Rising rates limit the appeal of bond ETFs

Article Excerpt

The Bank of Canada increased its benchmark interest rate in July 2018 from 1.25% to 1.50%. That rate could rise further later this year on stronger economic growth and low unemployment. Inflation has also moved up steadily, sitting at 3.0% in July 2018. We continue to caution against investing in bonds. Today’s still-low interest rates make them unattractive, and rising interest rates will push down their future value. However, if you need stable income and want to hold bonds, these funds offer lower fees and high-quality holdings. ISHARES CORE CANADIAN SHORT-TERM BOND INDEX ETF $27.18 (Toronto symbol XSB; buy or sell through brokers) mirrors the FTSE TMX Canada Short-Term Bond Index. The fund’s MER is a low 0.17%. That index tracks investment-grade government and corporate bonds with one- to five-year terms. The ETF holds 502 bonds with an average term to maturity of 2.83 years. The bonds are 66.7% government and 33.3% corporate. Most of the corporate bonds are from high-quality issuers such as TD…

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