Canada’s inflation rate is just 1.1%, well below the Bank of Canada’s 2% target. That lets the bank keep interest rates low, which holds down our dollar, making our exports cheaper in world markets. That’s good for Canada’s economic growth, but bad for income investors. We continue to advise against investing in bonds right now. Today’s low interest rates make them unattractive for income. Rising rates would push down their asset value. However, if you need stable income you may consider holding certain bond funds. Here are two we cover in our advisory on safety-conscious investing, Canadian Wealth Advisor. ISHARES DEX SHORT-TERM BOND INDEX FUND (Toronto symbol XSB; ca.ishares.com) mirrors the performance of the DEX Short-Term Bond Index. This index consists of a wide range of investment-grade federal, provincial, municipal and corporate bonds with terms to maturity ranging from one to five years. The fund holds 384 bonds with an average term to maturity of 2.91 years. The bonds in the index are 60.2% government and 39.8% corporate. The fund’s MER is 0.28%. iShares DEX Short-Term Bond Index Fund yields 2.6%. However, this high yield is due to the fact that some of the fund’s bonds pay above-market interest rates. As a result, they trade above their face value. When these bonds mature, holders will only get the bonds’ face value, which means the portfolio will incur predictable capital losses. These losses will offset some of the appeal of the above-market yields. The key figure when looking at the long-term return of this fund is yield-to-maturity. This yield takes into account the series of capital losses the fund will experience as its above-market-rate bonds mature. iShares DEX Short-Term Bond Index Fund’s yield-to-maturity is around 1.62%—less than the 2.6% yield but still higher than the 0.96% you’d earn by investing in, say, a one-year T-bill.
Longer-term bond fund has 3.2% yield and 2.9% yield-to-maturity
ISHARES DEX UNIVERSE BOND INDEX FUND (Toronto symbol XBB; ca.ishares.com) mirrors the performance of the DEX Universe Bond Index. The 784 bonds in the portfolio have an average term-to-maturity of 9.79 years. The fund’s MER is 0.33%. The bonds in the index are 66.7% government and 33.3% corporate. The fund yields 3.2%, compared to the Short-Term Bond Fund’s 2.6%. Its yield-to-maturity is 2.53%, 0.91% above the Short-Term Fund. In the latest issue of Canadian Wealth Advisor, we examine the long-term outlook for interest rates and balance the relative risks of short-term and long-term bonds. We conclude with our clear buy-hold-sell advice on these two funds. (Note: If you are a current subscriber to Canadian Wealth Advisor, please click here to view Pat’s recommendation. Be sure to log in first.) If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question. COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members Do you always keep a portion of your portfolio in bonds? Do you hold bonds or bond funds? Do you feel that the stable income you get with bonds makes up for today’s low interest rates?
