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Number Cruncher

Diverse bond ETFs shine in volatile quarter Add to ...

What are we looking for?

Stock markets stumbled in the second quarter amid concerns about Greece’s debt woes and slow U.S. growth. Given that exchange-traded funds are an increasingly popular way to invest, let’s see which ones fared the best during this period.

The screen

We looked for the 15 best-performing Canadian-listed ETFs. Bull and bear leveraged ETFs, which allow investors to amplify their long or short bets on the market, were excluded.

What did we find?

Lots of bond ETFs of different stripes.

Eleven of the 15 top-performing ETFs invested in everything from government and corporate fixed-income investments to emerging market and real-return bonds.

It pays to have some bonds in a portfolio because they can help offset the volatility of stock markets.

BMO Long Federal Bond ETF , which invests in Canadian government bonds with a term to maturity of more than 10 years, was among the leaders with a 4-per-cent gain.

Long-term bond funds shone as concerns about rising interest rates began to fade amid a slowing global economy, said Alfred Lee, an investment strategist with BMO ETFs at Bank of Montreal. “Long-term bonds tend to be more interest-rate sensitive.”

BMO Real Return Bond ETF , which holds Canadian government bonds with their coupons tied to the consumer price index (CPI), also gained 4 per cent. The CPI rose 3.7 per cent year over year in May and 3.3 per cent in April, mainly due to higher gasoline prices.

BMO Emerging Markets Bond ETF was close behind with a 3.9-per-cent return in the quarter. Its top holdings include Brazilian, Russian, Mexican and South Korean bonds. Bond yields are higher in many emerging market countries than developed markets such as the United States, which is trying to kick-start its economy with low interest rates.

A decade ago, emerging market debt was considered very risky, but now “a lot of emerging markets have stronger balance sheets than developed markets,” Mr. Lee said.

BMO Equal Weight U.S. Health Care ETF , which hedges its foreign currency exposure to Canadian dollars, was the lone stock fund. It emerged at the top of the heap with a 7.1-per-cent return.

This ETF includes companies ranging from pharmaceutical and biotechnology firms to hospital operators and health care insurers. It got a lift from investors embracing this defensive sector to get away from market volatility and economic uncertainty.


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