Some of the most stubborn investors out there are the ones who believe they're getting yields of as much as 4 per cent on their mainstream bond ETFs.
Consider the popular five-year laddered corporate and government bond funds offered in BlackRock Canada's iShares family of exchange-traded funds (CBO and CLF). If you view the quotes for them on Globeinvestor.com, you'll see yield of 4.2 per cent for the corporate bond ETF and 3.6 per cent for the government bond ETF. For comparison's sake, a Government of Canada five-year bond yields about 1.4 per cent a 10-year Canada bond gets you just short of 2 per cent.
I am continually surprised by the number of investors who don't question these bond ETF yields further. They insist on believing they are getting double the yields available on government bonds. Think about it, people. If bond ETFs offered such outsized yields, wouldn't investors have piled into them and driven the yields down? As prices rise for bonds and bond ETFs, yields fall.
If you're in the group that takes the published yields for bond ETFs at face value, let me direct your attention to the yield to maturity numbers displayed on the fund profiles for CBO and CLF on the BlackRock website. CBO clocks in at 2 per cent, or 1.7 per cent after fees. CLF comes in at 1.4 per cent, or 1.2 per cent after fees.
The yields you see in bond ETF quotes is the distribution yield, which is based on the previous 12 months' worth of interest payments and the current share price for the bond ETF. If the price of a bond ETF stayed put, then distribution yield might mean something. In fact, the price of CBO and CLF units have been falling in recent years. Globeinvestor.com shows a three-year cumulative drop of 3.6 per cent for CBO and almost 5 per cent for CLF. A lot of the bonds held in these ETFs have been trading at prices that are above their value at redemption. As these bonds approach maturity, they decline in price.
If you want to know what yield you'll get from a bond ETF on a total return basis – that's interest paid out combined with changes in the unit price – then check yield to maturity. The distribution yield is a much happier number, but it's not the whole picture.