Crossing two thresholds – ETFs and negative yielding debt

A couple of interesting round number thresholds in the finance world were crossed recently and we thought it worth pointing out!

1) Canadian Exchange Traded Fund aggregate assets under management reach $100 billion in May:

ETFs in Canada continue to grow, offering investors an increasing variety of low cost and transparent investment options.  According to Atul Tiwari, head of Vanguard Canada writing for the Findependence Hub, the increasing importance of ETFs in Canada can be attributed to 4 trends (our comments in italics):

  • The rise of indexingCanada is still way behind the US in terms of adoption of low cost passive investment options but things are changing.
  • Increased competitionThe number of ETFs and number of ETF providers has grown significantly over the last 8 years.
  • Greater transparency and awareness of investment feesindividual investors can now assemble a low-cost globally diversified portfolio for 1/5th of one percent or lower.
  • Fee-based versus commission based productsunbiased fee-based advisory services tend to favour lower cost, more transparent investment products like ETFs.

2) Global sovereign debt trading with negative yields surpasses $10 trillion globally:

Yes, negative yield means that if you invest in a bond and hold it to maturity you will end up with less than your initial investment – not a very attractive proposition for investors.  While central banks continue to try to spur risk taking, investment and economic growth by lowering rates, investors continue to thwart these efforts by demanding even more sovereign debt. Interestingly, the result is that near term returns for government bonds have been positive as interest rates have continued to come down.  With interest rates so close to or below zero, bond prices are very sensitive to rate changes.  The resulting near term positive absolute return is offsetting the prospect for negative yield longer term.  Even some corporate bond issues are being traded at a negative yield.  We are breaking new ground that hasn’t yet been well hypothesized by academics or tested by industry practitioners.  While this situation is unlikely to go on forever, it’s very difficult to try to guess what will happen next (or when rate increases may happen) and in the US there is new uncertainty over when the US Federal Reserve will resume its indicated rate increases.

The ETF milestone is a positive indication that things are getting better for Canadian investors in terms of fees and transparency.  The negative yield milestone reminds us that investors still sometimes have to make choices in the face of extreme uncertainty.  Perhaps the best we can do is use some of those low cost ETFs to create diversified portfolios to dampen the impact of uncertainty wherever it shows up.