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The Great Canadian ETF Price War of 2014 has left bond funds nearly untouched.

The cost of owning an ETF tracking the S&P/TSX composite index has fallen from 0.27 per cent to 0.05 per cent this year, and U.S. and international fund fees have fallen significantly as well. But, with only a couple of exceptions, bond ETFs have for the most part been exempt from this price competition.

One of those exceptions is the iShares High Quality Canadian Bond Index ETF (CAB), which holds a portfolio that is 60 per cent weighted to government bonds and 40 per cent weighted to corporate bonds. All bonds in the portfolio have a credit rating of A or higher, which is where the "high quality" name for this ETF comes from. The fee for CAB has fallen to 0.12 per cent from 0.3 per cent, which makes it a low-cost leader for ETF investors. Other broad Canadian bond ETFs have fees in the 0.23 to 0.33 per cent range.

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Another bond fund to benefit from fee cuts is the BMO Short Corporate Bond Index ETF (ZCS), which falls to 0.12 per cent from 0.30 per cent. The previous floor for this type of ETF had been about 0.15 per cent.

CAB and ZCS represent two different approaches for holding bonds in a diversified portfolio. CAB works well for investors who want to cover off their bond needs with a single fund that should offer decent stability when stock markets tank and won't be hit too hard when interest rates rise. The duration for CAB is six years, which is to say that the fund would fall 6 per cent in price if interest rates rose by 1 per cent.

Whereas CAB is the kind of bond ETF you buy and hold indefinitely, ZCS is a defensive choice that will appeal to strategic investors who want to tailor their portfolios to withstand rising interest rates. First, the duration for ZCS is a comparatively short 2.7 years. Second, the fund avoids government bonds, which will be hit harder than corporates when rates move higher.

Yield-wise, CAB comes in at 2.1 per cent and ZCS at 1.8 per cent. Modest, yes. But a little better than a few months ago, thanks to those recent fee cuts.

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