ISHARES CDN SHORT BOND INDEX FUND $29.35 (CWA Rating: Income) (Toronto symbol XSB; buy or sell through a broker) 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 between one- and five-year terms to maturity. The fund currently holds 183 bonds with an average term to maturity of 3.01 years.

Top issuers include the Government of Canada, Canada Housing Trust and the Province of Ontario. The bonds in the index are 89.7% government and 10.3% corporate. The fund’s MER is 0.25%.

iShares CDN Short Bond Index Fund yields 4.1%. However, this high rate is due to the fact that some of the fund’s bonds pay above-market interest rates. But as a result, they trade above their face value. When these bonds mature, holders will only get the bonds’ face value, which means that 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 CDN Short Bond Index Fund’s yield-to-maturity is around 2.02% — less than the 4.1% yield, but still higher than the 0.53% that you’d earn by investing in, say, a one-year T-bill.

If you want to invest in a bond fund, this one is a buy.