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Nov 1, 2022

How To Defend Yourself Against Inflation: Use Ladders And ETFs That Keep Pace With Rates

by Richard Morrison

Central bankers around the world have been increasing interest rates in reaction to inflation. As a result, most investments have suffered this year, including both bonds and stocks. Investors who’ve sold everything and stuffed cash under the mattress may have prevented stock and bond losses, but thanks to inflation, the buying power of their cash is also falling.

To help fight inflation, the Bank of Canada has steadily increased its target for the overnight rate, rising to one per cent on 13 April 2022, a further 50 basis points to 1.5% on June 1, a larger-than-expected full percentage point to 2.5% on July 13, and another 75-basis point rise to 3.25% on September 7 with another increase expected October 26.

“The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices,” the Bank’s 7 September 2022 statement said. “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further,” the statement concluded.

Among the main victims of the rising rates are Canadian real estate investment trusts (REITs) and other real estate and construction companies, while the energy sector has been a bright spot. Of the 34 largest Canadian oil and gas companies that have market capitalizations of more than $1 billion, only four had negative returns this year as of mid-October, the TSX site shows. Not surprisingly, exchange-traded funds (ETFs) that invest in oil and gas stocks have also performed well in 2022, as most of the top performing Canadian ETFs this year focus on the oil patch. (The other top performers are funds that have bet against the fortunes of the market, marijuana companies and bitcoin.)

Energy aside, gold has always been regarded as an inflation fighter, but it doesn’t seem to be working this time. The gold price spiked up to more than US$2,000 an ounce in early March 2022, but aside from a small rally in August, its general trend this year has been down. Most Canadian gold mining stocks are also down this year, as are all the 15 Canadian ETFs that focus on bullion, with virtually none showing positive returns in 2022.

Here are a few investments that Canadian investors can use to offset inflation and rising rates.


For years, investors have hedged successfully against rising interest rates by assembling a ladder of fixed income securities such as treasury bills, bonds, or guaranteed investment certificates (GICs). Ladders can be made up of equal amounts of securities that mature at regular intervals, perhaps every year for several years. When the nearest-dated security matures, the investor reinvests the proceeds in a new series with the longest maturity date, usually at a higher rate of interest. Callable bonds should not be used in a ladder since the issuer may call them away.

Bond Ladder ETFs

iShares has two laddered corporate bond ETFs, a one-to-five-year version (CBO) and a one-to-10-year version (CBH), together with two laddered government bond ETFs, a one-to-five-year version (CLF) and one-to-10-year version (CLG). RBC has the one-to-five Year Laddered Canadian Bond ETF (RLB) and a corporate bond version (RBO). TD has the TD Select Short-Term Bond Ladder ETF (TCSB). All are down so far in 2022.

Canadian Floating Rate ETFs

Floating rate ETFs hold bonds, notes and other securities that have variable interest payments. Among a dozen or so Canadian floating rate ETFs, most are new, tiny or have generated only slightly fewer dismal results than bond funds so far this year. The two main exceptions are funds that hold most of their assets in the Canada Housing Trust No. 1 issue, which issues mortgage bonds backed by the Canada Mortgage and Housing Corporation (CMHC). The trust issues five- and ten-year fixed rate bonds along with five-year floating rate bonds.

The iShares Floating Rate Index ETF (XFR), launched in 2011, has managed to hold its own this year with a total return of 0.85% to mid-October. Almost three-quarters of the fund’s $457 million in assets are in the Canada Housing Trust bonds, with smaller allocations to 23 provincial and corporate issues. The fund carries a Management Expense Ratio (MER) of 0.22% and pays a monthly distribution that yields 2.33%.

The Invesco 1-3 Year Laddered Floating Rate Note ETF (PFL), launched in 2014, has $204.7 million in assets. Like the iShares fund, PFL has managed a positive return this year, and like the iShares fund, most of the ETF’s portfolio is in Canada Housing Trust No 1, while its MER is the same at 0.22%.


The yields on Government of Canada treasury bills have skyrocketed over the past year, with yields on one-year T-bills reaching 4.31% as of mid-October. T-bills are bought at a discount and mature at par, with maturities anywhere from a few days away to a full year, usually with increasing rates of interest as the maturity date lengthens. The minimum T-bill purchase is $5,000. You could make up a short-term inflation-fighting T-bill ladder with, say, $60,000 put into 12 T-bills that mature one month apart, or six $10,000 T-bills that mature every two months and so on, reinvesting the maturing bill in one that matures in a year.


GICs are generally available only in one-, two-, three-, four- and five-year maturities. (Now, some issuers such as BMO, Bank of Nova Scotia, CIBC Equitable Bank and Laurentian Bank offer six-year GICs, the GIC table shows.) The many sites where you can shop for GIC rates include, which offers sortable tables with 28 issuers. Generally, credit unions and small banks offer the best rates, and ladders made up of GICs from these issuers are good inflation fighters, although GICs are relatively illiquid since most can only be cashed out on their maturity date.

All interest-bearing investments are heavily taxed and, therefore, should be held in tax-favoured accounts such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs).

Real Return Bonds

Real Return Bonds (RRBs) are the government’s way of protecting investors from inflation and rising interest rates. RRBs pay interest semi-annually on June 1 and December 1, which consists of a coupon rate plus an adjusted amount based on the Consumer Price Index. Both the principal and the interest rate are designed to fluctuate with inflation. Current Canadian government real return bond issues include issues maturing on December 1 of 2026, 2031, 2036, 2041, 2044, 2047 and 2050. Unfortunately, bond prices fall when interest rates rise, and long-dated bonds fall most dramatically. Institutions such as banks and insurance companies that sell real return bonds rarely point this out.

ETFs that hold a portfolio of real return bonds are down more than 10% as of the end of September 2022. The iShares Canadian Real Return Bond Index ETF (XRB), for example, posted a net asset value total return of minus 14.47% as of September 26, while the net asset value of the BMO Real Return Bond Index ETF (ZRR) was down by 15.29% as of the end of August.

High-interest Savings/Cash Alternative ETFs

Several ETFs hold high-interest deposit accounts at Canadian banks, with their millions in assets granting them rates normally unavailable to individual retail savers. Such ETFs are more liquid than GICs since they can be sold at any time. Most have MERs in the 0.13% to 0.17% range and pay out a variable monthly distribution. The unit prices of most high-interest savings accounts are stable, falling by the amount of the monthly distribution just before the payout and then climbing for the next month.

Among Canadian high-interest savings ETFs are the CI High-Interest Savings ETF (CSAV), the Purpose High-Interest Savings ETF (PSA), the Horizons High-Interest Savings ETF (CASH) and the Ninepoint High-Interest Savings Fund (NSAV).

One fund whose unit price does not conform to the pattern is the Horizons Cash Maximizer ETF (HSAV), which makes no distributions. Instead, the fund’s net interest income is reinvested in the fund. Horizons suspended new subscriptions to the fund on 3 February 2022, two years after its inception, after the fund’s net asset value had climbed to $2 billion. However, the units still trade on the secondary market. HSAV carries an MER of 0.12%.

U.S. Treasury Inflation-Protected Securities (TIPS)

Any U.S.-dollar-denominated investment exposes Canadian investors to currency risk since a rise in the Canadian dollar reduces the value of your U.S. holdings. Currency fluctuations also affect the apparent performance of U.S.-dollar-denominated funds, causing returns to seem excellent after periods in which the Canadian dollar has fallen and to look poor after stretches in which the Canadian dollar has climbed.

TIPS are the U.S. government’s version of Canada’s real return bonds. The bonds are issued in $100 denominations and come in either five-, 10- or 30-year maturities. TIPS pay interest once every six months at a rate multiplied by the amount of the principal, which increases along with the inflation rate. For example, an investor who holds $100,000 in TIPS at a one per cent coupon rate for a year would normally earn $1,000 in interest if the U.S. Consumer Price Index (CPI) did not change. If the CPI were to rise by five per cent, the principal would rise to $105,000, and the investor would get $1,050 in interest. Unlike Canada’s real return bonds, TIPS provide protection against deflation as well as inflation. Among about a dozen U.S. ETFs that hold TIPS, none have generated positive returns so far this year.


There are few ways to effectively defend yourself against inflation and the sledgehammer of rising interest rates, the only tool that central bankers appear to have in their toolbox. You can make up a ladder of T-bills or GICs or hold units in a floating rate or high-interest ETF. All such investments generate low single-digit returns for now, at least, which is the best you can hope for.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.