the big issues is just like private equity, your capital is locked in. So it's locked in. So they have here three plus years, but I wouldn't be surprised you see these funds like five, 10 years capital locked in. And if there's some issues with the fund that could even be extended if they're having trouble recouping some of the debt, just like private equity, if they're having trouble actually exiting those private equity investment, whether it's selling it off to another company or an IPO, for example. So there is some risk and not being able to touch that capital being locked in is a massive downside here. Yeah, and I think there's also the element that, I mean, when you go

in this situation, you really don't know what you're buying? I mean, I would imagine you could kind of dig into it a little bit, but this is just a pool fund. And I kind of noticed they had, now, I don't know if this was for Well Simple's private equity, but I remember it used to be $100,000 minimum. I know they've even decreased that to 50. Now, I can't say that's for sure. They might have launched the private credit at 50 to start, but I'm pretty sure that private equity when it first launched was 100,000 minimum in assets before you could even buy it. Yeah, I'm not sure. So I don't want to mention I really don't know. But just kind of word of caution here. Obviously, you can get more. I think they're advertising 9% yield. But again, there's additional risk. So keep that in mind. The higher the yield for the most part, every easy roll of thumb. The higher the real compared to other products is the risk here it will be. So that's kind of the risk premium that you're getting. Yeah. I mean, obviously you're going to lend to these companies. If you're going to finance these companies, you're going to do so at a higher rate. And say a company, like just off the top of my head, like an Enbridge, who's, you know,

AAA credit paid everything they've owed for decades, right? Whereas these funds are a little higher risk. You're going to get that higher yield. But, you know, just acknowledge the risk. Yeah, exactly. Syndicated leverage loans. So large loans split amongst multiple lenders can be a floating rate loan. There are some ETFs and platforms that will also offer this for retail investors.

So you can just do some research. here. Mortgage reits. So mortgage reits are companies that invest or finance and mortgages passing a long income to shareholder. Clearly, there are some advantages and downside for each. So higher yields than traditional bonds since borrowers are less credit worthy or less liquid. Some might say diversification since it provides exposure beyond public markets. I think that's a whole lot of BS, but that's always been me. Same thing for private equity. You're investing in businesses and the fact private equity, I won't go too much on the rent, but they're basically not marking it to market,

and they're saying that it's diversification when you're using even more leverage. But anyways, I will continue before. You know my point of view on those. Floating rate structures can benefit from higher interest rates for these type of investment. Now, the downsides are pretty significant, so higher default risk.

So boroughs are often less established or higher risk than those in public bond markets. There's manager risk. You're really relying on heavily on the fund managers to do proper due diligence on the loans they originate or buy. And these have become increasingly popular, especially when it comes to private credit. So the more popular they become, the more funds there are, the less quality there will be, because then you have these managers that feel like they have to find some kind of credit to

invest in to borrow to to lend to and you know sometimes they'll probably cut corners because they have to find an investment they're not very liquid i think we talked about that before so unless you invest in a traded etf money can be locked in for years of course mortgage rates will be pretty liquid but for mortgage rate you'll experience some volatility they can swing pretty hard with interest rates so someone who bought annalee and ly in 2021 which invests in mortgage residential mortgages is likely still down or just breaking even at this points in total returns because yields were so much lower back in 2021. So the price of the mortgage retail actually gone down pretty significantly.

Again, same type of reason as long-dated bonds here. They can be quite complex. The loan structures leverage securitization make it tough for retail investor to fully understand what they own and evaluate the risk and their high fees. So private credit and loan funds often charge higher fees and management fees and also performance fees compared to just regular index bond ETFs, for example. So you're looking like you could pay easily up towards of 2% in fees, whereas something that would be offered by any of the major ETF providers, whether it's a BMOETF or someone else, you'll usually look into like much less than one percent, oftentimes lower than

50 basis points as well. Yeah, I mean, these fund managers, they go where the money is. That's kind of been evident for a while now. I mean, we've seen even with BlackRock over the last while, like how aggressively they're looking to get into private credit, private equity. There's more money to be made in this area. And I mean, obviously it's a hot, hot new product, high yielding products. So it has a lot of appeal to retail investors. I mean, I don't touch it mostly because I just don't know enough about it. Yeah. But I do know quite a bit of people who kind of took on the offerings that were made in this area. And I mean, thus far, returns have been been pretty good. But as you said, yeah, it's a little bit complex. Not a lot of them are marked the market.

They're relatively illiquid, especially on the equity side of things. Like, they're, they're complex. I mean, before you're going to buy these, I would heavily. heavily research what you're buying before, uh, before you kind of dip your toes into it. Yeah. It's all great and fun when, uh, you're getting that income until they gate the fund, for example, and then you're not able to take out the money when you thought you would. So just keep that in mind. There's nothing, there's no free lunch in investing.

It's all about tradeoffs. So once you understand that, I think that is probably the, the one concept in investing that is probably under-talked about is trade-offs. Like, you want the most liquid option for fixed income, then go and put your money in a savings account or go buy treasury bills. Like, it's not going to yield as much, but that's a trade-off. You're trading off lower yield for high liquidity and kind of safer principle, whereas, you know, you can get some higher yields with these products, but you're trading off liquidity

and oftentimes much more risk in terms of your principles. So just be aware of that and applies to pretty much like everything and invest. Pretty much everything. There is always, yeah, tradeoffs. Yeah. The next one here, preferred shares. Preferred shares are typically, or technically equity actually, but they behave a lot like fixed income in terms of the properties.

So elders get a fixed dividend that has priority over common stock dividend. For example, a bank may issue preferred shares that pay 5% annually. if the bank struggles, preferred shareholders must be paid before common shareholders receive any dividends. So there is still some equity risk here. Obviously, if a company that has preferred shares, they go bankrupt, you're still going to be pretty low on the list to get your money back or, you know, cents on the dollars where bond holders will have priority. And then you'll be kind of a bit lower than that. You're before regular equity. That's good. But you know, just something to keep in mind. In terms of advantages, has higher yields and most bonds

from the same issuer. Priority over common stocks in dividends and liquidation. Some prefer trade on exchanges. There is some liquidity here, especially if you're looking at a larger company. In Canada, dividends from preferred qualify for dividend tax credits. So it can be a bit more appealing from a tax perspective. In terms of downside, it's not true debt. So they can be, dividends can be suspended in stress situation. Prices can be volatile with interest rate changes in terms of longer duration here, lower priority than bonds if the issuer goes bankrupt like we just talk. And the market is definitely smaller and much less liquid than corporate bonds or even equities or regular equities. Yeah, I think the one, the main differentiator,

you know, preferred and common shares is you don't really participate in the earnings growth of the company. I mean, you're, your payment is, you're trading that off. Like, you're not going to get a lot of capital appreciation. These typically fluctuate the same, like they're kind of inversely correlated to interest rates. So, you know, if a company reports, you know, 30, 40 percent earnings growth in a particular year, the common shares will usually see some appreciation where the preferreds might not necessarily see that. There's also like I'm pretty sure there's like dozens of different types of preferred shares like there's convertable where you can kind of convert your preferred shares to common equity at some point. There's like callable ones where the company can just decide to call them back at any time. So if you're going to buy these, again, there's a ton of ETFs that you can utilize. Like I don't know too many people. I do know people who own these, but I don't know too many people that are just buying straight up preferred shares. They're just buying ETFs. for the most part

because there's a very complex world in regards to preferred shares and you definitely need to know what you're buying before you buy it. Yeah, yeah, probably something that would be AI is probably very useful. If you have like the document, you can ask it to kind of summarize it for you,

the main points, but just verify again. We've talked about this before, like the information gives you just make sure you verify it, but that's something that you can leverage an LLM, so a chat GPD or something else to kind of help you understand what you're buying, but again, make sure you verify. And last but not least here, something I'm not very familiar with, so I'll be listening.

So principal protected notes. Yeah, so these are probably, yeah, I would imagine the vast majority of people don't really know these exist. And I'm not really a gigantic fan of them, but they kind of are a form of fixed income and will be suitable for some people. So what happens with these PPNs? Your original investment is guaranteed. However, your returns are not, which is kind of where these investments get interesting.

So they'll typically have a fixed maturity date and they're more so on the longer side of things. And I'll kind of explain why in a bit. But they're usually five plus years, five 10 year maturities. And what the banks will do, they'll take your money and they'll take your principal. So say you give them $5,000. They'll take something like that, invest in a GIC, and then they'll take a smaller portion of that investment and invest it typically in derivatives that, like options, I guess, type of derivative that track an underlying asset. So, for example, you could buy a PPN on the SB 500, gold, oil, the TSX, the NASDAQ, anything. And if the underlying asset increases in value, that's where you'll get the return.

So if the asset declines in value, you get your initial investment back and effectively the bank kind of eats that loss. I mean, they don't really because there's other ways for them to earn money. There is some situations where they could take an L on this, but not really. They kind of seem like no brainers in this regard, but there is a catch that, I mean, makes it very, very appealing to the banks, which is why they offer these. So they can have performance caps. So they can say you can only earn a max of 10% a year. So if the underlying asset rises by 40%, they give you 10 and they take the remaining 30.

They can also have participation rates. So let's say you get to participate in, say, 50% of the returns of the underlying assets. So that means if the asset increases by 40%, you'd earn 20% and the bank earns the other 20. And the bank often has longer maturities on these so that the risk for them is very little because, you know, if they had, they're not going to issue these with a one year maturity because, you know, the market could easily be 20, 30% lower in a year and they could end up taking some pretty big losses on these. But, you know, they extend them out longer term so that, you know, there's obviously it's not guaranteed. We have had, say, dead decades on the markets before. But, you know, the fact that they long date these kind of allows them to, you know, earn returns on them and in turn give you.

you returns as well, but they're, they're decent products. I mean, again, I'm not a huge fan on them because you are giving up a lot of cost for your principal to be protected. Like, they're more, they're more attractive to a certain degree than say a GIC. Let's say a GIC right now is earning you 3%. So we- Well, yeah, and one that we skip, by the way, so I- Oh, yeah, the GICs. I completely went over it. So we'll do, we'll finish with the GICs here. But it kind of sounds a little bit like a market link GIC has some similarities to that. Although I don't know if there's like participation rates. Well, there would have to be, I would say.

I don't know too much about market link GICs. I know that they do. Well, I think for the most part, they're just like they're tied to an index. It could be like a sub index of a larger index like the utilities index in Canada. And then usually it'll, your interests will be capped to some extent as well. And then I think the words you can get is just your principal. back with the you know some chunk change yeah i would imagine it's more so along the lines of maturity dates that maybe make these lot different but yeah i mean they're the banks issue these

products because they make money on them obviously i mean in the event you bought one of these with a five year maturity and the markets have you know dead returns for five years you would have made out better than owning equity but yeah i'm sure the banks have hedges in place i think that's Oh, yeah, they're not losing money on these. The other big caveat here is you are not entitled to dividends. So you don't get the dividends from the underlying asset. I would imagine the bank does because you technically don't own the asset. The bank does.

So, yeah, that's another kind of caveat there. Yeah, they're interesting products. I have never heard of anybody who actually owns these. I've heard, like, I've heard of people who've been pitched them before, but I don't know anybody who owns these. But, I mean, if they're interesting to you, you can check them out. Yeah, it's like a unicorn. I've heard of them, but I've never seen them. Yeah. So I guess, yeah, GIC. So it was supposed to be second on the list here and I just rolled right down to treasury. Yeah, to treasury bills. So most people are probably familiar to GICs. They're similar to CDs in the US, guaranteed or certified deposit. Certified deposit. Yeah, certified deposit. Okay. You deposit a fixed. I'm just so used to the CD amount. So you deposit a fixed amount for a set period of time, which. is the term. There are different kinds of GICs like we just alluded to, but the most commonly

one is fixed interest GICs, meaning that you have a set interest rate for the duration of the term. Props to those who bought a 5, 10 year GIC back in 2022, you're probably getting a pretty good interest return on those. Example of other types of GICs would be like cashable and like we, I just alluded to market link GICs. So since it is on fixed income, this episode. So I think it's more, let's focus a bit more like on these more traditional GICs. So the advantage for the fixed rate non-redeemable GIC is that it's CDIC insured up to $100,000 per account, higher interest rates than savings account. And you lock in the interest rate for the set term. Downside, you lock it the interest rate for the set term. So you can ask anyone who would have

gotten a GIC back in 2021 for five years, how do you feel about? about those locking at that interest, you're unlikely to keep up with inflation over long periods of time. It is not liquid, especially, obviously there's the cashable version, but if you have a fixed term, not redeemable, GIC, your funds are locked in until the end of the term. And sometimes, I've never done it myself, but I've read and heard that sometimes you can take it out, but you have to forfeit the interest

and or have to pay a fee to be able to take it out. So it's, um, that's kind of the price you paid to be able to lock in and get a higher interest rate than is currently available in like a savings account, for example. Yeah, I think you have to be able to prove like financial hardship or something like that. Yeah, that's what I read too. Yeah, for them to ever give you one of these. I mean, the one thing you can do to boost liquidity a bit is ladder them. So I mean, if you if you have say $10,000 to invest and you, you know, say it's short term money that you might need. So you want to go to the G. I see you can kind of mix up your maturity dates. Your yield will obviously come down because when you're buying on the shorter end of things, the yields are going to be tinier typically. But you can buy a wide variety so you've kind of got consistent cash flow coming in.

Instead of, say, putting all that money in a five-year one, then you can't touch the money for five years. Whereas, you know, if you want to ladder them, you could do a six-month one, a year one, a two, a three, a five, and then as they mature. The only, I guess you could say risk, not really a risk per se, but if interest rates fluctuate, obviously you're when they mature and you want to renew them, you know, it can work out to your benefit. It worked out to a lot of people's benefits when they were laddering in 2022. You're laddering into higher income. But now, like, you know, as rates come down, you could actually be laddering into lower income.

But it's a strategy that a lot of people use for, you know, money that they might. need it so they don't want to lock in for five years. So they just lock in set sums for for lower periods. Yeah. Yeah, I've done that myself. So it's not a bad strategy, especially in that 2022, 23 when you could get some pretty nice rates here. But anything else we miss? I think this was a good, should be a good evergreen episode just to try and give as much kind of options or insights on the different kind of fixed income products that available out there we probably missed some you know maybe one or two that more obscure but i think for the most part it should cover it obviously we didn't touch like dividends or anything like that those

wouldn't be considered fixed income but hopefully it was useful thanks again for mary for just suggesting that as an episode hopefully this was helpful for everyone and for those who like this content want to support us in a different way and would like to get our full videos You can go at join tCI.com. It's $15 per month. You get access to our portfolio updates every single month. I also do an update for my parents' portfolio, which I manage myself. You get the podcast ad-free and the full video, of course.

And from time to time, I'll post some additional content there too. So for anyone interested, go to join tCI.com. If you have some questions and you're a member, we try to get back to you within a day or two at most. Sometimes I get a brain cramp and forget and there'll be five days, but usually because I'm traveling completely forget. So do apologize if that's the case. But if not, I mean, just any kind of support we get, continue listening to the episode, give us some like, subscribe. We also are posting more content on YouTube. So if you just want to see some shorter clips, you'll be able to see us on YouTube.

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