This week, the Bank of Canada concluded a key monetary policy meeting and announced a cut to its benchmark interest rate by 25 basis points (0.25%). This marks the first rate cut since the pause on hikes began in March of last year. This move follows an unprecedented series of rate increases throughout 2022 and 2023, after which rates were held steady for several months.
With interest rates now on a downward trajectory, Canadian investors are actively seeking opportunities to capitalize on lower borrowing costs. Real estate seems like an obvious choice—mortgage rates are expected to fall accordingly. Indeed, lower interest rates effectively reduce the real cost of housing (assuming one buys before prices fully adjust). Compared to recent years, now may be a relatively better time to purchase property.
However, this does not necessarily mean real estate is the best investment choice. From a purely financial perspective, private real estate investments come with numerous drawbacks, including maintenance costs, time commitments, manual management, and sometimes burdensome regulations such as rent control. Being a landlord isn’t always easy. In contrast, investing in stocks is entirely passive and has historically delivered solid long-term returns.
Stocks benefit from interest rate cuts in two main ways:
While these principles also apply to real estate, stocks tend to be more sensitive to interest rate changes. Many publicly traded companies—especially in the tech sector—generate rapidly growing cash flows. The faster the cash flow growth, the greater the boost in asset valuation within a DCF model when rates decline. Thus, stocks often outperform real estate in a falling rate environment.
For those looking to capitalize on lower rates through the stock market, there are several options. Index funds are particularly noteworthy. These exchange-traded portfolios offer built-in diversification and low fees, effectively reducing risk without significantly sacrificing returns.
Take the iShares S&P/TSX 60 Index Fund (TSX: XIU) as an example. It holds the 60 largest Canadian stocks by market capitalization, providing ample diversification. With a management expense ratio (MER) of just 0.15%, fees remain low enough to avoid heavily eroding returns. Additionally, it is one of Canada’s most popular and liquid funds, ensuring cost-efficient trading without significant market maker spreads. All in all, it represents a compelling investment value.
