Every farm needs a good fence and a full pantry. That's what fixed income is for. It won't make you rich, but it keeps the whole place standing when the weather turns.
Boring, yes. Safe, not exactly. In 2022, broad Canadian bond funds fell by more than 10% in a single year, and people who thought bonds couldn't lose were unpleasantly surprised.
That's true. A bond's price moves with interest rates, even if the borrower always pays.
So let's separate the products: GICs, bonds, HISAs, and the ETFs that wrap them. They look alike in a brochure and behave very differently in a downturn.
What Fixed Income Actually Does
Fixed income means lending your money in exchange for interest. In a portfolio it usually plays one of three roles: cushioning the drops in stocks, providing predictable income, or holding money you'll need on a known date. Which product fits depends on which role you need, and on how soon you need the money back.
Your Options Side by Side
| Product | How the rate works | Can the price fall? | Access | CDIC eligible? |
|---|---|---|---|---|
| HISA (savings account) | Variable, changes with the market | No, balance stays put | Instant | Yes, at a CDIC member |
| GIC | Fixed for the term (or variable in some types) | No, but you may be locked in | Locked until maturity, unless cashable | Generally yes, at a CDIC member |
| Government bond | Fixed coupon | Yes, if rates rise | Sell any day, at market price | No |
| Corporate bond | Fixed coupon, higher yield | Yes: rates and credit risk | Sell any day, at market price | No |
| Bond ETF | Distributions vary; no maturity date | Yes, if rates rise | Sell any day on the exchange | No |
| HISA ETF | Floats with short-term rates | Very little, but not zero | Sell any day on the exchange | No: you hold fund units, not a deposit |
Deposit insurance details, including limits and how it differs from investor protection, are covered in CDIC vs CIPF.
Interest Rate Risk and Duration
When market interest rates rise, existing bonds paying lower rates become less attractive, so their prices fall. Duration is a rough measure of how sensitive a bond or bond fund is: a fund with a duration of about 7 years would be expected to lose roughly 7% in price if rates rose by 1 percentage point, all else equal. The flip side is that falling rates push prices up.
Shorter duration means less sensitivity. That's why short-term bond funds move less than broad or long-term ones, and why a five-year GIC and a five-year bond fund can behave so differently on a bad day even if they yield about the same.
Credit Risk and Inflation Risk
- Credit risk: the chance a borrower doesn't pay. Government bonds carry the least; corporate bonds pay more because they carry more.
- Inflation risk: if your interest rate is lower than inflation, your money buys less over time even though the balance grows. This is the hidden cost of holding too much cash for too long.
GIC or Bond ETF? A Practical Way to Choose
- You know the date you'll need the money: a GIC that matures around then removes price risk, since you get the stated amount back at maturity.
- You want flexibility: a HISA or a HISA ETF keeps money accessible while earning something.
- You want long-term ballast: a broad bond ETF (or the bond portion of an all-in-one ETF) provides diversification, accepting that prices will move.
Bond ETFs never "mature" the way a single bond does, but their duration stays fairly steady, so you can think of a fund's duration as roughly the time horizon over which price changes tend to even out against the higher yield.
Taxes: Why Location Matters Here
Interest is fully taxable at your marginal rate, which makes fixed income one of the more tax-heavy asset types in a non-registered account. That's why many investors hold bonds and GICs inside a TFSA or RRSP where the interest isn't taxed currently. The rules are in the tax article.
How Much Fixed Income Is Enough?
There's no universal number. It depends on your time horizon, your income stability, and how you'd react to a big drop. As a reference point, popular all-in-one ETFs come in versions from about 20% bonds (growth) to 40% (balanced) to 60% (conservative). Shorter horizons and lower tolerance for drops generally call for more fixed income. The emergency fund belongs in cash-like savings, not in bonds.
A bond isn't safe. It's boring. Those are different things, and confusing them cost people real money in 2022.
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Frequently Asked Questions
This article is educational content, not personalized financial, tax, or investment advice. Contribution limits, tax rules, and fund details change, so confirm current figures with the CRA and the fund's own documents, and consider a licensed professional before acting. Bobbie and Prieto are fictional AlgoPotato characters created to make the topic easier to follow.
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