July 7, 2010, 5:00 am

Why Mortgage Funds Are Cool

by: The Financial Blogger    Category: Investment, Market and Risk
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Yup, last month the Bank of Canada just increased their prime rate for the first time in 18 months. Yup, the Canadian economy is growing and we can see the recession blur dissipating slowly. However, this situation is not  happening in the same fashion elsewhere on the planet. Plus, recent inflation stats show a slow return of inflation (1.4% and 1.8% without the resources) which is way below the 2% target fixed by the Bank of Canada.

All this to say that if you are waiting for high interest rates before you invest your money, this ain’t going to happen this year! So you are looking for an alternative? Why don’t you consider mortgage funds?


Money Market Funds Suck

As I just mentioned, the interest rate environment in Canada will stay pretty quiet for the upcoming months. Therefore, if you are leaning towards money market funds, you will barely get 1.20% (ING savings account) and it is going to be difficult to find better than this. Since inflation is at 1.4%, you are assured of a net negative yield.


Bond Funds Are Riskier

If you think that bond funds are better, read this article explaining why you will lose money buying bonds funds this year. They are riskier and they will be negatively affected to a great degree when interest rates start to climb.

Good Security – Higher Return

I like mortgage funds because they offer a high level of security. It is important to look at them carefully to make sure that you are not investing in some kind of leftover subprime mortgages from Florida ;-). Overall, most Canadian mortgage funds will include Canadian mortgages (both conventional or insured by the CMHC).

Therefore, they have a great level of security while offering a higher return than government bonds or money market funds.

Better Diversification

Another great point about mortgage funds is their diversification. Again, it is very important to carefully read the composition of your mortgage fund but they usually incorporate a mix of:

1-    Conventional Mortgages (properties with more than 20% equity)

2-    Insured Mortgages (backed by CMHC or Genworth)

3-    Government Bonds (Federal and Provincial)

4-    And sometimes a few corporate bonds!

So it’s a great way to add diversification to your fixed income portfolio while not increasing its risk.

The secret Mortgage Fund Weapon: Duration!

In fact, the biggest advantage of mortgage funds compared to other bonds funds is its duration. What does duration mean? Since I don’t want to go into the full detail (it deserves a full post alone!), let’s just keep in mind that the longer the duration you have, the more volatile the funds will be when there is an interest rate policy change. Since mortgage funds managers can keep their duration quite short (down around 2 years), your portfolio won’t be affected too much if there is a sudden interest hike.

I’d say that this is probably the best reason to consider mortgage funds for your portfolio; because of its protection against interest rate fluctuations.

Where can I get these mortgage funds?

You might end up looking for the best mortgage rates in Canada but if not, I’ve made a list of most of all the mortgage funds I was able to find with a history greater than 5 years so you can look at an interesting perspective:

Fund Name3 Mth Ret1 Yr RetQuart 2 Yr Ret5 Yr Ret15 Yr RetLegal StatusRRSP
CIBC WM Residential Mortgage CAD-
PH&N Short Term Bond & Mortgage D-0.84.414.15.7TrustYes
Educators Mortgage & Income-0.43.723.65.5TrustYes
HSBC Mortgage0.12.713.54.8TrustYes
TD Mortgage - I-0.8-
National Bank Mortgage-1.30.633.45.0TrustYes
MD Bond & Mortgage-0.71.923.3TrustYes
CDA Bond & Mortgage (Fiera)-0.72.313.2SegregYes
Scotia Mortgage Income-
Investors Mortgage & Short Term Income-1.00.332.94.1TrustYes
BMO Mortgage and Short-Term Income-0.80.832.74.1TrustYes
Great-West Life Mortgage (G) DSC-
Great-West Life Mortgage (G) NL-0.55.732.54.7SegregYes
London Life Mortgage (LC)-
CI Signature Mortgage0.22.532.23.8TrustYes
Clarica SF CI Mortgage A0.01.941.7SegregYes
Clarica SF CI Mortgage0.01.831.6SegregYes
Peer Diversified Mortgage-7.4-13.231.3TrustYes
ACM Commercial Mortgage2.410.31TrustYes
mortgage funds over 5 year-

Note: while I sound like a mortgage funds fan, I must say that this does not qualify as a recommendation to buy such a fund. A profound analysis of your personal situation and review of your portfolio is required before giving investment advice. Please don’t drink the koolaid and drive; do your own research 😉


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Good stuff…missing the funds though:)

Wow, very well conceived! Are these all mutual funds? Any consideration for ETF’s?:)

@ IS,

I beleive that a mortgage fund should be actively managed (to take into consideration duration for example). But if you want to write about Mortgage ETF’s and compare them, it could be interesting ;-D

@TFB – I might just do that then:)

[…] Why Mortgage Funds Are Cool – While we do hear a lot about Money Market funds and even Bond funds, we don’t hear too much about Mortgage funds. Investing in mortgages can be a viable alternative for some people and in this post you can read about one blogger’s views on Mortgage funds as an alternative to Money Market funds and Bond funds. […]

[…] Why Mortgage Funds Are Cool […]