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The Critical Element of Bonds  

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Image from Shutterstock, courtesy Outcome

Pleased to meet you
Hope you guess my name
But what’s puzzlin’ you
Is the nature of my game

  • Sympathy for the Devil, by The Rolling Stones

 

 

 

By Noah Solomon

Special to Financial Independence Hub

Historically, bonds have offered investors two main benefits. Firstly, their yields provided a reasonable, if unspectacular return. Secondly, they offered diversification value, muting overall portfolio losses during bear markets.

In my view, it is the second attribute that is the most important. In relative terms, bonds are not particularly useful for providing investors with strong long-term returns (that’s equities’ job!). So, by process of elimination it follows that the primary function of bonds is their diversification value.

When comparing equity strategies, one should compare their relative returns, volatilities, Sharpe ratios, drawdown characteristics, etc. However, given bonds’ primary purpose of providing diversification, an extra layer of diligence is required when evaluating bond strategies. Specifically, you should analyze their differing correlations to equities, and by extension their varying abilities to offset stock price declines during challenging environments.

There is no Free Lunch Part I

Economist and Nobel Prize recipient Milton Friedman famously stated, “There is no such thing as a free lunch,” which means that every choice has a cost, even if it’s not immediately obvious.

Traditional bond mandates each have their individual advantages and pitfalls with respect to returns, risks, and diversification properties. In terms of the tradeoff between risk and return, history strongly suggests that there is no clear free lunch to be had.

Risk vs. Return by Bond Type: 2000 – 2024

 

As the above table illustrates, there is a clear relationship between the returns of the various segments of the bond market and the maximum losses that they have sustained over the past 25 years. If you want extra return, you can reasonably expect to suffer larger losses in bad times. That being said, large losses in bond holdings are generally not what investors want or expect.

There is no Free Lunch Part II

Not only is there no free lunch with respect to the tradeoff between risk and return, but there is also none when it comes to diversification value. Higher returns are not only associated with larger losses but are also associated with higher correlations to equities.

Return vs. Correlation to Stocks by Bond Type: 2000 – 2024

Bonds that offer higher returns have a greater tendency to move in tandem with stocks, thereby providing less ability to mitigate stock losses during bear markets. In contrast, lower-return bonds possess greater diversification properties and thus are better equipped to offset stock-price declines during times of equity market turmoil.

None of the above: Sometimes there’s Nowhere to Hide

Notwithstanding the fact that higher-return bonds have on average suffered more severe losses and offered less diversification value than their lower return counterparts, these relationships have exhibited significant variations across different bear markets. Continue Reading…

CDRs vs. ADRs: What Canadian Investors need to know

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Learn the key differences between Canadian Depositary Receipts (CDRs) and American Depositary Receipts (ADRs), and how each structure helps Canadians access international stocks.

Image courtesy BMO/Getty Images.

 

By Erin Allen, CIM, BMO ETFs

(Sponsor Blog)

Investing outside of Canada sounds simple. Just buy shares of Apple, right? But if you’ve ever tried, you know it’s not that straightforward. You’ll need U.S. dollars, your brokerage will likely charge a steep currency conversion fee, and you’ll be exposed to foreign exchange (FX) risk the entire time you hold the stock.

That’s where depositary receipts come in. Canadian Depositary Receipts (CDRs) and American Depositary Receipts (ADRs) are two ways to buy foreign stocks without directly trading on an international exchange. They’re designed to make global investing easier: but they work differently.

In this article, we’ll break down the differences between CDRs and ADRs, which could help you determine which one makes more sense for your portfolio.

Canadian Depositary Receipts (CDRs)

CDRs are a homegrown solution designed to make global stocks more accessible to Canadian investors. Listed on a Canadian exchange and priced in Canadian dollars, CDRs give you exposure to foreign companies: without needing to exchange currency or worry about FX fluctuations.

What makes CDRs unique?

CDRs come with a built-in notional currency hedge. That means the value of the receipt adjusts for movements in the Canadian–U.S. dollar exchange rate (or other foreign exchange rate depending on the stock), helping reduce the impact of currency swings on your return. It’s a structural feature that’s automatically factored into the pricing of each CDR, so you don’t need to manage it yourself.

Another feature is fractional share access. Most CDRs are initially priced around CAD $10 per unit, making them more accessible than buying full shares of blue-chip companies like Tesla or Berkshire Hathaway in U.S. dollars. This structure makes it easier to build diversified portfolios: even with modest amounts of capital, which makes them particularly beginner-friendly.

Why consider CDRs?

Because CDRs trade on a Canadian exchange and in Canadian dollars, there’s no need for currency conversion, which means no currency conversion fees and the impact of currency movements is managed through a built-in notional hedge.

They also streamline global access: the current lineup includes U.S. giants, international developed-market companies.

And you can buy them at any major Canadian brokerage, just like any other Canadian-listed ETF or stock.

Notable examples in BMO’s CDR directory include ex-Canada companies like:

  1. ASML Canadian Depositary Receipt (CAD Hedged) (Ticker: ASMH)
  2. LVMH Canadian Depositary Receipts (CAD Hedged) (LV)
  3. Nintendo Canadian Depositary Receipts (CAD Hedged) (NTDO)
  4. Honda Canadian Depositary Receipts (CAD Hedged) (HNDA)
  5. Tesla (TSLA) BMO Canadian Depositary Receipts (CAD Hedged) (ZTSL)
  6. Berkshire Hathaway (BRK/B) BMO Canadian Depositary Receipt (CAD Hedged) (ZBRK)

With lower dollar-per-share amounts and built-in currency hedging, CDRs are designed to simplify international single-stock investing for Canadian portfolios.

American Depositary Receipts (ADRs)

ADRs are the original gateway to international investing for North American investors. Introduced nearly a century ago, ADRs were designed to make it easier for U.S. investors to buy foreign stocks: without dealing with foreign exchanges, unfamiliar regulations, or foreign currencies.

How ADRs work

ADRs trade in U.S. dollars on major U.S. exchanges like the NYSE and Nasdaq. Each ADR represents shares of a non-U.S. company, held by a U.S. depositary bank. These banks issue the ADRs and handle the underlying foreign shares.

There are two types of ADRs:

  1. Sponsored ADRs are backed by the foreign company itself and often come with better disclosure, liquidity, and alignment with investor interests.
  2. Unsponsored ADRs are issued by banks without the direct involvement of the company. These tend to be less liquid and may not offer the same level of investor information. They trade exclusively on Over-The-Counter (OTC) markets making them very hard to retail investors to access.

Unlike CDRs, most ADRs do not include currency hedging. Your returns will reflect not just the performance of the stock, but also any gains or losses from exchange rate movements between the foreign currency and the U.S. dollar.

Why investors use ADRs

ADRs are widely accepted and highly liquid, with a long track record. They provide convenient access to hundreds of international companies, particularly from developed and emerging markets in Europe, Asia, and Latin America.

But for Canadian investors, there are some added frictions. Because ADRs are priced in U.S. dollars, you’ll need to convert Canadian dollars to buy and sell them. That introduces currency conversion costs and FX risk, which can eat into returns.

For Canadian investors, ADRs still remain a viable route to global diversification. But they come with a few more moving parts compared to Canadian-listed alternatives that need to be accounted for.

CDR vs. ADR: Side-by-side comparison

Feature CDR ADR
Currency CAD USD
Exchange Cboe Canada / TSX NYSE / NASDAQ
Currency Hedge Yes (notional hedge) Typically, no
Fractional Access Yes Varies
Accessibility for Canadians High Limited

Investor considerations: a checklist

When deciding between a CDR and an ADR, the best choice often depends on your specific needs as a Canadian investor. Here’s a checklist of key factors to think about:

  1. ✓ Portfolio diversification with local convenience
    Both CDRs and ADRs give you access to global stocks, but only CDRs let you do it without leaving the Canadian market. You can trade them in Canadian dollars, through your regular Canadian brokerage account, during local market hours.
  2. ✓ Currency risk management
    CDRs include a built-in notional hedge that helps offset the effects of exchange rate fluctuations. ADRs, on the other hand, generally leave you fully exposed to currency movements. If FX risk is something you’d rather not manage, CDRs offer a more hands-off approach. Continue Reading…

Franklin Templeton likes prospects for US and global stocks in 2026

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Franklin Templeton’s Investment Outlook for 2026 and beyond was largely positive, judging by the three speakers who presented to advisors and the media at Toronto’s Ritz Carleton Hotel on Tuesday (Nov. 25). In fact, UK-based Global Investment Strategist Michael Browne declared the year now closing, 2025, to be “the Year that the Bear cried Wolf.”

Browne, who is with the Franklin Templeton Institute, released the following preliminary results of Franklin Templeton’s Global Investment Management Survey 2026, shown below:

Browne expects three Fed rate cuts next year and foresees U.S. equities as measured by the S&P500 to end as high as 7400 by the end of 2026.

Like other Templeton executives, Browne expects to see rises in stocks outside the United States. This year, the story has been about growth in the U.S. market and Value in the rest of the world, he said. But even though there are no “Magnificent 7” stocks in Europe or the Emerging Markets — the Mag 7 and their innovation mindset seem unique to the U.S. — he expects a widening and broadening of global markets, with “opportunities in all asset classes.” He expects earnings growth of 5 to 10%, somewhat below the 13.5% Factset consensus.

Corporate margins keep rising, housing markets are weak, and the High-Yield Default Rate is near historically low levels, Browne said, with slides illustrating each point: “Stress indicators do not
point to a severe default cycle in the near term.”

However, Tariff revenue for the U.S. is “unfortunately” high, he said.

Even so, as the chart below demonstrates, real GDP (Gross Domestic Product) is forecast to rise over 2026 and inflation is expected to be flat to down next year.


Meanwhile, there is more than US$7 trillion in cash still sitting on the sidelines and capex growth for the big hyperscalers is expected to remain strong, Browne said. They will spend US$3 trillion by the end of the decade and may generate significant returns for the four hyperscalers investing from Cash: Meta, Microsoft, Amazon and Google.

How to spot a Bubble … and a Crash

Browne provided past examples of historic bubbles, ranging from Dutch Tulipmania of 1637 to the American railway mania of the early 1850s, which crashed in 1873, and severe stock market declines in 1907, 1929, 1987, 2001 and 2008.

Bubbles usually end after 7 developments: Debt, Rate rises, a “First Failure,” Confidence fails Reverse Velocity, Margin Calls, Forced or Panic Selling and finally Fraud.

Comparing the 2020s to the 1990s, one of Browne’s slides said “The dot-com bubble burst in 2000: more than five years after the release of Netscape.”

Historically, Global Equities have delivered double-digit gains following Rate cuts and have supported P/E expansions, Browne said. All markets except China are more correlated to the U.S. than in the past. In Emerging Markets, Browne likes India and China: “When the Fed cuts, Emerging Markets fly.”

The last scheduled speaker was Jeff Schulze, CFA, Managing Director and Head of Economic and Market Strategy for ClearBridge Investments, who reassured attendees they don’t need to fear the All-Time Highs the U.S. has been experiencing throughout much of 2025:

Schulze says that with possible Tariff Refunds, “we think the economy next year will outperform consensus expectations … We’re buyers of Dips.” While valuations are “full” right now, with the Fed cutting we don’t see multiples going down  … for the first time in a long time, diversification will be more additive as we see a broadening out.” The previous laggards will become leaders, including small- and mid- caps and the S&P493 (all but the Mag 7).

One slide on the Tariffs said this: “The Supreme Court may decide that the administration’s IEEPA tariffs need to be refunded, which would be a windfall to corporate America next year. Secretary of the Treasury Scott Bessent has noted that approximately half of the incremental tariff revenue, which is on pace to near $200 billion by year-end, has come from IEEPA tariffs.”

Continue Reading…

Retired Money: Experts opine on various tweaks to Bengen’s famous 4% Rule

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William Bengen, creator of the famed “4% Rule.”

My latest MoneySense Retired Money column is titled The 4% rule, revisited: A more flexible approach to retirement income. Click on the hyperlink for full column.

It goes into more detail on William Bengen’s updated book about the 4% Rule, which was one of three recently published financial books we reviewed in the last Retired Money column.

For that column I had originally planned to focus exclusively on that book, A Richer Retirement, Supercharging the 4% Rule to Spend More and Enjoy More. However, I decided to review two other books at the same time; meanwhile I ended up on a related project on my own site, which involved asking more than a dozen financial advisors on both sides of the border what they think of the 4% Rule and the tweaks Bengen covers in his follow-up book. You can see all responses in this blog that appeared earlier this month on Findependence Hub, but at over 5,000 words  it was a tad long for the space normally assigned to the Retired Money column.

 For the MoneySense version, I focused on the most insightful comments and added a few thoughts of my own. The survey was conducted via Linked In and Featured.com, which has long supplied good content for my site.

Broader diversification spawns a 4.7% Rule

Trusts and estates expert Andrew Izrailo, Senior Corporate and Fiduciary Manager for Astra Trust, says Bengen’s original idea was to provide a sustainable income stream for at least 30 years without depleting your savings. In his new book, Bengen “revisits this concept using updated data and broader asset allocations,” summarizes Izrailo, “He now argues the safe withdrawal rate could rise to around 4.7%, supported by stronger market performance and portfolio diversification beyond the original stock-bond mix.”

For American investors, Izrailo still begins with 4% as a baseline because “it remains simple and conservative. Then I evaluate three major factors before adjusting: market volatility, portfolio performance, and expected longevity.” For Canadian retirees, “I tend to start lower, around 3.5%, due to differences in taxation, mandatory RRIF withdrawal rules, and the impact of currency and inflation differences compared to U.S. portfolios.”

Toronto-based wealth advisor Matthew Ardrey, of TriDelta Financial was not part of the original Featured roundup but agreed with the general view that while a helpful starting point, the 4 Rule is only a guideline. “When I meet with a client, I don’t rely on the 4% rule at all,” said Ardrey, who has worked with clients for more than 25 years “I’ve learned that rules of thumb — like the 4% rule — pale in comparison to the clarity and confidence that come from a well-crafted” and personalized financial plan.  Such a plan should reflect each person’s unique circumstances, priorities, and goals, allowing them to build the right decumulation strategy for their situation.

No one size fits all

Almost all the experts caution against taking a one-size-fits-all approach to the 4% Rule or its variants. Over 20 years with her own clients financial advisor and educator Winnie Sun, Executive Producer of ModernMom, starts with 4% as the baseline, then adjusts it based on actual client spending patterns and market conditions … The biggest mistake I see isn’t about the percentage itself: it’s that people forget about tax efficiency in withdrawal sequencing.”

Oakville, Ont.-based insurance broker James Inwood says the 4% rule is “a decent guideline, but it’s not some magic number you can set and forget. I’ve watched people get into trouble because they didn’t account for medical bills, which are a real wild card here in Canada. I always tell people to build in a cash buffer and check in on that withdrawal rate every couple of years instead of just locking it in permanently.” Continue Reading…

HCAL turns 5: Enhanced Exposure to Canadian Banks

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Image courtesy of Hamilton ETFs

By Hamilton ETFs

(Sponsor Blog)

Since launching in October 2020, the Hamilton Enhanced Canadian Bank ETF (HCAL) has provided investors with a simple way to get more from one of Canada’s most reliable sectors, the Big-6 banks. By adding modest 25% leverage to an equal-weight portfolio of Canadian bank stocks, HCAL has delivered strong results over the past five years, offering investors enhanced income and growth potential from a sector known for its stability and consistent dividends.

Five years of Enhanced Growth & Income

HCAL’s structure is straightforward: for every $100 invested, HCAL borrows ~$25 at institutional borrowing rates and invests it back into the same six banks, providing roughly 1.25x exposure to the sector. This approach has supported higher monthly income and higher long-term returns since HCAL’s inception when compared to a non-levered Canadian bank portfolio, specifically the Solactive Equal Weight Canada Banks Index (“Canadian Bank Index.”)

HCAL vs. Canadian Bank Index — Growth of $100K [1]

Long-Term benefits of Modest Leverage

Over time, the power of compounding is a key driver of returns, and modest leverage can amplify that effect. In HCAL’s case, the 25% leverage applied to Canada’s largest banks has contributed to meaningfully higher long-term returns. The leverage is realized at institutional borrowing rates, typically lower than those available to individual investors, and HCAL can be held in registered accounts, providing access to the benefits of low-cost leverage in accounts where margin isn’t normally available. Continue Reading…