Topic: ETFs

Two ETFs may be the best choices in bonds

The Bank of Canada has held its benchmark interest rate steady at 1.75% since October 2018. The Canadian economy is growing and unemployment is low, although annualized inflation is sitting just under its 2.0% target.

We continue to caution against investing in bonds. Still-low interest rates make them unattractive, and rising rates will push down their future value. However, for investors who need income and want to hold bonds, these two funds offer lower fees and high-quality holdings.

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ISHARES CORE CANADIAN SHORT-TERM BOND INDEX ETF $27.64 (Toronto symbol XSB; buy or sell through brokers) mirrors the FTSE TMX Canada Short-Term Bond Index. The funds MER is a low 0.10%.

That index tracks investment-grade government and corporate bonds with one- to five-year terms. The ETF holds 488 bonds with an average term to maturity of 2.91 years.

The bonds are 67.7% government and 32.3% corporate. Most of the corporate bonds are from high-quality issuers such as TD Bank, Hydro One, Intact Financial, Hydro Quebec, Bank of Nova Scotia, Enbridge and CP Rail.

The fund yields 2.4%; the high yield reflects the fact that some of the bonds it holds pay above-market interest rates. As a result, they trade higher than their face value. However, when these bonds mature, holders will only get the face value, meaning the portfolio will incur predictable capital losses. These losses could partially offset the above-market yields.

The key figure when looking at the long-term return of this fund is its yield to maturity. That ratio takes into account the series of capital losses the fund will experience as its above-market-rate bonds mature.

The yield to maturity for the iShares Canadian Short-Term Bond Index ETF is 1.83%. That’s less than the 2.4% yield, but still higher than the 1.7% you’d earn by investing in, say, a one-year T-bill.

Recommendation in Canadian Wealth Advisor: If you want to invest in a bond fund, the iShares Core Canadian Short-Term Bond Index ETF is a buy.

ETFs: Higher yield reflects greater risk of long-term bonds

ISHARES CORE CANADIAN UNIVERSE BOND INDEX ETF $32.07 (Toronto symbol XBB; buy or sell through brokers) mirrors the FTSE TMX Canada Universe Bond Index. The portfolio’s 1,280 bonds have an average term to maturity of 10.78 years. The fund’s MER is 0.10%

The bonds in the Canadian Universe Bond Index are 72.3% government (federal, provincial and municipal) and 27.7% corporate. Its bond issuers are similar to those of the iShares Canadian Short-Term Bond Index Fund.

This fund yields 2.8%, compared to the Short-Term Bond Fund’s 2.4%. Its yield to maturity is 2.10%27 basis points above the Short-Term Fund’s. That reflects the added risk of long-term bonds.

Recommendation in Canadian Wealth Advisor: The iShares Core Canadian Universe Bond Index ETF is a buy for safety-conscious investors who can accept that risk.

 For our advice on how to make the right choices amid the growing number of ETFs, read Selecting the best Canadian funds for your portfolio.

For our recent report on one of the best ways to invest in global markets, read Two ETFs offer low-fee access to global markets.


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