Skip to main content
// //

Don’t be lulled into a false sense of security by the duration numbers on high-yield bond ETFs.

Alex Slobodkin/Getty Images/iStockphoto

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?

Our screen

Story continues below advertisement

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.

Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies