There’s good news from the bond market for anyone seeking returns of 5 per cent with minimal risk.
Yields in the bond market are one of the biggest influences on returns from guaranteed investment certificates, which present virtually no risk of losing money thanks to deposit insurance. Since the Bank of Canada rate announcement on Wednesday, bond yields have ticked higher.
For borrowers, it would have been ideal if the central bank indicated imminent rate cuts. The bank did leave the door open to cuts in June or July, but its overall tone suggested inflation hasn’t yet been subdued enough to make rate cuts a slam dunk. The Bank of Canada’s view on things was supported by the latest inflation number in the United States, which was disappointingly high.
Investors in the bond market latched onto these U.S. and Canadian developments and sent bond prices lower. Lower prices mean higher yields, and vice versa. Bond yields didn’t rise enough to sustain hopes of an immediate wave of GIC rate increases. But they create room for better GIC rates from banks and credit unions that want to attract money for mortgage lending as we head into the spring home buying season. The way to do that is to offer a better GIC rate.
Many alternative banks and credit unions currently offer one-year rates of 5 to 5.4 per cent for one year, and several offer 5 to 5.3 per cent for a two-year term. The best three-year rates were just a tick below 5 per cent at 4.75 to 4.9 per cent. For four and five years, the best rates topped out around 4.75 per cent.
Five-year GIC rates climbing to 5 per cent or higher would mean rising pessimism in the bond market about inflation and rate cuts. We likely won’t get to that point, but there’s enough concern about inflation right now to provide a firm floor for one- and two-year GIC rates of 5 per cent or more.
If you can’t get that rate from your bank, don’t settle. Look elsewhere.
— Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
The Rundown
The 2024 Globe and Mail ETF Buyers Guide, Part Four: International equity funds
More than ever, your portfolio needs diversification into stock markets outside North America. The S&P 500 is 30 per cent weighted to technology stocks these days, and there are seven dominant stocks within that sector. The case for international investing is that you get exposure to markets beyond Canada and the United States, without a big tech presence. For help in picking an international equity fund, check out Rob Carrick’s fourth instalment of the 2024 Globe and Mail ETF Buyer’s Guide.
Is BCE’s high dividend yield scaring you? Two reasons why it shouldn’t
No one wants Canadian telecom stocks right now. That may be their most attractive feature, argues David Berman.
Unraveling U.S. rate cut bets spur investor portfolio shifts
Expectations for how much policy easing the Federal Reserve can deliver are falling rapidly as one strong economic report after another suggests inflation could come creeping back if the U.S. central bank lowers borrowing costs prematurely. The fading prospect of rate cuts presents a dilemma to market participants who piled into stocks and bonds over the last few months in hopes of a policy easing, leaving some of them scrambling to readjust their portfolios. Reuters tells us more about how fund managers are reacting.
Here’s how to squeeze out more yield from your bond portfolio – if you’re brave enough
The sovereign debt crisis that many have been warning about has yet to materialize, but it will eventually, says veteran bond fund manager Tom Czitron. But that doesn’t mean all investors should stay clear of having exposure to bonds in emerging markets. With the right approach and risk tolerance, he says allocating a small weighting of one’s portfolio in countries with below-investment-grade credit ratings could be quite profitable.
Bulls jump deeper into copper amid supply challenges, AI-fueled demand
Copper’s bull run should continue for at least the next three years, fueled by global supply challenges and hot demand for the metal to power energy transition and artificial intelligence technologies, industry analysts say. As Reuters reports, the outlook is an optimistic harbinger for Freeport-McMoRan, BHP and other producers as decarbonization and technological shifts fuel copper’s latest demand wave after China’s rise powered a similar one two decades ago.
If you own a Canadian-listed exchange-traded fund such as ZSP that invests in U.S. stocks, the ETF will be subject to a 15-per-cent U.S. withholding tax on the U.S. dividends paid to it by the underlying companies. The withholding tax applies regardless of the type of account – registered or non-registered – in which you hold the Canadian-listed U.S. equity ETF.
Canadian investors can avoid withholding tax on U.S. dividends by investing in U.S. stocks directly or through a U.S.-listed ETF. However, to qualify for a withholding tax exemption under the Canada-U.S. tax treaty, the U.S.-listed stocks or ETF must be held in a RRIF, registered retirement savings plan or other account that specifically provides retirement or pension income. (Sorry, a TFSA doesn’t count.)
Still, investing in U.S.-listed ETFs or individual U.S. stocks has its own drawbacks. Unless you already have sufficient U.S. cash on hand, you’ll need to convert your Canadian dollars into U.S. dollars to make the purchase. This can be expensive, as brokers typically charge exchange rates that could cost you 1.5 per cent or more on each transaction.
When I checked with my broker on Friday, for example, converting $10,000 into U.S. dollars, then back into Canadian dollars, would have cost about $315, or more than 3 per cent of the principal amount. That’s a hefty price to pay just for currency transaction costs.
Most Canadian-listed U.S. ETFs, on the other hand, trade in Canadian dollars, eliminating the need for investors to purchase U.S. dollars. The ETF itself handles currency conversions to purchase U.S. shares, but the costs aren’t nearly as onerous because ETF companies deal with large sums of money and get access to institutional exchange rates not available to the general public.
It’s also important to keep the withholding tax issue in perspective. The S&P 500 Index currently yields just 1.4 per cent. Subtracting withholding tax of 15 per cent would reduce the net yield to about 1.2 per cent – a loss of about 0.2 percentage points.
That’s not a big deal. Based on a $10,000 investment in ZSP, the annual drag from withholding tax would be about $20. At that rate, it would take about 15 years for the accumulated withholding tax to equal the currency transaction costs for buying and selling a U.S.-listed ETF that is not subject to withholding tax in a retirement account.
Bottom line: Don’t let a small amount of withholding tax stop you from investing in a Canadian-listed S&P 500 ETF and holding it in your RRSP, RRIF, TFSA or any other account.
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
