What we're looking at
Risk levels in the most widely held bond exchange-traded funds listed on the Toronto Stock Exchange. How vulnerable are they to the rising interest rate trend we've seen in recent weeks?
Yves Rebetez of ETFInsight.ca has ranked bond ETFs here in descending order according to their asset size. You'll find a key risk measure for each called duration, which refers to the number of years it takes for a bond to repay its cost through twice-a-year interest payments and return of your investment dollars at maturity. However many years of duration a portfolio of bonds has on average, that's how many percentage points it will fall in price if rates increase by one percentage point (and rise if rates move lower).
You'll also find each fund's yield to maturity, which is the best forward-looking gauge of likely returns. YTM factors in not only interest paid by bonds, but also any capital gains or losses incurred when the bonds in the portfolio mature. Subtract a fund's management expense ratio from its YTM to get a net return.
What we found
A strong argument for being cautious in holding longer term bond ETFs in order to squeeze out a little extra yield than you can get with short-term bonds. The PowerShares long bond ETF on our list has a gross yield to maturity in the 3.5-per-cent range, which beats the 1.5- to 2-per-cent yields available from the many short-term bond funds also documented here. But look at the duration for the long bond ETF – it's in the 14 range, which suggests an awful lot of risk in exchange for the higher yield.
Don't be lulled into a false sense of security by the duration numbers on high-yield bond ETFs. High yield-bond funds – and emerging market bond funds, for that matter – are quite volatile and can fall more than their portfolio duration would suggest.