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Just in time for the challenge of rising interest rates comes a rush of new bond ETFs designed for Canadian investors.

There are about 20 exchange-traded funds focusing on bonds listed on the Toronto Stock Exchange today, up from eight a year ago, and at least three more should arrive by the end of next month.

Meanwhile, interest rates are beginning what could be a long rise from the depths they hit during the recession.

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Let's take a close look at 10 popular bond ETFs listed on the Toronto Stock Exchange to see what they're made of and how they might bear up to rising rates.

But first, there are a few technical terms used here that require some explanation:



MER

Stands for management expense ratio, which measures almost all fees and costs associated with owning a fund as a percentage of assets. Some ETF companies display only their management fee, which does not reflect all costs.

Yield to maturity

The annualized, after-fee return you'll get from the bonds in an index tracked by an ETF if held until they mature. This is a forward-looking indicator of what to expect when you buy a bond ETF.

Current yield

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Your annualized return based on the interest paid out by a bond ETF over the past 12 months and its current share price. This measure is more of a backward look at bond ETF returns and not a reliable indicator of future returns.

Duration

The number of years it takes for a bond to repay the amount you invested in it, and also a key measure of bond sensitivity to rising rates. With a duration of five years, a one-percentage-point increase in interest rates would theoretically cause a bond ETF to fall five percentage points in value. So shorter durations are preferable if you're worried about your bond holdings.

Let's be clear here about bond ETF risk. Prices for most will fall as rates rise, but interest payments should continue as usual. When interest rates eventually stabilize and begin to fall again, bond ETFs will rise in price. Unlike actual bonds, they never mature and repay your upfront investment.

Investor Education:

  • All about ETFs
  • ETF picks for your RRSP portfolio
  • The bad boys of the ETF world
  • Are ETFs your cup of tea?
  • How do ETFs fit my investment strategy at this stage in life?






Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

BMO High Yield U.S. Corporate Bond Hedged to CAD Index ETF

ZHY

0.69

135

8

9

4.7

n/a

Comments: High-yield bonds behave more like stocks than plain old government bonds, which means they'll hold up comparatively well to rising interest rates while remaining highly vulnerable to market crashes like we saw in 2008. With this ETF, BMO has put its own currency-hedged wrapper on an NYSE-listed high-yield ETF called the SPDR Barclays Capital High-Yield Bond ETF (JNK). Currency hedging makes you immune to losses caused when our dollar rises against the U.S. buck, but it also prevents you from benefiting when our dollar drops. Why no high-yield bond ETF with Canadian bonds? Our market's too small.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

BMO Short Corporate Bond Index ETF

ZCS

0.33

71

2.8

4.6

2.7

-0.6

Comments: This ETF holds investment-grade corporate bonds, which are less risky than high-yield bonds. Risk is further contained here by sticking to short-term bonds. Note that financial stocks dominate the portfolio with a weighting of 67 per cent. Think about that if you have a lot of financial exposure elsewhere in your portfolio.

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Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

Claymore 1-5 Year Laddered Corporate Bond ETF

CBO

0.27

33

2.4

4.7

2.5

-1.7

Comments: A very good option for investors who want the extra yield that corporate bonds offer over government bonds without picking individual securities. The MER is nice and low and the bonds are all short term, which should help when interest rates rise. The laddering approach means the holdings are evenly divided among bonds maturing in one through five years. There's an opportunity to capture higher yields as bonds in the portfolio mature each year and are rolled over into new five-year bonds.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

Claymore 1-5 Year Laddered Government Bond ETF

CLF

0.17

25

2.2

4.2

2.5

-2.1

Comments: If you want the best possible yield from something safe, you'd do better with a ladder of one- through five-year guaranteed investment certificates from alternative banks (who offer deposit insurance, of course). But if you need something that you can trade in and out of with ease, then this ETF is good option. Note the very low MER, which compares to a laughably high average cost of 1.49 per cent for short-term bond mutual funds.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

Claymore Advantaged High-Yield Bond ETF

CHB

0.95

133

7.9

7.9

4.7

n/a

Comments: A high-yield bond ETF that is best held in non-registered accounts because it's designed to deliver interest payments that are taxed like capital gains and a return of capital rather than interest. Hedging is used to block out the effects of currency fluctuations. Note that the MER here is an estimation based on the expected cost of providing the tax benefit. Claymore's Advantaged Canadian Bond ETF (CAB) applies a similar tax benefit to a portfolio of government and investment-grade corporate bonds.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

iShares DEX All Corporate Bond Index Fund

XCB

0.4

360

3.6

4.7

5.2

-0.9

Comments: If you judge by recent trading volumes, XCB has been far and away the most popular of all TSX-listed bond ETFs. The cost of owning this ETF is a little higher than CBO, described earlier, but it offers more diversification because of the larger number of holdings in its underlying index. Note that both ETFs are about 40-per-cent weighted to the financial sector. You get a somewhat higher yield with XCB over CBO, but also a little more interest rate risk because of the longer duration of the portfolio.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

iShares DEX Real Return Bond Index Fund

XRB

0.35

13

1.1

2.6

15.7

0.8

Comments: Don't think of XRB as being immune to rate increases. Rather, it's a way to protect your portfolio from the inflation threat that's driving the expectation for higher rates. If inflation flares up, real-return bonds ratchet up their semi-annual interest payments and the amount they pay on maturity. On the negative side, yields on real-return bonds are low right now. Also, these are long-term bonds, which means they can be extremely volatile. Some money managers aren't crazy about XRB because fees are high in relation to the yield, but it's the only ETF option for real-return bonds in Canada (BMO has a competitor ready for launch next month). Note that trading of this ETF soared on Tuesday, after the Bank of Canada rate announcement.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

iShares DEX Short Term Bond Index Fund

XSB

0.25

183

2.3

4

2.6

-1.6

Comments: A good choice for investors who want the convenience of having a mix of short-term government and corporate bonds in a single package. This is one of the most heavily traded bond ETFs these days, which suggests that investors are getting defensive in their approach to owning bonds right now.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

iShares DEX Universe Bond Index Fund

XBB

0.3

309

3.2

4.5

5.8

-1.1

Comments: Here, we have almost the entire bond market in a single ETF. If you were trying to keep things simple in a buy-and-hold portfolio for the long term, XBB could easily cover off the allotment to bonds. Expect a fair degree of vulnerability to rising rates, however. Almost 25 per cent of the index tracked by XBB is accounted for by long-term bonds, and government bonds dominate the portfolio. Remember, government bonds will be hit harder than corporate bonds as rates move higher.

Ticker

MER

# of

Yield to

Current

Duration

YTD %

Fund

(TSX)

(%)

Holdings

Maturity (%)

Yield (%)

(years)

Price chg

iShares U.S. High Yield Bond Index Fund (CAD Hedged)

XHY

0.6

312

7.6

8.5

4.1

n/a

Comments: Like BMO's high-yield ETF, this is actually a Canadian wrapper on an NYSE-listed ETF, the iShares iBoxx $ High Yield Corporate Bond Fund (HYG). Currency hedging is another common feature. Where XHY differs in its slightly lower fee and greater diversification. Diversification is key because defaults are not unknown in the high-yield sector. The more bonds you're exposed to, the less one default can hurt the value of your ETF. Also note the somewhat shorter duration of this ETF versus its BMO counterpart. Note: All price and yield data is to April 20

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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