A handful of bond ETFs seem to be holding their own or even flourishing despite the challenge of rising rates in 2017.
The big, broad-based bond ETFs have done what you'd expect when rates are rising – they have fallen in value over the past 12 months even after you factor in the yield on their interest payments to investors. Globeinestor.com data showed the iShares Core Canadian Universe Bond Index ETF (XBB) down 0.6 per cent on a total return basis for the year to Nov. 6, while the BMO Aggregate Bond Index ETF (ZAG) was down 0.5 per cent and the Vanguard Canadian Aggregate Bond Index ETF (VAB) was down 0.7 per cent.
Let's look through the dozen funds covered in the bond installment of the latest Globe and Mail ETF Buyer's Guide to find bond ETFs that are holding up well. The funds that have made money on a total return basis are:
- First Asset Investment Grade Bond ETF (FIG): This actively managed bond ETF holds corporate bonds issued by companies in Canada, the United States and Europe. The one-year gain was 2.8 per cent.
- Horizons Active Corporate Bond ETF (HAB): A consistently strong corporate bond ETF that produced a total return of 1.6 per cent over the past 12 months.
- iShares Canadian Corporate Bond Index ETF (XCB): Notice the trend? Corporate bond ETFs are showing more resilience than government bond funds or funds that mix government and corporate debt. This index-tracking corporate bond ETF was up 1.2 per cent for the past 12 months.
- BMO Short Corporate Bond Index ETF: (ZCS): A 0.6-per-cent increase for the past 12 months.
- iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO): Short-term corporate bonds parlayed here into a 12-month gain of 0.3 per cent.
- PowerShares 1-5 Year Laddered Inv. Grade Corp. Bond Index ETF (PSB): Short-term corporate bonds produce a total return of 0.1 per cent.
Diverse bond holdings still make sense in today's market. If the stock market tanks, government bonds would be the preferred haven. But if you believe the long-term trend for interest rates is higher, then short-term corporate bonds (a term of one to five years) seem to be the most attractive.