Wednesday, August 10, 2016

Bond Indexes and Currencies

When it comes to establishing your index portfolio, some form of bond index will likely be a key component of it. It may be a small or substantial part of your portfolio, depending on personal factors such as risk tolerance and age. One key consideration that is generally recommended is to purchase a bond index in your local currency (i.e. a Canadian would purchase a bond index in CAD, while alternatively an American would purchase a bond index in USD). The reason this is generally a good idea is due to the fact that currencies tend to experience greater fluctuations than bond indexes. As your objective is to invest in a bond index, not a currency, and assuming that fluctuations are equally probable to swing in + or – direction, the logical move is to purchase a bond index in your local currency.

If we look at the currency fluctuation between the USD/CAD since the year 2000:

(click image for increased resolution)


As compared to the calendar performance since 2008 of TD e-series Canadian Bond Index - TDB909:

As you can see from the graph, even currencies of large and geographically nearby economies can still fluctuate rather heavily over time. In comparison to a relatively steady return from the Canadian Bond Index. Bond indexes are generally considered one of the most stable types of investments you could possibly own. By purchasing one in a foreign currency, you add a multiplier of variance which is random by nature thereby defeating much of the purpose of buying a stable investment in the first place.

Hope you guys enjoyed the article and managed to take something away! As always feels free to share the article and interact in the comment section below!


-Yinvestors. 

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