Carrick: Another way to beat an ETF bond ladder

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Want to build a better corporate bond ladder? Do it yourself instead of using a laddered bond ETF.

Bond ladders are Investing 101 stuff, but they work. By investing equal amounts of money in bonds or guaranteed deposit certificates maturing in one through five years, you ensure you have money coming due annually to take advantage of rising interest rates. And if rates fall, the risk of having to renew at lower rates is limited. Bond ladders are so basic that many exchange-traded fund companies have packaged them into ETF form. Buy the ETF and get an instant five-year ladder.

But in a recent column, I argued that building your own ladder with GICs offers a better yield. Here, a case is made that building your own ladder of individual short-term corporate bonds also beats the yields available on laddered corporate bond ETFs.

Here are five investment-grade bonds I picked from one online brokerage firm's online inventory:

One year
407 International Inc. 3.88 per cent bond maturing June 16, 2015, with a yield of 1.36 per cent.

Two year
AltaGas Services 6.94 per cent bond maturing June 29, 2016, with a yield of 2.04 per cent.

Three year
Enbridge Income Fund 5 per cent bond maturing June 22, 2017, with a yield of 2.14 per cent.

Four year
Manulife Financial 5.5 per cent bond maturing June 26, 2018, with a yield of 2.32 per cent.

Five year
Bell Canada 3.35 per cent bond maturing June 18, 2019, with a yield of 2.59 per cent.

Average yield for the five bonds, assuming equal investments in each, would be 2.09 per cent if all are held to maturity. Now, let's compare that to three laddered corporate bond ETFs:

iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO)
The weighted average yield to maturity minus fees is 1.60 per cent.

RBC 1-5 Year Laddered Corporate Bond ETF (RBO)
An estimated net yield to maturity of 1.74 per cent.

PowerShares 1-5 Year Laddered Investment Grade Corporate Bond Index ETF (PSB)
An estimated net yield to maturity of 1.66 per cent.

Of course, these laddered corporate bond ETFs offer far superior diversification – CBO has 46 holdings, RBO has 165 and PSB has 25. But the default risk with any of the five bonds listed above is slight. Credit ratings for the group range from A-high for Manulife to BBB for AltaGas.

Higher yield, but a little more risk and a fair bit more work. There are your tradeoffs for building your own corporate bond ladder.