The fees on bond ETFs are finally falling into line with the low interest rate world we're stuck in.
Exchange-traded funds holding bonds are less costly to own than bond mutual funds. But with bond yields as low as they've been in recent years, bond ETFs still seemed a bit pricey. Price competition in the ETF business is taking care of this, at least for core bond funds.
BlackRock Canada recently announced that the management fee for three of its bond ETFs has been reduced to 0.09 per cent. The three ETFs are:
- iShares Canadian Universe Bond Index ETF (XBB): The previous management fee was 0.3 per cent
-iShares Canadian Short Term Bond Index ETF (XSB): Previously at 0.25 per cent
- iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH): Previously at 0.12 per cent
The management fee is by far the biggest component of the management expense ratio (MER), which is the definitive measure of the cost of owning an ETF or mutual fund. Add roughly 0.03 of a percentage point to the management fees of the three iShares ETFs to get an idea of what the MER will be.
The fee cuts for iShares bond ETFs brings them into line with what Vanguard, low-cost leader in the ETF business, is charging for bond funds. For example, the Vanguard Canadian Aggregate Bond Index ETF (VAB) has an MER of 0.13 per cent. The BMO Aggregate Bond Index ETF (ZAG) has an MER of 0.14 per cent.
Low MERs are vital for any sort of a bond fund because investment-grade corporate and government bonds generate such low yields these days. The five-year Government of Canada yield has been just below 1 per cent in recent days, and the 12-month high is just 1.17 per cent. To estimate the yield going forward with a bond ETF, subtract its MER from its weighted average yield to maturity.
VAB's yield to maturity is 1.9 per cent. Subtract the 0.13-per-cent MER and you're left with 1.77 per cent. The less you pay for bond ETFs in this low-rate world, the more yield you get to keep for yourself.