In today’s investment landscape, the choice between bonds and stocks is top of mind for many investors.

Rising interest rates have made bonds more appealing, but central banks seem to be nearing the end of their rate hikes. On the other hand, stocks historically outperform other investments, but there are still fears of a recession later this year or early next—what impact will that have on the markets?

What’s the right choice right now?

Faced with this investment dilemma, the choice between bonds and stocks hinges on individual risk tolerance, financial goals, and investment horizon.

 

Why Bonds Look Attractive Right Now

Elevated interest rates are a catalyst for higher bond yields, meaning there are potential advantages for those considering fixed-income investments in our prevailing high-rate environment.

The yields on U.S. government bonds, for example, have recently surged to their highest levels since right before the global financial crisis of 2007/2008. Ten-year Treasuries are delivering returns of 4.5%, while shorter-term two-year bonds are yielding a return exceeding 5%.¹

In Canada, as of this writing (September 28, 2023), many one-year guaranteed investment certificate (GIC) payout above 5.5%, with some as high as 5.95%.² Yields on government and corporate bonds are likewise up compared to last year.³

Bond yields are unlikely to climb much higher, however. Central banks the world over seem to be close to the end of the rate hiking spree that began in early 2022. The Bank of Canada, the U.S. Federal Reserve, and the Bank of England all held their benchmark lending rates in September.⁴ ⁵ ⁶

And while many Fed watchers expect perhaps one more rate hike by the end of this year, the European Central Bank signaled that its most recent increase would be the last.⁷ ⁸

However, that doesn’t mean rates will be coming down anytime soon. The era of cheap money that existed from the Great Recession through the initial waves of the COVID-19 pandemic is over, with many experts expecting rates to remain elevated for the next five to ten years.⁹

So, after more than a decade of low yields, bonds once again offer the possibility of meaningful returns. And the stability and security of bonds help make them attractive, too.

“Uncertainty and volatility are likely to be key themes as we navigate the end of the interest rate cycle and bonds can help to hedge portfolio risk,” says Charu Chanana, market strategist at Saxo Bank’s Singapore office.¹⁰

 

Why You Shouldn’t Ignore the Potential of the Stock Market

With the potential for higher interest rates over the medium term and the security offered by bonds, should we expect to see a flood of people ditching stocks in favour of bond investments?

While risk-averse investors or those needing to draw from their investments soon (such as those nearing retirement) may find the stability of bonds attractive, for investors with more appetite for risk or who have more time to stay in the market, the benefits of stocks for a balanced portfolio shouldn’t be overlooked.

Stocks offer the potential for much higher growth than bonds if you hold the stocks over the long term. With stocks, it’s all about the long game. And we mean long: since the year 1800, stocks have returned an average of 6.5% to 7.0% per year, after inflation.¹¹

While nothing in the stock market is guaranteed, historically, the S&P 500—a broad-based index fund that tracks the performance of the top 500 companies in the U.S. economy—posts gains in more years than it does losses. The S&P 500 was up 40 out of 50 years between 1972 and 2021, with an average annualized return of 9.4%. Between 2012 and 2021, the average return for the S&P 500 was 14.8% annually.¹² This year, so far, the S&P 500 is up over 14% from last year.¹³

Over the long term and across every market condition—including recessions, wars, inflation, and turbulent economic times—investing in stocks outperforms other classic forms of investment, including 10-year bonds, gold, and real estate.¹⁴

So while experts will point out the upsides and downsides to bonds and stocks, remember: a well-balanced portfolio often includes a mix of both asset classes to achieve a suitable risk-return balance.

 

ETF Options for Bonds and Equities

If you’re looking for an opportunity to diversify your portfolio with fixed-income holdings like bonds, one option is investing in fixed-income ETFs.

As of October 4th, 2023 the Evolve Enhanced Yield bond Fund has begun trading on the Toronto Stock Exchange (“TSX”) under the ticker BOND. BOND invests primarily in fixed income ETFs.

Or maybe you’re looking for an investment solution that will keep you invested in stocks while allowing you to take advantage of market volatility?

The Evolve S&P 500® Enhanced Yield Fund (ESPX ETF) is designed to provide investors with the performance of the S&P 500® Index, with the addition of enhanced yield through active covered call strategies on the underlying securities. This Fund invests primarily in the equity constituents of the S&P 500® Index, while writing covered call options on up to 33% of the portfolio.

Evolve’s S&P/TSX 60 Enhanced Yield Fund (ETSX ETF) is designed to provide investors with the performance of the S&P/TSX 60 Index, with the addition of enhanced yield through active covered call strategies on the underlying securities. This Fund invests primarily in the equity constituents of the S&P/TSX 60 Index, while writing covered call options on up to 33% of the portfolio.

Remember that the covered call options in both funds have the potential to provide extra income and help hedge long stock positions.

For more blogs like this, and for insight on investing and investment products, sign up for our weekly newsletter here.

 

Sources

1. Jones, H., “As interest rates peak, is now the time to invest in bonds?,” The National News, September 27, 2023; https://www.thenationalnews.com/business/money/2023/09/27/as-interest-rates-peak-is-now-the-time-to-invest-in-bonds/
2. “The best 1-year non-registered GIC rates,” RateHub, September 28, 2023; https://www.ratehub.ca/gics/gic-rates/non-registered/1-year
3. Jackson, D., “Rate hike pause puts retirement investors in a sweet spot,” BNN Bloomberg, Jan 27, 2023; https://www.bnnbloomberg.ca/rate-hike-pause-puts-retirement-investors-in-a-sweet-spot-1.1875667
4. Evans, P., “Bank of Canada holds interest rate steady at 5%,” CBC News, September 6, 2023; https://www.cbc.ca/news/business/bank-of-canada-rates-sept-6-1.6957903
5. Saphir, A., “Fed’s Kashkari sees another rate hike, then a hold,” Reuters, September 25, 2023; https://www.reuters.com/markets/us/feds-kashkari-sees-one-more-rate-hike-this-year-2023-09-26/

6. Partington, R., “Bank of England’s interest rate pause raises hopes peak has been reached,” The Guardian, September 21, 2023; https://www.theguardian.com/business/2023/sep/21/bank-of-england-keeps-interest-rates-hold
7. Saphir, A., “Fed’s Kashkari sees another rate hike, then a hold,” Reuters, September 25, 2023; https://www.reuters.com/markets/us/feds-kashkari-sees-one-more-rate-hike-this-year-2023-09-26/

8. Duncan, G., “ECB raises interest rates to all-time high,” The National News, September 14, 2023; https://www.thenationalnews.com/world/uk-news/2023/09/15/ecb-interest-rate/
9. Carrick, R., “Prepare for five to 10 years of financial disruption from persistent high interest rates,” The Globe and Mail, September 25, 2023; https://www.theglobeandmail.com/investing/personal-finance/article-prepare-for-five-to-10-years-of-financial-disruption-from-persistent/
10. Jones, H., “As interest rates peak, is now the time to invest in bonds?,” The National News, September 27, 2023; https://www.thenationalnews.com/business/money/2023/09/27/as-interest-rates-peak-is-now-the-time-to-invest-in-bonds/
11. Vartika,G., Kohn, D., Koller, T. & Rehm, W., “Markets will be markets: An analysis of long-term returns from the S&P 500,” McKinsey & Co., August 4, 2022; https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/prime-numbers/markets-will-be-markets-an-analysis-of-long-term-returns-from-the-s-and-p-500
12. Price, M., “Average Stock Market Return,” The Motley Fool, March 13, 2023; https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/
13. Valetkevitch, C., “S&P 500 to end 2023 up 17% but little gains seen between now and year end: Reuters poll,” Reuters, August 23, 2023; https://www.reuters.com/markets/us/sp-500-end-2023-up-17-little-gains-seen-between-now-year-end-2023-08-23/
14. De La Cruz, I., “Why You Need to Keep Investing in Stocks Despite the Challenging Outlook,” Investing.com, March 8, 2023; https://ca.investing.com/analysis/why-you-need-to-keep-investing-in-stocks-despite-the-challenging-outlook-200554131

The contents of this blog are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed. These contents are not an offer or solicitation of an offer or a recommendation to buy or sell any securities or financial instrument, nor shall it be deemed to provide investment, tax or accounting advice. The information contained herein is intended for informational purposes only.

Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs) and mutual funds (funds). Please read the prospectus before investing. ETFs and mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. There are risks involved with investing in ETFs and mutual funds. Please read the prospectus for a complete description of risks relevant to ETFs and mutual funds. Investors may incur customary brokerage commissions in buying or selling ETF and mutual fund units.

Certain statements contained in this blog may constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to a future outlook and anticipated distributions, events or results and may include statements regarding future financial performance. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “anticipate”, “believe”, “intend” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Evolve Funds undertakes no obligation to update publicly or otherwise revise any forward-looking statement whether as a result of new information, future events or other such factors which affect this information, except as required by law.