It’s rare that we get a chance to see an investment product stress-tested like bond ETFs were in the past year or so.
Between wild swings in the interest rate outlook and a stock market correction, exchange-trade funds that hold bonds have been tested in good and bad conditions. Use the second installment of the 2019 Globe and Mail ETF Buyers’ Guide to see how well these key portfolio building blocks held up. Look not only at how individual funds did, but also at the differences in how the various categories of bond ETFs performed.
There are a few different bond ETF categories – the broad market fund combining corporate and government bonds of short, medium and long maturities, broad market short-term funds and funds holding just corporate or government bonds. You can get all these flavours in a passive index-tracking fund, or a fund run by an active manager.
The bond ETFs covered here do not mature and pay you your money back like individual bonds do, so expect the share price to rise and fall continually over the years. Rising rates will push bond ETF prices lower – that was the story of 2017 for bond ETFs. The helpful impact of falling rates was seen in late 2018 and into 2019.
The reason to consider bond ETFs is that they are a cost-efficient way to reduce the stress of the stock market’s sharp ups and downs on your portfolio and generate a modest amount of interest income. Bond ETF fees have been falling in recent years, and ETF companies buy bonds for their portfolios at more competitive prices than individual investors get when buying bonds themselves.
The common characteristics of the funds covered here are that they have been around for at least five years and are suitable as a core bond holding. Many of these ETFs are all you need to cover off the bond side of a portfolio.
Assets: Shown to give you a sense of how interested investors are in a fund.
Management expense ratio (MER): A measure of the main cost of owning an ETF on an ongoing basis; as with mutual funds, published returns are shown on an after-fee basis.
After-fee yield to maturity: This is the best estimate of the yield to expect from a bond ETF looking ahead.
Top sector weightings: Federal and provincial government bonds offer the least default risk and the lowest yields; corporate bonds offer somewhat more default risk, but higher yields. Note the tendency for corporate bond ETFs to have a heavy weighting in the financial sector.
Average duration: Duration, measured in years, is a standard risk indicator for bonds; if interest rates rise by one percentage point, the price of an ETF with a duration of five would fall 5 per cent (and vice versa if rates fell). The higher the duration, the more risk there is if rates rise.
Returns: ETF companies typically show total returns, or share-price change plus interest payments, or distributions.
Note: Returns to Jan. 31, 2019. Market data as of Feb. 11.