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BMO Mid-Term US IG Corporate Bond Hedged to CAD Index ETF (ZMU $12.66)
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BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF (ZSU $13.27)
Q: For a conservative investor with a 50/50 portfolio (seeking a 4% yield), what percentage of Fixed Income would you place in short and medium term US corporate Bonds? US PCE is stuck at 3%, while Canadian inflation is almost at target. My thesis is this presents a decent opportunity if there is any improvement in American inflation...while Canadian Bonds already have lower inflation priced in. Even if I'm wrong, does it still makes sense to have some US Bonds for diversification? Thanks as always.
5i Research Answer:
We think US bonds can help with diversification. Of course, this diversifies currency as well. Sector weightings need to be personal, but we think the thesis in the question is quite valid, and if rates move lower then short and mid bonds should do well. Corporates do have more risk than treasuries but tighter spreads would also help returns. We might see 10% as a position size for more-conservative investors focused on income.