So much for the hysteria over bond ETFs getting massacred.
There was a point in mid-May when it looked as if bonds were going to be a big problem for investors in 2018.
And then it passed. Let this be a lesson to all the investors who lost faith in bond exchange-traded funds – you never know what’s ahead in today’s ever-unpredictable financial markets. Stop trying to guess and just hold your bond ETFs, individual bonds, guaranteed investment certificates or whatever you use for exposure to fixed income.
May 17 was the day the yield on the Government of Canada five-year bond hit its year-to-date high of 2.3 per cent. Global trade tensions and political uncertainty in Europe intervened at that point, and bond yields fell to the 2-per-cent range. That’s still well up from about 1.5 per cent a year ago, but it’s a far cry from the bond market rout that was feared in the spring (bond prices and yields move inversely).
A midyear check-in with some of the bond funds covered in The Globe and Mail’s ETF Buyers’ Guide shows some reasonable total returns, considering the fretting going on earlier in the year.
- BMO Aggregate Bond Index ETF (ZAG): Up 0.5 per cent (includes share price change plus interest) for the first six months of the year.
- iShares Core Canadian Short Term Bond Index ETF (XSB): Up 0.5 per cent.
- PowerShares 1-5 year Laddered Investment Grade Corporate Bond Index ETF (PSB): Up 0.4 per cent.
- Horizons Active Corporate Bond ETF (HAB): Up 0.7 per cent.
- Vanguard Canadian Long-Term Bond Index ETF (VLB): Up 0.7 per cent.
Yes, the year-to-date returns for these and other bond ETFs are modest. If you measured just the share price of these funds alone and didn’t include interest, they’d likely be down in value. But what were you missing out on by holding bond ETFs instead of equity funds? Not much, if you judge by the S&P/TSX Composite Total Return Index. For the first six months of the year, it made a bit less than 2 per cent. In light of how much riskier stocks are than bonds, there hasn’t been much of a premium in holding an equity fund over a bond fund in 2018 so far.
Soon enough, bond yields will start creeping higher again and predictions of pain ahead for investors holding bonds and bond ETFs will resume. You can ignore them. Hold the weighting of bonds that corresponds to your investing profile and leave it at that.