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The performance of bond ETFs in 2019 is a definitive answer to everyone who thinks an investment in bonds is dead money when interest rates are low.

The 13 exchange-traded funds included in the bond installment of The Globe and Mail 2020 ETF Buyer’s Guide produced an average return of 6.7 per cent in the 12 months to Jan. 31. Honestly, that’s the kind of return you should be shooting for, on an average annual long-term basis, from stocks.

Bonds are primarily portfolio shock absorbers – they’re supposed to take the edge off bad times for stocks. But there are periods when they can deliver strong total returns made up of changes in bond prices and interest payments. Stock market corrections can propel bond prices higher, and so can the sort of interest rate declines we saw last year.

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Bonds will get pasted when interest rates rise. You can either take the long view and ride the ups and downs, or fine-tune your bond holdings to be more conservative. However you want to play it, the bond segment of the ETF Buyer’s Guide can help.

There are a few different bond ETF categories covered in the guide – broad market funds combining corporate and government bonds of short, medium and long maturities, short-term bond funds and funds holding strictly corporate bonds. Passive index-tracking funds and actively managed funds are included.

Unlike individual bonds, the bond ETFs covered here do not mature and pay you your money back, so expect the share price to rise and fall continually over the years. On the plus side, bond ETFs offer instant diversification and yields that are very competitive with individual bonds.

Funds shown here been around for at least five years and are suitable as a core bond holding. Many of these ETFs alone are all you need to cover off the bond side of a portfolio.

Click here to download an Excel version of the guide.

* Supranational bonds are defined by Standard & Poor’s as “those issued by entities formed by two or more central governments to promote economic development for the member countries.”



Here are definitions of some of the terms used in this guide:

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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 a continuing 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.

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Notes: Market data as of Feb. 4. Returns to Jan. 31. Sources: Globeinvestor.com, ETF company websites

See Rob Carrick’s guide to Canadian equity fund ETFs

Stay informed about your money. We have a newsletter from personal finance columnist Rob Carrick. Sign up today.

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