It’s been a rough year for bonds and most of the exchange-traded funds that hold them. People are dumping their bond funds, and, in many cases, switching the money to equities. That’s certainly been the case in 2021 as North American stock indexes have – until recently – soared to record levels.
According to the Investment Funds Institute of Canada, $362-million was pulled out of ETF bond funds in July (the last month for which figures were available at the time of writing). However, bond mutual funds showed an increase of just over $2-billion in net sales.
Why the difference? In part, because many mutual fund investments are tied to pension plans where a designated percentage of new contributions are allocated to bond funds.
The ETF numbers are a more accurate reflection of how investors feel about bond funds at this time, because they can be bought and sold by simply picking up the phone or tapping a computer key. So, let’s look at some of the bond ETFs we’ve recommended in my Income Investor newsletter and see how they’re performing.
iShares Core Canadian Universe Bond Index ETF (XBB-T)
- Current price: $32.05
- Originally recommended: Dec. 15, 2004, at $29.49
- Annual payout: 81.6 cents (forward 12 months)
- Yield: 2.6 per cent
- Risk rating: Moderate
Comments: This fund tracks the broad Canadian bond market, including government and corporate issues. So, what you’re seeing is a reflection of what is actually happening across the entire bond spectrum in this country.
It’s not as bad as some people seem to think. The fund was down 2.6 per cent year-to-date, as of Sept. 16, according to the BlackRock website. The one-year loss to Aug. 31 was 1.8 per cent.
No one likes to lose money, of course, but those numbers aren’t as bad as the general perception might suggest. I view this ETF as a long-term core fixed-income position.
iShares Core Canadian Short Term Bond Index ETF (XSB-T)
- Current price: $27.79
- Originally recommended: Sept. 24, 2003, at $28.62
- Annual payout: 56.4 cents (forward 12 months)
- Yield: 2 per cent
- Risk rating: Low
Comments: Short-term bond funds are less exposed to interest rate movements, either up or down. That means we should expect a better performance from this fund than from XBB in a time of rising rates. That’s exactly what we’re seeing. The fund is down a mere fraction (0.2 per cent) year-to-date and actually shows a one-year gain of 0.5 per cent to Aug. 31.
Not exciting numbers, but this fund isn’t meant to be exciting. It’s designed to provide stability for portfolios.
iShares Core Canadian Corporate Bond Index ETF (XCB-T)
- Current price: $21.98
- Originally recommended: Jan. 21, 2009, at $18.77
- Annual payout: 67.2 cents (forward 12 months)
- Yield: 3.1 per cent
- Risk rating: Moderate
Comments: This ETF invests in a portfolio of investment-grade Canadian corporate bonds with a maturity of at least one year. You might expect corporate bonds to be more vulnerable in times such as these, but that’s not proven to be the case. This fund is down 1.4 per cent year-to-date and is fractionally ahead over the 12 months to Aug. 31.
The forward yield, which is based on the current monthly distributions (so is not guaranteed), is a reasonable 3.1 per cent.
iShares Convertible Bond Index ETF (CVD-T)
- Current price: $18.60
- Originally recommended: March 23, 2017, at $19.14
- Annual payout: 85.2 cents (forward 12 months)
- Yield: 4.6 per cent
- Risk rating: Moderate
Comments: There seems to be a general impression that all bond funds are losing money this year. Not true. This one, which holds a basket of convertible bonds, is ahead almost 6 per cent so far in 2021 and shows a one-year rate of return of 9.6 per cent to Aug. 31. Not as good as the TSX, perhaps, but very respectable.
Convertible bonds offer a play on both the stock and bond markets. They’re convertible into common shares of the issuer at a set price. If the stock price rises to above the exchange rate, it drives the price of the bond up.
The current top holding is Morguard Real Estate Investment Trust convertibles, at just over 10 per cent of the portfolio. Morguard has not been a stellar performer recently but the fund’s No. 2 position, Northwest Healthcare Properties REIT (10 per cent of the portfolio), has been quite strong. Other top holdings include convertible bonds from Chemtrade Logistics Income Fund, WildBrain Ltd., and Alaris Equity Partners Income Trust.
Granted, CVD is an exception, and most bond ETFs are in the red year-to-date. But if you check their charts, the majority have moved off their 2021 lows. With the stock market looking pricy, and Monday’s sell-off a reminder that a correction is long overdue, I wouldn’t be too quick to dump these ETFs from your portfolio.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape