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Portfolio Strategy

How the bond ETFs measure up Add to ...

Just in time for the challenge of rising interest rates comes a rush of new bond ETFs designed for Canadian investors.

There are about 20 exchange-traded funds focusing on bonds listed on the Toronto Stock Exchange today, up from eight a year ago, and at least three more should arrive by the end of next month.

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Meanwhile, interest rates are beginning what could be a long rise from the depths they hit during the recession.

Let's take a close look at 10 popular bond ETFs listed on the Toronto Stock Exchange to see what they're made of and how they might bear up to rising rates.

But first, there are a few technical terms used here that require some explanation:



MER

Stands for management expense ratio, which measures almost all fees and costs associated with owning a fund as a percentage of assets. Some ETF companies display only their management fee, which does not reflect all costs.

Yield to maturity

The annualized, after-fee return you'll get from the bonds in an index tracked by an ETF if held until they mature. This is a forward-looking indicator of what to expect when you buy a bond ETF.

Current yield

Your annualized return based on the interest paid out by a bond ETF over the past 12 months and its current share price. This measure is more of a backward look at bond ETF returns and not a reliable indicator of future returns.

Duration

The number of years it takes for a bond to repay the amount you invested in it, and also a key measure of bond sensitivity to rising rates. With a duration of five years, a one-percentage-point increase in interest rates would theoretically cause a bond ETF to fall five percentage points in value. So shorter durations are preferable if you're worried about your bond holdings.

Let's be clear here about bond ETF risk. Prices for most will fall as rates rise, but interest payments should continue as usual. When interest rates eventually stabilize and begin to fall again, bond ETFs will rise in price. Unlike actual bonds, they never mature and repay your upfront investment.

Investor Education:

  • All about ETFs
  • ETF picks for your RRSP portfolio
  • The bad boys of the ETF world
  • Are ETFs your cup of tea?
  • How do ETFs fit my investment strategy at this stage in life?






Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

BMO High Yield U.S. Corporate Bond Hedged to CAD Index ETF

ZHY

0.69

135

8

9

4.7

n/a

Comments: High-yield bonds behave more like stocks than plain old government bonds, which means they'll hold up comparatively well to rising interest rates while remaining highly vulnerable to market crashes like we saw in 2008. With this ETF, BMO has put its own currency-hedged wrapper on an NYSE-listed high-yield ETF called the SPDR Barclays Capital High-Yield Bond ETF (JNK). Currency hedging makes you immune to losses caused when our dollar rises against the U.S. buck, but it also prevents you from benefiting when our dollar drops. Why no high-yield bond ETF with Canadian bonds? Our market's too small.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

BMO Short Corporate Bond Index ETF

ZCS

0.33

71

2.8

4.6

2.7

-0.6

Comments: This ETF holds investment-grade corporate bonds, which are less risky than high-yield bonds. Risk is further contained here by sticking to short-term bonds. Note that financial stocks dominate the portfolio with a weighting of 67 per cent. Think about that if you have a lot of financial exposure elsewhere in your portfolio.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

Claymore 1-5 Year Laddered Corporate Bond ETF

CBO

0.27

33

2.4

4.7

2.5

-1.7

Comments: A very good option for investors who want the extra yield that corporate bonds offer over government bonds without picking individual securities. The MER is nice and low and the bonds are all short term, which should help when interest rates rise. The laddering approach means the holdings are evenly divided among bonds maturing in one through five years. There's an opportunity to capture higher yields as bonds in the portfolio mature each year and are rolled over into new five-year bonds.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

Claymore 1-5 Year Laddered Government Bond ETF

CLF

0.17

25

2.2

4.2

2.5

-2.1

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