Higher, Safer Returns
What is Available for Consideration
If you don’t have a pension, receiving a regular income cash flow from some of your investments is important to manage the living expenses of retirement. What investments might offer you higher return than the fixed assets (bonds, GICs, Cash ETFs) discussed in the recent Bonds blog, while also remaining safer than the volatility of stocks and the stock market?
Let’s work through a couple of examples, considering their relative pros & cons, providing you with enough information to decide for yourself.
A couple of our readers use Structured Notes for this purpose. Others use Private Equity (PE) funds like the exempt market rental property real estate trusts (REITs) we will use in this comparison. In both cases, returns can be about 10% per year, much better than current fixed asset returns. Let’s dive in a little deeper.
What Are These Investments?
Notes are bonds sold to you by a Canadian bank complete with a derivative trading element. They are outside the stock market. The derivatives (first made infamous in the 2008 crash) create potential returns beyond the bond principal amount. The notes typically offer 6-10% return assuming derivative trading is successful.
PE REITs are fund ownership sold to you by the REIT via an exempt market dealer. They too are outside the stock market, not exposed to market volatility like the REITs you can find on the stock market. These funds offer 8-12% returns.
Other opportunities for regular retirement income include farmland and dividend paying best-in class stocks, both typically deliver in the 3-4% range. Lower yet are the 2%-3% fixed income options mentioned in the recent blog. Certainly, a big step down from 6-12% in our comparison.
Actual Return
If successful in their trading, the Notes return the 6% or 10% identified as their published target when offered. They are restricted to not returning more than the identified target. Target returns have been regularly achieved in recent years, as their risks have been minimized by steady stock market growth.
PE REITs have been challenged in recent years as the ongoing over-build of rental properties (prompted by excessive immigration and foreign post-secondary students) has overlapped the large reduction in immigration and foreign students. Despite this headwind, they have continued to deliver 7-8% returns at the low end of their target range.
Liquidity
With Notes, your money is tied up by the bank for 3-, 5- or 7-year terms. The note can be ‘called’ (closed) by the bank earlier than end of term, potentially under a year with the market/stock rising, or it could be the full term with a falling market/stock. You have no control over the liquidity.
PE REITS are typically liquid and able to return your investment in as little as 3 or 6 months, though there may be a 1-4% fee if funds are withdrawn in the first couple of years. In a bad market, exempt market REITS can choose to suspend redemptions (go illiquid) for a period. This is currently happening in 1 of the 3 funds we are invested in. Fortunately, we don’t need the funds to be liquid right now. In comparison, I’d say these have partial liquidity control.
Risk to Investment
For Notes, if the market/stock dropped 25%, 30%, or 50% (depending on note terms), you could lose some or all your investment principle. There is no actual collateral. I see a 25% or 30% downward correction as a probable event over the next 5 years, while a 50% drop is less likely but possible. The graph in the Mean Reversion blog at the start of 2026 certainly suggests this size of market drop is overdue. There is also the risk of the bank failing, but that’s so remote in Canada, it’s not worth considering.
With PE REITS, the ultimate collateral is all the rental apartment buildings their fund owns and operates. Real assets with real value. Plus, a third (more or less) of Canadians always have and always will be renters not owners. Downside risk is there, but relatively low over time in relation to the Notes.
Income Creation and Their Operating Expense
Notes rely on the bank to trade derivatives, put and call options on the market/stock rising and falling. Success is largely tied to the quality of the trader rather than the rise and fall of the market. The bank is compensated with hidden fees in the 1.5% to 2.5% range to do this trading.
PE REITs rely on the good management of their rental properties to generate revenue, which is distributed monthly or quarterly. The REITs are compensated with fees in the 1.5% to 2.5% range to manage the properties.
Access to Invest
Notes can be accessed directly (to save on fees) through online banking but are more easily accessible through the private wealth operations of their creators, the big banks. PE REITs need to be accessed through exempt dealers (similar fees to the big bank private wealth operations) and are not available through banks.
Summary
The higher return potential with regular income flow from both options is certainly appealing. But, depending on how you define safer (liquidity risk, loss of principal risk), they are certainly less safe than fixed assets. We are invested in one market and may consider the other in the future but will maintain a high level of other diversity to minimize our risk. Be Prepared by considering these options, their reward and risk.