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How not to give yourself a heart attack when investing in bond ETFs

Globe and Mail Update

Be careful how you gauge the returns of your bond ETFs as interest rates rise – you don't want to scare yourself.

Let's take the popular iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO) as an example. This $1.8-billion fund is a practical way to add well-diversified exposure to investment-grade corporate bonds to a portfolio. Top holdings include bonds issued by Toronto-Dominion Bank, Royal Bank of Canada, Hydro One and Manulife Financial. CBO is a defensive play in a rising rate world because it focuses on short-term bonds.

On the BlackRock Canada website (the company own the iShares franchise), CBO is shown as having generated a return of 0.9 per cent over the 12 months to June 30 and a 2.4 per cent annualized return for the year years to that same date. Not great numbers, but more or less typical in a world of low interest rates.

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You get a different and more alarming view if you look at a quote or chart of CBO on an investing website like The interactive charts on Globeinvestor show CBO closed at the end of June at $18.75. Five years earlier, chart shows us that this ETF traded right around $20. Could this most sensible of bond ETFs really be a five-year money loser?

The answer is no. Not if you measure total returns – interest payments plus share price changes – as opposed to just changes in the share price. ETF providers like iShares typically show total returns, which makes their products look their best. But total returns are also the smart way to judge returns of both stocks and bonds. Dividends and bond interest are an important component of the gains we make when investing. It doesn't make sense to focus only on changes in the prices of bonds or stocks.

Stock quotes are typically geared toward showing you only share price changes for stocks and ETFs. Remember that when looking up quotes for securities that you own. Where can total return data for stocks as well as ETFs? Try Globeinvestor's Watchlist feature. Under the "dividend view," you'll find one- and five-year total returns.

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