Foreign bonds investing: what you should know

Ken Norquay

We profit from the downtrend of the Canadian dollar by increasing the foreign content of our overall portfolios.

Investors who have owned U.S. stocks since 2011 know exactly what I mean: they have participated in a rising U.S. stock market and compounded their success in Canadian dollars because both American stocks and American dollars went up.

This is the exact opposite of what occurred during the great commodities boom in the early years of this century. In those years (2000 to 2011), Americans who bought Canadian resource stocks benefitted from the weakness in the U.S. dollar and the strength of the Canadian stock market. But 2011 reversed all that. Now it is our turn to compound our profits.

I am reluctant to recommend the purchase of foreign stocks at this time. First of all, most of the world’s stock markets have already enjoyed strong short-term uptrends this past year; it would be more prudent to buy them if/when they cool down somewhat.

Secondly, there are annual patterns of strength and weakness in most stock markets: strong in winter, weak in summer. If we honour the seasonality feature of stock markets, we generally like to buy in autumn and sell in spring.

What are the best bonds to invest in when it comes to foreign bond investing? Most foreign bond markets are stable like the Canadian and U.S. markets. Investors in foreign bonds will take advantage of a decline in the Canadian dollar and will earn interest, but have little prospect of significant capital gain. The brightest star in this group appears to be SPDR DB International Gov’t Inflation-Protected Bond ETF (NYSE-WIP, $59.00). Check the SPDR website to see if WIP is suitable for your risk tolerance (www.spdrs.com).

There are many U.S. ETFs that invest in foreign currency directly. I do not consider these ETFs to be conservative investments: they are more of a bet on the strength or weakness of a foreign currency. If you are a speculator, consider CurrencyShares Swiss Franc Trust (NYSE-FXF, $110.05) or CurrencyShares Euro Trust (NYSE-FXE, $135.11).

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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