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I am in the interesting position (not the only one I am sure) of trying to sack away what was to be a downpayment for a house. I have decided to put that off for a least a year if not two ... because although I am not a savvy investor ... I am no fool. Therefore, the question is what does one do with a sum of cash for a year or two in this economy. After doing some research, I decided to invest most of it in Short Term Bond ETF's .... Claymore (CLF). Now why did I do this. Well, I wanted to get a decent return, better than a GIC, but wanted to protect my principle and most of what I read had said that these funds were less volatile than a regular bond fund (of low duration?). However, I also understand the relationship of the direction of interest rates and its effect on these funds .... interest goes up .... value goes down. Now I have only owned shares for about a month and have seen the fund NAV go down almost 2% ... very upsetting. Now interest rates have not even begun to go up, so the question is why the decrease? Is this just occuring because of all those investor's out there anticipating the increase in interest rates in the coming months? What will happen when rates actually start increasing. Can I expect these increases to essentially wipe out whatever interest return I am going to get on this fund, or even worse, start to bite into my principle? I guess I am panicking already because at the end of the day, protecting my principle amount is the most important for me right now. Any comments or advice would be appreciated.

Thanks.
 

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CLF just paid a distribution of 21 cents per unit, which you should have received in your account last week. Of course, there is more risk in a short-term bond fund than in GICs. Given your investment horizon, GICs might not be a bad choice, even though rates are mediocre. If it's a sizeable amount, go to a GIC broker and you'll get a better rate.

Also, if you look at historical valuations, the fund you mention was around this value after inception at the beginning of 2008, when rates were much higher. I don't think gradually rising interest rates over the next few years will wipe you out. I definitely can't imagine you making out with less than your initial investment after two years (you'll have gotten about 8% of your initial investment in that time in interest). Whether your total return will be better than with GICs over that period is hard to say. I'd say yes, but the risk is there that it is worse than GIC total return. If you can't stomach that risk, go get some GICs.
 
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