BMO Emerging Market Bond Hedged to CAD Index ETF offers higher income for greater risk

Feb 6th, 2012 – Comment

Currently the trend is up and the units are holding support. In the current environment for income generating investments that’s about as good as it gets.


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Dear Lou,

My husband and I are retired seniors. Please give me your opinion on ZEF (the BMO emerging markets bond ETF) with respect to this year’s investment for our TFSA’s. Also, would it be all right to sell some of our very-low rate GIC’s in our RRSP’s and buy ZEF instead? I would sincerely appreciate your advice.

Thank you kindly,
Luciana

 

Hi Luciana,

Thank you for the assignment. The BMO Emerging Bond Hedged to the CAD Index Exchange Traded Fund (ZEF TSX) will provide a more substantial yield than what you could currently get from reinvesting in a GIC but not without an increase in risk. In the current economic environment interest rates are being kept extremely low as governments of developed countries in North America and Europe struggle to kick start weak demand. In a normal business cycle lowering rates would usually have done the trick. Clearly things have changed.

The U.S. Federal Reserve recently informed investors that they intended to keep interest rates at the current level through the end of 2014. Unfortunately the Bank of Canada has little choice but to follow the same policy as our biggest trading partner. The motivation for the Bank of Canada is that higher rates would drive up the value of the loonie and put more pressure on the stumbling manufacturing sector.

The end result for investors such as you and your husband is that you are forced to take on greater risk in an effort to generate the income needed to support your retirement lifestyle. Challenging times to say the least. A review of the charts for ZEF will provide some insight as to trend, support, and resistance, which may help with your decision.

 

 

The three-year chart indicates that there fund has recently broken above resistance at $16.25 after trading in a tight range since October of 2011. Support came in at $16.00.

 

 

 

 

 

The six-month chart provides a view of the lift off of the 50 day moving average in late January of 2012 taking the units through resistance. The MACD and RSI look to be turning down which would suggest a retest of support.

 

I have to assume that your motivation in conducting due diligence on ZEF is the desire to increase income. What you can’t ignore with this and other investments is that higher returns are only available in concert with higher risk. If you are comfortable with bonds issued by the likes of Mexico, Korea, and Venezuela then the higher return is in line with your risk profile.

At the moment the trend is up and the units are holding support. In the current environment for income generating investments that’s about as good as it gets.

Make it a profitable day and happy capitalism!

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