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What are we looking for?

Outperforming bond ETFs.

The screen

Over the past three decades, there have been three distinct market corrections in Canada (excluding the pandemic) where the S&P/TSX Composite Index fell by more than 20 per cent from its peak value before recovering. These included the Asian currency crisis in 1998 (down 27 per cent), the tech bubble in 2002 (43 per cent), and the global financial crisis in 2008 (44 per cent). Common among these extreme events in the past is the behaviour of broad asset classes; equity funds fell more sharply but recovered more quickly, bond funds moved less but didn’t participate on the upside, and balanced portfolios lay somewhere in between.

Looking at these extreme periods in detail, one particular category of funds moved opposite to domestic equities during drawdowns over the past three bear markets and maintained value during the recoveries: global fixed income funds. This category of funds primarily holds investment-grade bonds not in Canadian dollars (although some funds do offer hedged versions, thereby eliminating exposure to currency risk and returns). For investors who believe the worst is yet to come, this category of funds can be a good diversifier to already hard-hit domestic stocks.

To find reasonable picks within the category, I used Morningstar Direct to look for the best performing Canadian-domiciled global fixed income ETFs by screening on the Morningstar Rating Overall. Recall that this rating (also known as the “star” rating) is a historical look back at risk-adjusted returns after fees for each fund relative to category peers (which include both mutual funds and exchange-traded funds). Funds must have a three-year track record to receive a star rating. My screen looked for four- or five-star funds within the category.

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

What we found

Shown in the table are the funds that met the above requirements ranked by year-to-date total returns, along with their associated fees, ratings, inception dates and trailing returns. Readers will quickly notice ZTL’s outsized performance on a year-to-date basis. As evident in the name (and holdings) the fund holds long term U.S. Treasuries, which have a high sensitivity to interest rates. It’s no surprise that over the first quarter the two surprise interest rate cuts by the U.S. Federal Reserve provided a large boost in the price of the assets, since bond prices and yields move inversely. This said, it’s important to know that the long term return of global fixed income funds and their use as a diversifier is what investors should be focused on. For reference, the 15-year annualized return of the global fixed income category is roughly 3 per cent.

This column does not constitute financial advice. It is always recommended to speak to a financial advisor or investment professional before investing.

Select Canadian-domiciled global fixed income funds 

Exchange-traded fundTickerMER (%)Morningstar Rating OverallInception DateYTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)
BMO Long-Term US Treasury Bond ETFZTL-NE0.225 Stars2/21/201729.236.213.2n/a
BMO Mid-Term US Treasury Bond ETFZTM-NE0.235 Stars2/21/201716.517.06.6n/a
BMO Short-Term US Treasury Bond ETFZTS-NE0.234 Stars2/21/201711.510.04.0n/a
Horizons US 7-10 Yr. Treas. Bond CAD H ETFHTH-T0.175 Stars9/19/20168.512.14.6n/a
Vanguard US Aggregate Bond ETF CAD-HVBU-T0.224 Stars6/30/20144.
iShares Conservative Strategic FI ETFXSE-T0.564 Stars9/1/20152.05.53.4n/a

Source: Morningstar Direct 

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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