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Has there ever been a more uncomfortable time to hold bonds?

It’s not just the fact that the benchmark bond index has lost ground so far this year. Interest rates are widely expected to start to edge higher at some point in the next 12 months, which is negative for bonds. Meantime, the stock market surge of the past 15 months has heightened concerns about an eventual correction. Bonds will help stabilize a portfolio when this pullback happens.

How do you navigate this contradiction-filled outlook? One thought is to hold an exchange-traded fund holding short-term bonds, which mature in five years or less. Short-term bond ETFs are a compromise product. You get less income than you do from broad-based bond ETFs and less upside if stocks plunge. But you’re also less vulnerable to a rise in inflation that sends interest rates higher.

Short-term bond ETFs come in many different versions – some combine government and corporate bonds, while others hold one or the other. Another version replicates the time-tested laddering strategy, where your holdings are evenly divided between bonds or term deposits maturing in one through five years. When a bond matures, it gets reinvested into a new five-year term.

To compare the options, I created a Globe Investor Watchlist of short-term bond ETFs and evaluated returns for the year through early June. To set a baseline, the unit price of broad-based bond ETFs was down a little more than 5 per cent for that period.

Short-term bond ETFs from a variety of companies did much better – unit price declines for the year were typically in the low 1-per-cent range for funds that combined short-term government and corporate bonds. Three examples:

  • BMO Short-Term Bond Index ETF (ZSB-T): down 0.8 per cent for the year through early June.
  • iShares Core Canadian Short Term Bond Index ETF (XSB-T): down 1.2 per cent.
  • Vanguard Canadian Short-Term Bond Index ETF (VSB-T): down 1.3 per cent.

Consider funds such as these as a sweet spot for investors who want bond exposure that tamps down vulnerability to rising rates while also offering protection against falling stocks.

One big virtue of these diversified short-term bond ETFs is management expense ratios of around 0.1 per cent. Yields are low these days, which means a minimal fee is imperative. The mix of corporate and government bonds is also helpful – government bonds will do better if stocks fall hard, while corporates have more resilience in an inflationary world with rates rising.

The after-fee yield on diversified short-term bond ETFs is currently about 0.7 per cent. You can get about 1.6 per cent from broad-based bond ETFs, but with more downside risk.

At present, broad-based bond ETFs have a duration around eight years, while short-term bond ETFs average around 2.5 years. This means that if rates were to rise one percentage point, the broad-based bond ETF would fall by 8 per cent and the short-term fund by 2.5 per cent. If rates fall, you get the opposite effect.

-- Rob Carrick, personal finance columnist

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Stocks to ponder

TC Energy Corp. (TRP-T) The Keystone XL pipeline may be dead, but that hasn’t deterred investors in TC Energy. The stock is up nearly 26 per cent this year, trouncing the S&P/TSX Composite Index. And the return doesn’t include the hefty dividend that currently yields 5.4 per cent annually. Perhaps the takeaway here, says our David Berman, is that TC Energy can fare just fine without Keystone, and it’s best to tune out most regulatory hurdles and political noise.

The Rundown

Canadian auto parts makers give investors a chance to bet on North America’s economic reopening

Canadian auto parts makers offer an intriguing way for investors to bet on a reopening North American economy, says our Ian McGugan. While computer-chip shortages pose a challenge for automakers over the next few months, a recent surge in used-car prices speaks to strong demand for fresh rides. Combine that demand with solid household balance sheets and observers expect new-vehicle sales volumes to rip higher over the next couple of years.

Bitcoin ransom recoup is another sign the cryptocurrency isn’t all it’s cracked up to be

While bitcoin has struggled to find legitimate uses, it has shone as a way for hackers to extract money from their prey. For now, anyway. As Ian McGugan explains, the regulatory backlash against bitcoin in particular and crypto in general is gathering force, in large part because of how hackers are using the digital tokens to facilitate ransomware attacks on major targets.

Also see: Bank regulators plot toughest capital rule for bitcoin

The great British reopening: how investors are picking their bets

Britain’s blistering COVID-19 vaccine rollout is helping its economy open quicker than much of continental Europe, potentially providing a blueprint for investors trying to map how the recovery trade will play out across the rest of the region.

Hotter inflation fails to shake U.S. markets out of torpor, with Fed in driver’s seat

Investors are not freaking out over a spike in U.S. inflation in the past two months, showing confidence that the Federal Reserve is deftly handling a rebound in economic growth even as it leaves markets guessing about how it defines “transitory” when it talks about price increases. In fact, Wall Street’s benchmark index this week inched to a record high after days of sideways trading, and U.S. Treasury yields eased after Thursday’s Labor Department report showed the consumer price index in May had its biggest year-on-year jump in 13 years. Karen Pierog of Reuters reports.

Others (for subscribers)

The highest-yielding stocks on the TSX, plus risk data

Number Cruncher: These Canadian dividend payers can provide value and income strategy for the summer doldrums

Friday’s Insider Report: Director cashes out over $20-million from this cannabis stock

Thursday’s Insider Report: Director invests almost $450,000 in this skyrocketing stock

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

China’s ride-hailing giant Didi sets stage for mega New York float

What’s up in the days ahead

The battle over bitcoin is accelerating. Regulators and some countries (notably China) are increasingly taking steps to crack down or rein in the cryptocurrency, frustrating proponents’ vision of an alternative currency free of normal monetary rules. Ian McGugan will size up the situation this weekend.

Fed-flation in focus: World market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff