Q – I note your recommendation to move to cash by buying iShares 0-5 Years TIPS Bond Index ETF (TSX: XSTP-U). While this ETF was ahead 4.62% in 2024, how much of this is due to the USD/CDN exchange rate? If the USD comes back down, I’m not convinced this will be a good ETT to hold. Is there not a better CDN bond ETF to hold as interest rates fall? – Norman M., London ON
A – The Canadian dollar version of this ETF (TSX: XSTP) was ahead 14.11% for the year compared to 4.62% for the US dollar units. That’s where you see the exchange rate differential. The US dollar version (TSX: XSTP-U) reflects the pure return in American currency.
That said, short-term bond funds won’t normally generate gains of this magnitude. This is a rare event, caused by the inverted yield curve earlier in the year that meant short term rates had farther to fall than long-term ones. Hence short-term funds generated higher capital gains.
Removing the foreign exchange factor from the equation may make it easier to understand. The iShares Core Canadian Short Term Bond Index ETF (TSX: XSB), which only holds Canadian bonds, was up 5.59% in 2024. The iShares Core Canadian Long Term Bond Index ETF (TSX: XLD) gained 1.13%. Under normal conditions, we’d expect the opposite scenario. The yield curve is now much closer to normal, so I don’t expect this pattern to continue. If we assume interest rates will drop in 2025, which I suggest is a strong possibility, XLB would be a good choice if you’re prepared assume more risk. If want lower risk and you don’t like XSTP, then go with XSB. – G.P.