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Alex Slobodkin

Question for all the bond ETF investors out there (and there are many of you): What yield are you getting from your funds?

It's a basic question, but one that many investors flub for reasons that are partly their own fault and partly the fault of the exchange-traded fund industry. Let's use the $630-million BMO Aggregate Bond Index ETF (ZAG) as an example.

If you get a quote on for ZAG, you'll find the yield is 3.3 per cent. Only the most naïve investors will accept this at face value, given that this ETF is a proxy for a bond market where a five-year Government of Canada bond yields a puny 1.7 per cent. In fact, the 3.3-per-cent number is a distribution yield based on the trailing 12-month interest payments for the ETF, and its latest share price. Counting on getting this yield is like finding an individual bond to buy and thinking the coupon is your actual yield. Most bonds today have yields that below their coupons, and bond ETFs are no exception.

BMO's bond ETF homepage shows a more realistic yield of 2.44 per cent for ZAG, which is based on yield to maturity (YTM). This gives you an idea of your yield if all the bonds in the ETF are held to maturity. That probably won't happen, but YTM remains the industry standard way of showing a real-world yield. Problem is, the YTM as displayed by ETF companies isn't the last word.

For that, you need to subtract a fund's management expense ratio from the YTM. ZAG's MER is 0.23 per cent, which means the net YTM is 2.21 per cent. This is the figure that ETF companies should be displaying prominently on their websites, but aren't.

BMO is typical in showing the current yield, aka the distribution yield, and the YTM. But there's no guidance on which is the best measure, and there's no net, after-fee number to guide investors on what they can expect in the real world.

Investors have a duty to research what they buy and understand how it works. Investing companies have a duty to give investors the tools they need to do this. ETF companies are about three-quarters of the way there with their bond products, but they have some work to do.