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Short Summary
Main recommendation: Ben Felix suggests that bond funds and GICs are largely equivalent economically, and that his personal preference is bond funds for diversification, factor exposure, and liquidity, while GICs can still fit as part of a short-term fixed income allocation if they suit the investor psychologically. He argues that focusing only on principal guarantees misses the point, since total return is what matters.
Key Points
- Total return, not principal protection, is the right lens: bond returns come from principal changes, interest payments, and reinvested interest.
- GICs are well suited to a known expense on a known date (for example, a car purchase in two years), but for long-term goals like retirement, the principal guarantee adds little real economic benefit.
- Economically, a GIC and a short-term bond fund (such as XSB) end up in a similar position when rates change; the main difference is the psychology of daily price visibility.
- GICs are CDIC insured only up to five years, so they are typically short-maturity holdings that miss out on the term premium, which has been substantial over time.
- GICs are illiquid and cannot be sold on the open market, which can complicate rebalancing if all fixed income sits in GICs.
- Most Canadian investors have heavy home bias in bonds (about 90 percent Canadian exposure), while Canadian bonds are roughly 2 percent of the global bond market; in the cited data (Feb 1999–Dec 2017), hedged global bonds had similar returns but lower volatility than Canadian bonds.
Details Worth Noting
- Concrete instructions: Do not buy individual bonds as a typical retail investor, because they require extensive research and are relatively expensive and tricky to trade; GICs are simpler to buy and require no research if purchased properly through CDIC-backed deposits. Match a GIC's maturity to a known future expense date. Hold at least some bond funds alongside GICs so you have liquidity to rebalance. If using bond funds, consider currency-hedged global bond exposure to Canadian dollars; the speaker notes Vanguard's VBG and VBU as options as of the video, and says that allocating some (not all) fixed income to hedged global bonds captures most of the volatility-reduction benefit. In a falling rate environment, premium bonds in taxable accounts create extra tax drag, so GICs (always at par) can be relatively attractive after tax under certain conditions, though BMO's ZDB is mentioned as a fund that avoids premium bonds.
- The speaker cites XSB data: weighted average maturity 2.86 years, yield to maturity 2.71 percent, effective duration 2.7 years, with a 1 percent rate rise implying roughly a 2.7 percent price hit.
- Historical data from 1985: short-term Canadian bonds returned 6.51 percent annualized versus 7.97 percent for the aggregate universe.
- From February 1999 through December 2017, Canadian bonds returned 5.26 percent (standard deviation 3.66 percent), while hedged global bonds returned 4.85 percent (standard deviation 2.72 percent).
- Term premium is described as relatively unattractive beyond 10-year maturities on a risk-return basis.
- The speaker frames the decision as largely a matter of preference, since both options have advantages in different situations.
Bottom Line
Choose GICs or bond funds based on the job the money must do and how much daily price volatility you can tolerate, since the economic outcome is largely similar; the main trade-offs are liquidity, diversification, and psychology.
