Isabela: Welcome to the ETF Experience podcast, where we decode the world of exchange traded funds and help you become a smarter investor. My name is Isabela Sagan and I'm your new host. And today we're diving into the reliable world of fixed income, specifically bonds. I'm joined here today by Rachana Bhat. Rachana, it's both our first times on the podcast, but I'm sure we'll be able to bond over some fixed income stories.
Rachana: I actually love that because I resonate with this topic. So, this is very much in line with what how I think as a millennial. So, I'm really looking forward to sharing insights that, you know, make bonds a little less boring and a lot more relatable.
Isabela: Perfect. Maybe you could tell us a bit about yourself and your role as a lead portfolio manager?
Rachana: Sure. I've been with, you know, so I'm. I am a portfolio manager, on the active fixed income team at the Asset management. I've been, at TDA Asset Management for about eight years now. and I used to be on the credit research team before, and then I transitioned into being a portfolio manager. and my focus is corporate bonds, which is bonds that are issued by companies rather than government entities.
In terms of fun fact, I love cooking. and I do think I cook good Indian food. So, if you ever want to try, I would love to have you at home.
Isabela: I would love that. I love butter chicken. It's my favorite.
Rachana: Awesome. Well, good for you.
Isabela: Perfect. So, let's start with the obvious. Whenever you tell someone under the age of 40 to buy a bond, the first thing they think and say is, you know, that's what my parents invest in. Bonds do have a tendency for being boring. So why do you think the millennial investor should look into bonds?
Rachana: I like this question as a starting one. because I am a millennial and honestly, for the last 15 years I didn't care either. I was all about stocks. I loved the growth, the optimism, the excitement that came with equity investing. You know who needs slow and steady when you have meme stocks and tech rockets, right? but this is the first time ever that I actually own bonds in my own portfolio.
And there are three powerful reasons for why that's the case. the first one, the income that you earn with bonds is kind of awesome right now. you can earn 4 to 5% just by lending, to some of the largest and most stable companies in the world. Think about companies like JP Morgan, Bell tellers, Bank of America, Pepsi, Coca-Cola.
These companies used to just pay 1 to 2%. Just, you know, three years ago. now it's quite attractive. As I just mentioned, the best part about this is that you even beat dividend yields. those are, what, 2 to 3% right now. And that's the beauty of bonds at the moment. The second point is, this income that I just spoke about from, let's say, large companies is pretty safe.
For example, they can be situations like the downturn or the situation where the companies need to focus on balance sheets, and they might resort to cutting dividends at that point. But it's extremely rare for them to be, missing bond payments. It's so in terms of like these companies, they have been reliably paying, you know, bondholders for decades through wars, through pandemics, through recessions.
So, it's quite safe. And number three is, bonds give you a nice balance in your portfolio. If you think about the growth backdrop right now. We know things appear to be slowing. you know, whether it's tariffs, there's also wars. we need to think about what comes next. Inflation risk or a growth shock. We don't know.
In this situation bonds really help you add some calm. in times of chaos, it's almost like adding a seat belt to your portfolio when you know the ride with stocks, gets choppy when you put all of the things that I just spoke about. If I tell you, you can earn high income, that's relatively safe and it's in an uncertain backdrop as well that you're earning that income.
Why wouldn't you want to add, or own bonds in your portfolio? Not just as a portfolio manager, but I would say as an investor, who wants to build wealth and sleep well at night?
Isabela: Absolutely. I like how you said that bonds are like that seatbelt. I always wear my seatbelt, so that's great. So, some thoughts on for sure. you know what I was thinking? If you kept your money in cash over the past year, you probably wouldn't have been able to keep up with the cost of everyday items. Like, for example, peanut butter, one of my favorite foods, which increased in price over the past year by 3.2%.
Rachana: Right? Yeah, I noticed that.
Isabela: Yeah. So not fun. but right now, let's take it back a little bit. What about sometimes it's hard to understand. Exactly. Like what is a bond? Can you explain it to me? Very basic terms, for sure.
Rachana: And let me just tell you, if you invested in bonds just because we are being bond nerds here, you would have made about 8% in the last year. And not just paying for that peanut butter you, but you would have saved some extra dollars as well.
Isabela: Perfect.
Rachana: Yeah. Okay. So, let's, you know, love that question. On define bonds essentially. Think of a bond like a loan. But you are the lender. when you buy a bond, you're lending your money to a company or a government entity. and in exchange, they say, well, I'm going to pay you some extra dollars every year as a thank you.
and at the end of the term, we call it maturity date. It can be one year or two years, three years, even 30 years. So, at the end of the short term, you get your original money back. in your in your pocket. If I had to give you an example, let's say Bell Canada, at the moment, a three-year bond probably yields around, you know, 4%.
right now. So, you can earn about 4% every year in terms of interest payments. if you put in $100 in that bond for the next three years, you get $12 an extra income. So, $4 each year. And at the end of the term, you get the $100 back. So, it's $112 on your $100 investment. and that is quite simple study.
And you knew exactly what you were going to get from day one if you held the bond to maturity. I almost like to define stocks as, you know, like dating in your 20s, where a lot of highs, a lot of heart risks. But with bonds, it's there's, you know, long term committed relationship. And guess what? You even have a maturity date with bonds.
So that's yeah, that's how I think about it. But it's good to remember though that the variety of bonds is it can vary. So, you have super safe government bonds. But you also have bonds that are issued by small some sketchy companies as well. And the latter pays you more because there's more risk associated with it.
Isabela: Right. So, bonds do also have that opportunity to be risky than contract if.
Rachana: But you have to. That's again those are smaller companies. And what we are speaking today about is the larger companies, which is where we believe there is, more safety and there's more opportunity for sure.
Isabela: And so, what happens if you sell a bond before maturity?
Rachana: That's a great question. So, if you sell the bond before maturity, let's take the same example of Bell Canada. You're still learning the income every year as we just discussed until you sell the bond. But when you sell the bond before maturity, you could sell it above 100 or below 100, depending on two things. It's possible that the number could be below or above 100.
And those two things are. The number one is interest rates. So, if interest rates move up that means your existing bonds are becoming less attractive to other people. That means your bond prices will fall when you sell it. and let's say a situation where market mood, that's another you know, that's another consideration. Let's say markets are where feeling very bullish.
in that situation the companies are doing well, which means the bonds that are issued by these companies are feeling positive too. So, the bond prices will go up. But remember that when it comes to larger companies and bonds issued by them, the volatility is still very low as compared to, let's say, investing in stocks. if you have if you're investing in shorter, shorter bonds like one year or two years, three years, four years.
Isabela: okay. So far, I know that a bond is my seatbelt and it's a long, stable relationship for me.
Rachana: You're doing great.
Isabela: Okay, perfect. I actually came across a survey recently that said Millennials and Gen X hold up to 22% of their investment indices. So why wouldn't I keep my money, for example, in a GIC or a savings account? Isn't that the safest bet?
Rachana: I actually knew that there are, you know, investments that are high in GIC, but I did not know that. So that's very interesting. Across millennials and Gen X, I would say that it's not ideal. it's almost like you have your money sitting on the couch. Binge watching Netflix is how I would put it. and there are better ways you can make your money work harder.
by actually focusing on shorter. And you defined shorter hours less than five years shorter corporate bonds. So corporate bonds issued by the bonds issued by large companies. Okay. That's how I would call short corporate bonds for this for the purpose of this podcast. and those shorter corporate bonds are paying you pretty well. So much higher returns than GIC.
For example, if you put in $100 in gas last year, your money would be about $104 today. Do you want to take a guess? At what? You know, let's say a short corporate bond would have made for you if you put that $100 instead of GIC if you decided to go for a shorter corporate bond. Do you want to take a guess?
Isabela: I'll take a guess. Maybe, I don't know, $106.
Rachana: You close, but not really. So, it's almost double the income that you made on gas. It's almost $108. that's how attractive corporate bonds are. But it doesn't stop there. the second thing that I think is very important in this backdrop is the flexibility. So, we have some wonderful products in the market. it's called Target Maturity Bond ETF.
And they allow you to move in and out, of your position as well. It's pretty. It's it treats like a stock. it's that easy. and to me, that is very valuable at this time. Let's say stocks fall and I want to now put in my money in stocks is a better opportunity. I can do so with these ETF products, but I cannot with would you like I'm locked in.
I don't like that for sure.
Isabela: Yeah, because I see guaranteed investment certificate. Like, if that's. You got to hold that till the end. But I'm curious because you mentioned, target maturity bond ETFs. Maybe we can get into the details behind that. What is the advantage of a bond ETF versus an individual bond.
Rachana: Great. So, you're actually listening. So, I'm sure you're ready to invest in bonds after this. I hope so. Okay. so let me define TOG maturity bond ETFs. And let's imagine this together for a second. So, imagine a basket of bonds okay. It's not just one bond. It's a basket of bonds. and each of these bonds are issued by a large company okay.
And they all mature in a certain year. So, we do have TOG maturity bond ETF that mature in 2026, 2027, 2028. But for this example, let's use Target Maturity Bond ETF 2026. So, all bonds in that basket mature in 2026. When you put in your money in this ETF, you're basically buying this basket of bonds. and the way it works is you earn monthly income.
And the at the end of 2026, you actually get all your money back. so, if you think about the difference now, let me bring the difference between a bond and an ETF here. The first difference is diversification. and it's extremely important in this backdrop, as you and I can relate to looking at markets. So, you have a greater number of sectors, you have more credits or companies that that you own within a sector.
So, you don't have all your eggs in one basket. It's diversified. that's what I like about ETFs. the second point is, think about the flexibility that we just spoke about. It's very easy to get in and out of this ETF. let's say there's an opportunity somewhere else. You want to basically just park your money.
This is a perfect place. So, there's just a lot more flexibility with this product. and the third point is it's accessible. You can start small with a single bond. It means, you know, minimum investment of $1000 to $5000, sometimes, sometimes even $10,000. So, so that range, it just it just means you need to put in more money.
But with ETFs, you can start with $20, you can start with $50. It's accessible is how I would see it. in my view, when I think about who should actually benefit from this product. I think of anyone who's sitting on cash. Extra cash. If you have cash in your checking account, that's extra.
There's no reason for. You're not. You're not making it work harder for you. or let's say you have money in GIA or HSA, or maybe there's a situation where you have cash, but you need cash in a few years. You just don't know when. Maybe it's an auto, you know, maybe you want to buy a car. Maybe you want to think about a house or a condo.
maybe it's a wedding ring. Who knows? Right. There're so many things. in that situation, you don't want you want your money to be safe. You want it to grow a little bit, at least. But you don't want the volatility of stocks. And maturity bond ETF is a perfect solution for that. it fits in very nicely.
you know, giving you the predictability the flexibility. and steady returns. which, which is quite important.
Isabela: So, when it comes to these bond ETFs, are they just randomly put together. Is there a method behind the madness. How does it work.
Rachana: No. This there's way more going on. so, behind the scenes, we have a credit research team. and I mean, some of the sharpest minds in the business. that are analyzing companies day in and day out. So, they're digging deep into, call it the cash flow forecasts, the industry trends, the balance sheet, and even, you know, talking to management teams to understand risks that others might miss.
that's the kind of access we have. and we're lucky to have that. So, when you buy the maturity bond ETF, you know, as we spoke about the definition of it, each bond that we handpick in that ETF is through discussion, you know, on fundamentals with our credit research team. So, you're not just having bonds that give you that nice income, but it's backed by solid fundamentals.
And it's to ensure that you get that, you know, call it the professional. due diligence on every name in the portfolio that you own. and that, in my view, can make all the difference in today's, backdrop for sure.
Isabela: And it sounds like it would save me a lot of time as well, rather than going and doing the research on each individual bond. Like, I feel like that's a lot of work. I would like to leave that to the professionals.
Rachana: I, I agree with you. Yeah.
Isabela: Awesome. Okay. Rachana, what are your top takeaways for our listeners today from our podcast?
Rachana: Okay, so my top takeaways would be giving bonds a closer look. They deserve a close look. And, and a space in your portfolio, the returns that the bonds can provide as from an income generation standpoint are quite attractive. And you shouldn't be missing out on those, opportunities. Don't think of this as a product that's just for your grandparents.
No, it's not, it's something I, as a millennial, own it today, and I believe in it. And I'm seeing the benefits from it as well. and the second point I would say is don't think bonds are not accessible. You can actually look up these ETFs that we just spoke about. But there are other products that we have as well.
you can look them up as easily as you can look up a stock. And it's as easily investable, in terms of how much minimum amount you need to put into these products.
Isabela: Perfect. Awesome. Well, thank you so much. that's it for this episode of the ETF Experience Podcast to our listeners. Stay curious, stay informed, and stay invested. Until next time.
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