Bond ETFs are a real problem-solver for investors who prefer not to have 100 per cent of their portfolio in the stock market.
Almost everyone needs bonds for those years when stocks get hammered, but buying them is complicated. You can buy individual bonds, but the commissions built into the price you pay are huge and you'll need to buy bunches of bonds for proper diversification. You can also use guaranteed investment certificates, but they can't easily be sold before maturity.
Bond ETFs offer a low-cost way to acquire a liquid, well-diversified bond portfolio in a single purchase. Bond ETFs don't mature and hand you your money back as actual bonds or GICs do. But they do otherwise behave as if they're bonds, rising in price when rates fall, falling back when rates move higher and paying interest on a regular basis.
This edition of the Globe and Mail ETF Buyer's Guide focuses on core bond ETFs that have been around for at least five years and generate sufficient trading volumes to make sure you get competitive prices when buying and selling. There are dozens more bond ETFs focusing on niches such as long-term bonds, real-return bonds and high-yield bonds. Here, we look at the kind of fund that lets you cover off the bond side of your portfolio in a single purchase.
Some of the terms you'll find in this instalment for the ETF Buyer's Guide are listed below.
Assets: Shown to give you a sense of how interested investors are in a fund.
Management expense ratio (MER): A measure of the main cost of owning an ETF on an ongoing basis; as with mutual funds, published returns are shown on an after-fee basis.
After-fee yield to maturity: This is the best estimate of the yield to expect from a bond ETF looking ahead.
Average 30-day daily TSX trading volume: Another indication of how popular an ETF is.
Top sector weightings: Federal and provincial government bonds offer the least default risk and the lowest yields; corporate bonds offer somewhat more default risk, but higher yields. Note the tendency for corporate bond ETFs to have a heavy weighting in the financial sector.
Average duration: Duration, measured in years, is a standard risk indicator for bonds; if interest rates rise by one percentage point, the price of an ETF with a duration of five would fall five percentage points (and vice versa if rates fell). The higher the duration, the more risk there is if rates rise.
Returns: ETF companies typically show total returns, or share-price change plus interest payments, or distributions.
Click here to download an Excel version of the table