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Canadian Investors: 2 Once-in-a-Generation Buying Opportunities

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Image source: Getty Images

Written by Tony Dong at The Motley Fool Canada

As inflation in Canada soared throughout 2022, the Bank of Canada (BoC) responded by aggressively increasing the policy interest rate. A series of 25 (0.25%) and 50 (0.50%) basis-point hikes occurred one after the other, sending risk assets like tech stocks and crypto plummeting.

For many new investors, 2022 marked an end to an era of easy money and double-digit stock market returns. While January 2023 saw markets rally, there’s no telling where asset prices might head in the future. However, the losses of 2022 creates new opportunities for investors.

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While most investors are looking to snap up value stocks at discounts (and the Fool has some excellent suggestions for those at the end of this article), my focus today is on two often neglected asset classes: bonds and cash. Here are two exchange-traded funds (ETFs) I think are worth watching given today’s economic climate.

Long-term government bond ETFs

When interest rates rose aggressively, one of the biggest losers was bonds, particularly those with a long duration. Duration is a measure of interest rate sensitivity, and bond prices are inversely related to interest rate changes. When rates rise rapidly, bond prices can fall sharply.

An example of this occurring was BMO Long Federal Bond Index ETF (TSX:ZFL), which holds AAA-rated Canadian federal government bonds with an average duration of 17.50 years. This means that all else being equal, a 1% increase in interest rates would cause ZFL to lose 17.50% in value. Conversely, if rates fall, ZFL stands to gain great value.

By the end of 2022, ZFL lost 23.90% even with distributions reinvested, putting it back at 2014 levels. However, now that interest rates and bond yields are starting 2023 at much higher levels, ZFL now potentially has room to benefit from long-term tailwinds.

In addition, high-quality government bond ETFs like ZFL have historically been an excellent hedge against market crashes and recessions when interest rates are cut and investors flee to safe assets. Case in point, ZFL was one of the few ETFs with positive returns during the 2020 COVID-19 crash.

High-interest savings account ETFs

If the volatility of long-term government bond ETFs is too much for you, there are other ways to take advantage of heightened interest rates. A good example here is CI High Interest Savings ETF (TSX:CSAV), which holds cash deposits with Schedule 1 Canadian banks.

Thanks to this, CSAV has virtually no market risk or volatility. In addition, the ETF pays monthly interest that moves in lockstep with interest rates. Right now, CSAV is yielding 4.96% gross annually before its management expense ratio of 0.16%.

If you want to hold some cash to buy the dip or rebalance your portfolio with, an ETF like CSAV is ideal. With CSAV, you receive safety of principal while earning a competitive rate of interest. If interest rates go up more, the gross yield of CSAV will as well.

The post Canadian Investors: 2 Once-in-a-Generation Buying Opportunities appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2023