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portfolio strategy

The hardest job in ETF investing just might be picking bond funds.

Finding an equity ETF is comparatively simple – choose a major stock index and find the cheapest, most liquid exchange-traded fund that tracks it. With bonds, the choices never end. Do you want corporate or government bonds? Investment-grade corporate or high yield? Short-term, medium-term, long-term bonds or a blend? Active management or an index-tracking ETF?

The third instalment of the updated Globe and Mail ETF Buyer's Guide is here to help by listing core bond ETFs that, either alone or combined with a few others, can cover all your bond needs. Recent instalments of the Buyer's Guide have covered Canadian and U.S. equity ETFs. Still to come are international equity ETFs and dividend/income funds.

Bond ETFs are a low-cost way to get diversified exposure to government and corporate bonds of all types. The only hitch is that, whereas an actual bond matures and repays your principal, the typical bond ETF never matures. Instead, it rides interest rate trends over the years, increasing in value when interest rates retreat and falling in value when rates rise. A key variable in choosing bond ETFs is yield, which can be measured in a few different ways. Used here is yield to maturity after fees, which is the best estimate of what yield you can expect looking forward.

Here's some explanation of other terms you'll find in the ETF buyer's guide.

Assets: Shown to give you a sense of how interested other investors are in a fund; unless they're new, the smallest funds may be candidates for delisting.

Management expense ratio: The main cost of owning an ETF on an ongoing basis; as with virtually all funds, published returns are shown on an after-fee basis.

Average 30-day daily trading volume: Trading of fewer than 10,000 shares a day on average tells you an ETF isn't generating much interest from investors.

Top sector weightings: Federal and provincial government bonds offer the least default risk and the most interest rate risk; corporate bonds offer more default risk and somewhat less rate risk. Note the heavy weighting in the financial sector that many corporate bond ETFs have – Canadian equity and dividend ETFs also have a lot of exposure to this sector. Be cautious about overexposure to financials, or any other sector.

Average duration: Duration, measured in years, is a standard risk metric 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).

Returns: ETF companies typically disclose total returns, or share price change plus interest payments, or distributions.

Click here to download an excel version of the table.


Sources: ETF company websites,

Click here to download an excel version of the table.