Business and Financial Education: A Canadian Perspective.
Monday, October 18, 2010
Safe place to park some money.
Often people are looking for a nice spot to park their money for an indeterminate length of time. With uncertain futures and an incomplete knowledge of when we might use or need certain portions of our money, GIC's and fixed term investments are often risky and poor choices for most Canadians. Even though the bank would appreciate it if we kept buying GIC's, the truth of the matter is that they are good for the banks, but bad for the investing public.
In recent years there have arose a number of decent alternatives. The IShares Universe Bond Index, which tracks the Scotia Universe Canadian Bond Index, trades on the Toronto Stock Exchange under the symbol XBB. Currently, it only has a yield to maturity of about 2.8%, but with low interest rates right now, that is not too bad. It must be bought through a brokerage account but can be bought and sold on any business day, which is great for people who have uncertain periods of time for their money.
Traditionally, to own bonds an individual would have to buy them in blocks starting at around $5,000 for a defined period of time, or buy them through a mutual fund. But bond mutual funds will rarely ever perform as well as the Bond Index simply because the management fees associated with the fund will be too high. The XBB has had a return after expenses per year of over 6% and it only costs 0.3% per year to own it. So, if you are looking for a safe place to park money but are generally unsure of the date when you might need it back, try and avoid GIC's in favour of the bond index.