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Canadian investors have been flocking to fixed-income exchange-traded funds – a major driver of record growth in ETF assets in Canada in 2019 and so far this year – seeking safety amid fears of global economic instability.

Bonds are traditionally used to diversify portfolios, and ETFs are a popular vehicle given their asset mix, low fees and transparency.

The Globe and Mail asked three experts for their recommendations on the best fixed-income ETF strategies and to pick some interesting Canadian bond ETFs in today’s market:

John Hood, president and portfolio manager, J.C. Hood Investment Counsel

Bonds act as a “seatbelt for the overall portfolio,” although many investors look exclusively at their yield, “and that’s exactly the wrong thing to do,” John Hood says. “Never trust yield,” he says. “It’s an incomplete story.”

Instead, Mr. Hood recommends that investors consider yield-to-maturity, and believes it’s often best to opt for short-duration bonds of less than three years.

“If you’ve got a longer-term bond, it’s going to pay you more, but if interest rates go up, it’s going to get killed,” Mr. Hood says.

Another important factor is credit-worthiness. Mr. Hood looks for ETFs with bonds rated BBB or higher and avoids those outside of North America, which can be hit by currency fluctuations and political instability.

The pick: BMO Aggregate Bond Index ETF (ZAG-T)

This fund has a combination of short-, medium- and long-term holdings, so that “if the rates go up, the long-term bonds will be weakened, but the short-term bonds will do better,” he says. ZAG includes federal, provincial and corporate bonds. Mr. Hood appreciates its rock-bottom cost, with a management expense ratio (MER) of just 0.09 per cent, “and the credit quality is there.”

The pick: BMO Ultra Short Term Bond ETF (ZST-T)

As its name suggests, ZST has extremely limited durations, with exposure to a diversified mix of fixed-income asset classes that have a term-to-maturity of less than one year or reset dates within one year. ZST currently holds investment-grade corporate bonds, so there’s low default risk, Mr. Hood says, and the MER is a modest 0.17 per cent.

Yves Rebetez, chief investment officer, Pascal Financial

Yves Rebetez, former managing director of ETF Insight, a website dedicated to the Canadian ETF space, doesn’t see a lot of risk-reward coming from the fixed-income category, “absent positioning for negative interest rates coming to North America, which I neither expect nor would cheer.”

That leaves him looking at ETFs that are floating-rate, have short durations, have “meaningful” assets under management (several hundred million dollars in assets) or are actively managed (to mitigate credit risk and interest-rate risk.) He doesn’t hold any at the moment.

The pick: Horizons Active Floating Rate Bond ETF (HFR-T)

HFR uses derivatives to generate more income as interest rates rise, which removes bonds’ traditional risk of experiencing losses as yields increase. It has an MER of 0.46 per cent and invests primarily in a portfolio of Canadian debt securities, hedging the portfolio’s interest-rate risk to generally maintain a portfolio duration of less than two years.

The pick: iShares 1-5 Year Laddered Government Bond ETF (CLF-T)

This ETF has a laddered bond structure that “allows this fund to effectively reload duration with the passage of time,” Mr. Rebetez says. It has an MER of 0.17 per cent. Laddered government bonds have significantly lower interest-rate risk than the traditional bond benchmark, he says, leaving investors significantly less exposed to rising rates than the broader bond index.

David Kletz, vice-president and portfolio manager, Forstrong Global Asset Management

Bond ETFs have many advantages for the average retail investor, David Kletz points out, such as liquidity, a diversity of exposure and a lower cost than buying and selling individual bonds. Those who rotated to fixed-income ETFs last year appeared to be pivoting back to equities at the start of 2020, he says, given the more encouraging geo-political backdrop. Still, Forstrong remains invested in fixed-income ETFs, including his two picks, which are tilted toward corporate exposure and short-duration bonds.

The pick: Vanguard Canadian Short-Term Corporate Bond ETF (VSC-T)

An anticipated stabilization of the global manufacturing sector should mean good things for corporate bonds, Mr. Kletz says. But he says it’s best to stay with short-duration funds such as VSC, in case global growth spurs interest-rate hikes that hit yields. The MER is 0.11 per cent.

The pick: CI First Asset High Interest Savings ETF (CSAV-T)

“It’s not traditional fixed-income by any means,” Mr. Kletz says, but the growth of capital in high-interest savings ETFs has been “astonishing.” This fund, with an MER of 0.15 per cent, has no interest-rate risk and a relatively attractive yield. It’s currently invested in high-interest deposit accounts in five major Canadian banks. CSAV launched in June, 2019, and now has about $1.6-billion in assets. “It might have been one of the most successful launches in Canadian history,” Mr. Kletz says.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 13/06/24 10:17am EDT.

SymbolName% changeLast
BMO Aggregate Bond Index ETF
BMO Ultra Short Term Bond ETF
GX Active Ultra-Short Term Invt Grade Bond ETF
Ishares 1-5 Yr Ladder Govt Bond ETF
Vanguard CDN Short Term Corp Bd ETF
CI High Interest Savings ETF

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