Going global in bonds

What’s the largest global asset class? International bonds.

Adding them to your asset mix can help reduce portfolio volatility, so long as currency exposures are hedged and the portfolio already contains some domestic fixed income.

Global bonds give you exposure to the interest rate profile, inflation and economic cycles, and political climates of markets outside Canada.

Some of these exposures might seem to add both volatility and risk. But a global allocation also can reduce risk within a fixed-income portfolio without necessarily decreasing expected return.

And, investing outside Canada means you’ll own bonds that pay interest and principal in different currencies.

These need to be converted from the issuer’s currency into Canadian dollars, and since currency movements are driven by major economic factors over long time periods, currencies can deviate significantly from fair value in the short to intermediate term. This volatility can impact your returns.

Whether you pursue a hedged or unhedged strategy depends on your goals.

• If you want exposure to international debt and reduced portfolio volatility, investing in a hedged ETF gives you pure exposure to the performance of the underlying bonds, minus hedging costs.

If you want currency exposure, an unhedged investment gives you exposure to both the underlying bonds and the currency fluctuations, which can overshadow the performance of the bonds themselves

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.