Having a small percentage of an investment portfolio tucked away in bonds has generally been considered to be a prudent investment strategy long-term.
While many investors today do not believe the risk reward relationship bonds provide investors justify having a large position in bonds in a given portfolio, studies have shown that diversification across asset classes (including bonds) have significant long-term portfolio benefits that outweigh short to medium-term reduced return.
Bonds generally perform well in low interest rate environments as well as recessionary or deflationary environments.
While today’s current interest rate levels in most developed countries are at rock-bottom levels (although some economists believe further rate cuts into negative territory could become more commonplace), protecting a portion of a portfolio’s downside risk is always considered a good thing, and bonds are one way to go about gaining such diversification.
For investors looking at an easy and less-costly way of adding bond exposure to a portfolio, one option providing investors with a relatively safe 3% annual yield tied to high quality companies is iShares Dex Short Term Corporate Bond UPM Index Fund (TSX:XSH).
This bond fund has maintained relatively stable performance over the past five years, and has more than made up for a slight drop in the ETF share price over this time frame (-3% total five-year return) with its annual 3% yield. Compounded over time, this ETF can provide income growth and available liquidity for a small portion of a portfolio, acting as a nice long-term hedge.
Invest wisely, my friends.
