TIPS Equivalent In Canada

[rajera]

Hello, Is there a equivalent for TIPS in Canada (Treasury Inflation protected Security in the US).Appreciate your reply..Thanks .rajera

[garilou]

Hello rajera,

Hello, Is there a equivalent for TIPS in Canada (Treasury Inflation protected Security in the US).Appreciate your reply..Thanks   

Hum.. maybe you could explain us a little more about what are those TIPS in the US.
Maybe give us some examples. Seems interesting.

Louise

[Victor]

They're called Real Return Bonds in Canada (RRB for short).  Issued by Govt. of Canada and some Provinces.  There's an ETF that has them, XRB on Toronto, although it also contains some short term bonds so it won't be a perfect correlation to the RRB's.

Cheers,

Victor

[garilou]

Thank you Victor!

I did not even know that there were iShares on the Canadian market!
I thought they existed only in the US!

For rajera, and all those who might be curious,
iShare

In Product Info
You'll find the one I think Victor was talking about:

XRB

Victor have you ever invested in one of those?

Is that pretty safe?

Such a big part of my RRSP is so conservatively invested, (I keep only about 20% to trade on the markets) but the return is maybe safe, but so small!
Could that be a (at least for a part of it ) relatively safe alternative?

Thanks!

Louise   

[rajera]

Thank you all. I will research XRB.
I will post more details on TIPS a little later.
Supposedly, it is very safe to use this Investemnt vehicle.
I am tryong to get to talk to some one who has used this inevstment vehicle....rajera

[Victor]

Check the web for details on this but as I understand it...

1) Principal and interest increase with CPI.  Note: in deflation (negative CPI) the principal and interest will decline.
2) Interest attracts the regular tax, but so does the increase in principal.  Please double check this, but I'm pretty sure this is true.

So let's say you buy the RRB directly at issue (100), yielding 4%.  A year later inflation as measured by CPI is 3%.  The cash received would be 0.04 x 1.03 (0.0412), and the principal amount grows to 103.  In actual fact the CPI effect is calculated more often than annually and there's a delay effect.  In other words, CPI affects the payment and principal a short time after it's actually reported, not immediately.

All of the issues are quite long dated (2011... 2026, etc.) so there's the potential to see prices way above 100 along the way.  Note that investor's perception of future inflation affects pricing, your aren't buying/selling at the actual principal amount, but at the price buyers/sellers meet.  For example, let's say you are going to buy an already issued RRB.  It's principal amount is now 180 and its original yield was 4%.  You would buy/sell this security above/below 180 depending on the future perception of inflation, since the payment would be 7.2% of the original invesment, but still 4% of the adjusted principal.  If expectations are high it might trade at 185 or even 190, if expectations are low it would work the other way.

At maturity you receive the inflation adjusted principal.

Typically, the yield will be very low, but it will keep up with inflation.  An exact opposite would be a perpetual preferred share which yields a constant amount in the form of dividends.  You get a tax advantage, but if rates go up (or expectation of rates goes up), or a yield spread builds between corporate securities and governments (like now!) you can expect these to decline.  If inflation and rates head lower, the preferreds should outperform and the RRB's should underperform.

Cheers,

Victor

[garilou]

Thank you so much Victor,
This is one of the most instructive answers I have received on this forum.

I mean that I feel you have really put an effort in that reply, and not just quick quick.. well you know what I mean.

(You get an applaud from me for that, because I really appreciate you help!)

Still an answer sometimes bring other questions...

In this case I am not sure if we are really talking about the same.

I was thinking about buying some of the iShares, more precisely the XTR that tracks the Income trusts Index.

http://ca.ishares.com/tools_charts/index_returns_chart.do

I have been following the quotes of XTR for a few days now, since your first reply to rajera, when I started to make some research that lead to my own reply to rajera. The price has been going steadily up.

But before I would buy them, I had to free a part of my "conservative placements" which should be done by Tuesday or Wednesday latest, (both for this and to start seriously and in a more disciplined way then until now with a SSP Portfolio) but most of all I waited for your advice.
Seriously, I am not "flattering" (is this English?) you, I really respect everything you write!

Are we talking of the same thing?
I do not quite understand what you mean by:

Principal and interest increase with CPI

and by:

So let's say you buy the RRB directly at issue (100), yielding 4% 

XTR gives a pretty high return, and has been steadily performing better than the TSX:

Look at the chart:
http://ca.moneycentral.msn.com/investor/charts/charting.asp?FC=1&Symbol=CA%3AXTR , and choose "compare to indexes"

If you look at their holdings,
http://ca.ishares.com/product_info/fund_holdings.do?ticker=XTR
their 6th biggest holding is YLO. UN.
I already own a few thousand shares of YLO.UN. It has lost a lot of ground since I bought them, but the dividends were high enough for me to hold, but now it is going back up and I expect it could reach around $12,00 which would be + 20% of the price I paid.

Way down you can see that they also hold some of the DAY.UN that was recommended by SSP.
Sure, the problem could be that their biggest holdings (the 5 first) are in energy trusts, and energy is going down, COS.UN is their strongest holing, and even if it has done much better then the TSX, there is a downward trend starting, but the dividends (9.70%) are still pretty high.

What interested me in this type of investment was that as much as I hate Mutual funds, this one, like all Trust Income funds,
1. gives regular cash returns (Since it is in my RRSP, I do not have to think too much about the fiscal implications, because usually part of the return is a mix from interests and dividends)
2.they trade like any other market stocks, you can buy and sell the same way you would with any other stock and with a limit order you know what you are buying or selling for.

So, again, are we talking about the same thing?
as you suggested, I have done some of the research on the web, but honestly I must confess that I do not exactly what to search    .

Sure if would be a little more risky then my TDB164 that I bought very fast when, months after my husband's death, (all those months where I helpless could just look at his Mutual Funds going down: everything crashed the Monday after his death) his RRSP was transferred to mine, that is 100% sure not to lose invested cash, but brings so little return.

If you are so kind to reply again to my numerous questions, I'll be so grateful.
May I add that you can answer freely: I never hold someone else as my-self responsible for what I do on the markets.

Louise