One of the most popular investing products of the past few years is the laddered bond ETF, a mega-convenient way to add conservative fixed income exposure to a portfolio.
But not the best way. A ladder of guaranteed investment certificates is better, as long as you don't foresee the need to sell your holdings before maturity. Laddered bond ETFs can be bought and sold any time during the trading days, so they win decisively over GICs on liquidity.
On yield, bond ETFs place a distant second behind a GIC ladder I created using the online inventory of one particular online brokerage firm. Here's what I found:
-A one-year GIC at 1.85 per cent from Home Trust Co., a member of the Canada Deposit Insurance Corp.
-A two-year GIC at 2 per cent from Equitable Bank, also a CDIC member.
-A three-year GIC at 2.1 per cent from Bank of Nova Scotia, a CDIC member.
-A four-year GIC at 2.33 per cent from ICICI Bank of Canada, another CDIC member.
-A five-year GIC at 2.6 per cent from Canadian Tire Bank, also a CDIC member.
If you invest equal amounts in these GICs, thereby creating a five-year ladder, your average yield would be 2.12 per cent.
Now, let's consider the bond ETF option. Here, you have the choice of having one – through five year corporate or government bonds wrapped up in a single product. Instead of buying five separate GICs, you buy one ETF. Two of the most popular laddered bond ETFs are:
-The iShares 1-5 Year Laddered Government Bond Index Fund (CLF), which has a weighted average yield to maturity of 1.39 per cent. Subtract the management expense ratio of 0.17 per cent and you've got a net yield of 1.22 per cent.
-The iShares 1-5 Year Laddered Corporate Bond Index (CBO), which has a weighted average yield to maturity of 1.88 per cent and an after-fee-yield of 1.6 per cent.
The GIC ladder is more work – you must take the GIC that matures in your ladder each year and invest the money in a new five-year certificate. The laddered bond ETF does that for you. It also offers the possibility of capital gains if interest rates fall, or capital losses if rates rise. Given the flat to rising outlook for rates, losses seem more likely than gains.
Because they've proven popular, laddered bond ETFs are now offered by a few different firms and have attracted billions in assets. Now you know the better alternative.