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Don’t be lulled into a false sense of security by the duration numbers on high-yield bond ETFs. (Alex Slobodkin/Getty Images/iStockphoto)
Don’t be lulled into a false sense of security by the duration numbers on high-yield bond ETFs. (Alex Slobodkin/Getty Images/iStockphoto)

NUMBER CRUNCHER

Beware the risk in bond funds Add to ...

What we’re looking at

Risk levels in the most widely held bond exchange-traded funds listed on the Toronto Stock Exchange. How vulnerable are they to the rising interest rate trend we’ve seen in recent weeks?

Our screen

Yves Rebetez of ETFInsight.ca has ranked bond ETFs here in descending order according to their asset size. You’ll find a key risk measure for each called duration, which refers to the number of years it takes for a bond to repay its cost through twice-a-year interest payments and return of your investment dollars at maturity. However many years of duration a portfolio of bonds has on average, that’s how many percentage points it will fall in price if rates increase by one percentage point (and rise if rates move lower).

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You’ll also find each fund’s yield to maturity, which is the best forward-looking gauge of likely returns. YTM factors in not only interest paid by bonds, but also any capital gains or losses incurred when the bonds in the portfolio mature. Subtract a fund’s management expense ratio from its YTM to get a net return.

What we found

A strong argument for being cautious in holding longer term bond ETFs in order to squeeze out a little extra yield than you can get with short-term bonds. The PowerShares long bond ETF on our list has a gross yield to maturity in the 3.5-per-cent range, which beats the 1.5- to 2-per-cent yields available from the many short-term bond funds also documented here. But look at the duration for the long bond ETF – it’s in the 14 range, which suggests an awful lot of risk in exchange for the higher yield.

Don’t be lulled into a false sense of security by the duration numbers on high-yield bond ETFs. High yield-bond funds – and emerging market bond funds, for that matter – are quite volatile and can fall more than their portfolio duration would suggest.

Follow on Twitter: @rcarrick

 

Bond ETFs: Using Duration to Assess Risk

ETF Name Ticker MER
(%)
Assets
($-mil)
(July 3)
Weighted
Duration
(July 3)
iShares DEX Short Term Bond Index Fund XSB-T 0.28 2,256 2.79
iShares DEX All Corporate Bond Index Fund XCB-T 0.44 1,888 5.74
iShares DEX Universe Bond Index Fund XBB-T 0.33 1,837 6.83
iShares 1-5 Yr Laddered Corporate Bond Index Fund CBO-T 0.28 1,670 3.25
iShares 1-5 Yr Laddered Government Bond Index Fund CLF-T 0.17 997 3.23
BMO Aggregate Bond Index ETF ZAG-T 0.31 943 6.8
BMO Short Corporate Bond Index ETF ZCS-T 0.34 799 2.87
BMO High Yield US Corporate Bond Hedged CAD Index ETF ZHY-T 0.62 645 4.4
PowerShares Ultra DLUX Long Term Government Bond Index ETF PGL-T 0.28 637 14.3
iShares US High Yield Bond Index (CAD-Hedged) Fund XHY-T 0.61 605 4.39
BMO Mid Corporate Bond Index ETF ZCM-T 0.34 543 5.91
Horizons Active Corporate Bond ETF HAB-T 0.56 531 5.8
iShares DEX Real Return Bond Index Fund XRB-T 0.39 518 15.63
iShares DEX HYbrid Bond Index Fund XHB-T 0.5 418 6.01
iShares Advantaged Short Duration High Income Fund CSD-T 0.61 287 1.72

Source: ETFInsight.ca

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