Fixed income markets offer a wide range of opportunities for investors. These investments can be issued by many different organizations, private and public. For example, you can invest in bonds from various levels of government and corporations. You also have choices to invest in both domestic and global markets.
Fixed income investments can vary widely in terms of the level of risk and return. They may respond differently to changes in the level of, and outlook for, interest rates. They can also deliver varying levels of income, depending on the level of risk you are willing and able to tolerate.
While this makes fixed income investing more complex, it allows professional investment managers to combine different investments to achieve specific objectives. This is called ‘diversification.’
As highlighted below, no single fixed income category has led in performance all of the time. That’s why it’s so important to include a broad cross-section of different types of fixed income investments in your portfolio.
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Note: All returns are total returns in Canadian dollars, unless otherwise noted.
*C$ Hedged
The benefits of diversifying your fixed income holdings
Diversifying across multiple fixed income markets has the potential to offer investors a number of important benefits:
- It may protect your portfolio from interest rate changes.
Bond prices move in the opposite direction of interest rates. This means that when rates go up, bond prices go down.
Certain types of fixed income investments are less sensitive to interest rate changes. This is because they have other characteristics that also contribute to their performance. For instance, their performance may be strongly linked to corporate profitability. When interest rates rise, they may therefore provide some protection for your portfolio. This can lead to a smoother investment experience for you, which could mean steadier performance along the way.
Fixed income performance in rising rate periods
Source: Morningstar Direct. Chart depicts average monthly return of fixed income indices in months in which the yield on U.S. Treasuries rose for 20 years ended December 31, 2023. An investment cannot be made directly into an index. The graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results. Canadian Bonds: FTSE Canada Universe Bond Index, U.S. Government Bonds: ICE BofA U.S. Treasury Index, Global Government Bonds: FTSE WGBI Index (C$ Hedged), Emerging Markets Foreign Exchange: JP Morgan ELMI+ Index, Emerging Markets Corporate Bonds: JP Morgan CEMBI Diversified Index, U.S. High-Yield Bonds: ICE BofA BB-B US HY Index.
- It may deliver better risk-adjusted returns.
The higher return potential offered by some fixed income strategies often comes with higher risk levels. However, different fixed income markets aren’t highly correlated. They don’t move perfectly in sync. So a diversified fixed income portfolio may provide higher returns with a more modest increase in risk or volatility.
- It may provide an income boost.
Once you add investments outside government and investment-grade bonds to your portfolio, you are more likely to see higher yields. Investing in other parts of the bond market offers the potential for higher returns.
Benefits of diversified sources of income
Source: Morningstar Direct as of December 31, 2023. An investment cannot be made directly into an index. The graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results. Canadian Bonds: FTSE Canada Universe Bond Index, U.S. Government Bonds: ICE BofA U.S. Treasury Index, Global Government Bonds: FTSE WGBI Index (C$ Hedged), Emerging Markets Foreign Exchange: JP Morgan ELMI+ Index, Emerging Markets Corporate Bonds: JP Morgan CEMBI Diversified Index, U.S. High-Yield Bonds: ICE BofA BB-B US HY Index.
The challenge: Adding value in global fixed income solutions
Creating a highly diversified fixed income portfolio is a complex task for most investors. There are a tremendous number of moving parts to track. Global interest rates, currency fluctuations, changing credit environments and evolving economies are among the factors that must be monitored closely. While investing in higher-yielding fixed income markets can provide important return and diversification benefits, effectively managing the complexities is an ever-growing challenge.
This is why many investors turn to fixed income mutual funds (also called a fixed income pool). A fund contains a highly diversified mix of fixed income investments that you can use in your portfolio instead of choosing individual investments yourself.
When actively managed, both funds can position you to take full advantage of the benefits of fixed income investing. You have a team of investment experts selecting fixed income investments and making all the day-to-day investing decisions on your behalf.
Finding the right fixed income fund for your portfolio
Before you decide to invest, ask yourself these questions:
- What are the goals of the fund? What level of regular income does it hope to achieve? Do its goals align with yours?
- What’s the background of the investment team? Is the fund actively managed by a professional team with global expertise in new and developing fixed income asset classes? Does the team have specialized disciplines in place to enhance its global perspective?
- How broadly diversified is the fund? Options could include: global government, corporate, high-yield and convertible bonds as well as emerging-market government and corporate bonds and more.
- What is the level of risk in the fund? Does it match your risk tolerance? Is the strategy tilted toward government and corporate-grade bonds to keep risk low? This would be the typical design of a more ‘conservative’ strategy. Does it have a higher portion of high-yield bonds, which tend to have more risk? These funds are designed to generate a higher level of income. You need to choose a fund that delivers the right balance of risk and return for you.
- What does the fund? Consider all of the costs, including the management expense ratio (MER).
Watch this video to learn more about fixed income investing, including RBC Fixed Income Pools.
Explore investing in global bonds now. Or, if you’re ready to explore how to use fixed income within your portfolio, talk to your financial advisor.