Every bond ETF comes with a risk meter that shows you how much downside there is if interest rates rise.
The technical name for this measure is duration, which is expressed in years. If a bond or bond fund has a duration of five years, then it would fall 5 per cent in price if rates rise a percentage point, and rise by the same if rates fell. The bond fund installment of the 2018 ETF Buyer's Guide includes average portfolio duration for each of the listed funds. If you're interested in a bond fund that isn't included in the guide, go to the profile page on the issuing ETF firm's website.
One of the great things about ETFs is how easy it is to find important facts about what they hold. This is particularly true with bond ETFs, which have more moving parts than ETFs holding stocks. Virtually all bond ETF profiles include a duration figure for the entire portfolio of bonds. You'll find that short-term bond ETFs – holding bonds maturing in five years or less – have duration between 2.5 and 3 years. Broadly diversified bond ETFs tend to be in the range of seven years, and long-term bond ETF can be around 15 years.
As discussed in this recent column, duration isn't the definitive word on risk. In the 12 months to Jan. 31, rising interest rates had the biggest negative impact on short-term bond ETFs, not longer-term funds. But this is most likely a short-term aberration. For the most part, the shorter duration of a short-term bond ETF means less vulnerability to rising rates than bond fund with longer durations.
Here's a handy rule for managing bond fund risk from Mark Noble, a senior vice-president of Horizons ETFs: If a bond ETF's duration is greater than its current yield, you'll see losses on a total return basis if interest rates rise more than 1 percentage point over 12 months. Total return means changes in the ETF's market price plus interest paid by the bonds in the ETF's portfolio, while current yield is built on recent level of interest payments and the recent unit price. If you get a stock quote for a bond ETF, you'll typically find the current yield.
"When in doubt, try to match your duration with yield as much as possible," Mr. Noble said in an e-mail. "If your ETF yields 3 per cent, try to keep the duration in the three to five year range to mitigate interest rate losses."