Worried about what rising interest rates will do to your bond holdings?
Let's look at some bond ETFs that combine a low level of vulnerability to a rate increase with cheap fees.
We start with the bond exchange-traded funds listed in National Bank Financial's ETF Handbook and then screen for three factors:
Broad-based exposure to government and investment-grade corporate bonds
A blend is optimum in that government bonds have the lowest default risk, but will fall a bit harder when rates rise.
Management-expense ratios below 0.2 per cent
Bond ETF fees have been falling, so there's a decent selection of very cheap funds.
Duration of less than three years
Duration is a measure of how a bond or bond fund reacts to changes in interest rates; a duration of three means a fund would fall three percentage points in price if rates rise and rise by the same amount if rates fall (that is, one percentage point for each year).
Here are the funds that made it through the screening process.
Vanguard Canadian Short Term Bond Index ETF (VSB): An impressively low MER of 0.11 per cent coupled with a duration of 2.8.
iShares Core Short Term High Quality Canadian Bond Index ETF (XSQ): A newish offering for investors willing to sacrifice a bit of yield to get higher quality bonds; the MER should come in around 0.13 per cent and the duration was 2.8.
Desjardins Canadian Short Term Bond Index ETF (DCS): Another newcomer, this one with an MER of 0.17 and a duration of 2.6.
VSB is the easy winner in this group on the basis of liquidity with a 20-day average trading volume of 170,000 shares. XSQ and DCS are well behind in that regard.
Low MERs are a particular asset with bond ETFs because interest rates are so low. To forecast the yield you'll get from a bond ETF, subtract the MER from the published yield to maturity. If you're willing to pay a little above 0.2 per cent in MER for bond funds, two others to consider are the hugely popular iShares Canadian Short Term Bond Index ETF (XSB), which has an MER of 0.28 per cent, and the RBC 1-5 Year Laddered Canadian Bond ETF (RLB), which an MER of 0.24 per cent.