If all this talk of tariffs and recessions has you worried, fear not—there’s an asset class that offers protection and steady income: fixed income.
Structurally, fixed-income investments differ from stocks because instead of owning a company, you’re lending money to them—or even to the government. In return, you get interest payments and, in most cases, your principal back at maturity.
Because of this, fixed-income investments can provide more safety and stability, especially during market downturns. Even if you’re a high-risk, high-growth investor, keeping at least 10-20% of your portfolio in fixed income can help smooth out volatility and provide a reliable income stream.
Here’s a look at two key options for building your fixed-income fortress: Guaranteed Investment Certificates (GICs) and bond exchange-traded funds (ETFs).
GICs: Maximum safety
GICs are fixed-term deposits where you lock in your money for a set period in exchange for a guaranteed interest rate. GICs are one of the safest investments available, as they are insured by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000 per institution.
The downside is that GICs are not liquid—once you deposit your money, you can’t withdraw it early without forfeiting interest or facing penalties. Additionally, rates fluctuate based on what terms banks want to promote and the direction of the Bank of Canada’s policy interest rate.
Right now, my preferred GIC provider is EQ Bank, which offers rates between 3.50% and 3.65% for registered accounts like Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs), with terms ranging from one to five years.
Bond ETFs: Crash protection
Bond ETFs can vary greatly along two key dimensions: credit risk and maturity.
For credit risk, bonds range from junk bonds (high yield but riskier), to investment-grade corporate bonds (moderate risk and yield), to federal government bonds (the safest but lowest-yielding). The higher the credit quality, the lower the risk of default, but also the lower the return.
For maturity, bonds are classified as short term, intermediate, or long term. Short-term bonds are least sensitive to interest rate changes, while long-term bonds are most sensitive—meaning their prices can drop sharply when interest rates rise but rally when rates fall.
If I were hedging against the risk of a near-term recession, I’d focus on high credit quality and long duration. That’s why my preferred tool for this is BMO Long Federal Bond Index ETF (TSX:ZFL). This ETF only holds Government of Canada bonds with maturities longer than 10 years and currently yields around 3%.
If long-term interest rates fall sharply due to an economic downturn, ZFL could see significant price appreciation, making it a strong defensive play.
The Foolish takeaway
Understanding bonds and fixed income unlocks a ton of strategies for playing defence with your investment portfolio.
For example, you could buy a series of one-year GICs that mature in staggered intervals—ensuring you always have a steady stream of safe, interest-earning assets being redeemed each year.
If your portfolio is currently 100% stocks, you might also consider shifting 10% into ZFL. During a recession, long-term government bonds tend to rise in value as interest rates fall. This could create a rebalancing bonus, where you sell high-performing bonds to buy cheaper stocks when markets eventually recover.
A little fixed-income exposure can go a long way in making your portfolio more resilient.
