Our Canadian fixed income positions all performed beyond our expectations as Canadian interest rates have decreased significantly, and we expect more Canadian rate cuts. While the Bank of Canada has signaled a slow approach to rate decreases, it is still likely to cut rates more aggressively than the U.S., given our weaker economic conditions and lower inflationary pressures. This should help realize capital gains in Canadian fixed income investments this year.

In contrast, U.S. interest rates have declined over the past year but remain relatively high, and we expect them to be range-bound moving forward. The U.S. economy continues to outperform Canada’s, and inflation risks persist. Over the past year, U.S. 10-year Treasury yields dropped from over 5% in late 2023 to around 3.60% before rebounding above 4.6%. As a result, many U.S. fixed income ETFs, indexes, and managed investment pools saw more volatility than Canadian fixed income. That said, with U.S. rates stabilizing in a higher range, we see opportunities for both capital gains trading and strong interest returns, particularly within the 4.75% to 7% range. We also believe the new administration will take a measured approach to economic policy, helping maintain stability in fixed income markets.

As mentioned in previous updates, after a roughly 35% gain, we sold in late 2021 and into 2022. We then purchased preferred share index/ETF holdings, such as Dynamic’s DXP and Global X’s HPR (formerly Horizons), in September 2024. After rallying over 20%, we are now taking some profits in DXP and HPR. Preferred share returns remain cyclical, and we will continue capitalizing on these opportunities while managing liquidity and rate sensitivity.

 

Equities:

After the impressive equity rally from August through Q4 2024, we selectively took profits in November, December, and early January 2025.With the Trump administration taking power and prioritizing regulatory reduction and financial sector consolidation, we are likely adding to regional banks due to potential mergers. Additionally, we are evaluating further healthcare exposure. While our portfolio’s healthcare holdings—ABBV, COR, MCK, and LLY—exceeded expectations, broader U.S. healthcare under performed. There is speculation that Trump’s policies may ease healthcare regulations, creating opportunities in select sub-sectors.

Given the strong performance of Canadian equities in 2024 and renewed tariff concerns under Trump, we increased Canadian downside protection, (hedging/insurance) into April 2025. The Canadian equity portion of the portfolio is approximately 50% hedged against a 7% decline. This is partial protection aims to reduce volatility and partially limit the portfolio drops. 

 

Conclusion

We remain watchful in managing our portfolios and will actively monitor opportunities over the coming quarters. We appreciate your trust and confidence. Please reach out if you need anything—we are available via phone, WebEx, or in person.

 

** Here’s the fine print and there’s a lot of it…

Currency can add return when the Canadian dollar goes down but reduce returns when the Canadian dollar goes up for non-currency hedged US and international investments. Also, please remember that your US accounts report values in US dollars.

Securities or investment strategies mentioned in this newsletter may not be suitable for all investors or portfolios. The information contained in this strategy update is not intended as a recommendation directed to a particular investor or class of investors and is not intended as a recommendation in view of the particular circumstances of a specific investor, class of investors or a specific portfolio. Options, and other strategies mentioned, may not be suitable for all investors. You should not take any action with respect to any securities or investment strategy mentioned in this newsletter without first consulting your own Portfolio Manager or in order to ascertain whether the securities or investment strategy mentioned are suitable in your particular circumstances. This information is not a substitute for obtaining professional advice from your Portfolio Manager. The commentary, opinions and conclusions, if any, included in this newsletter represent the personal and subjective view of Daniel Kelly who is not employed as an analyst and do not purport to represent the views of RBC Dominion Securities Inc. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. Investment Trust Units are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with Investment Trust investments. Please read the prospectus before investing. Investment Trusts are not guaranteed, their values change frequently, and past performance may not be repeated. (Keep reading, there’s only 7 more sentences to go.) This commentary is based on information that is believed to be accurate at the time of writing and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns.   RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under license. ©2025 Royal Bank of Canada. All rights reserved.

 

Investment portfolios are not guaranteed, and past performance is no indication of future returns. In addition to these portfolios not being a guaranteed investment, there can also be significant fluctuations in the value of the portfolio. Has anyone read this far?