Earlier this month, I provided you some of my favourite, low cost Canadian equity Exchange Traded Funds (ETFs) to consider for your portfolio. Now, I want to talk about what a bond can do for you, sharing some of my favourite low cost Canadian bond ETFs for your portfolio. First up, why bonds matter.
Despite Crappy Yields…
To borrow some words from Rick Ferri, passive indexing guru, bonds help protect a portfolio from its owner – they keep you from investing in too many equities. Yes, bond yields have been crappy for a few years now and recently bond prices have been falling but bonds do provide some portfolio and mental stability. To borrow a phrase from my friend Andrew Hallam, bonds are parachutes when equity markets fall; bonds will cushion the portfolio landing.
For a few years now, a small portion of my portfolio is in this product. Here are my reasons:
- It tracks the widely followed DEX Universe Bond Index.
- Over 50% of holdings are short-term (1-5 years); less subject to interest rate fluctuations.
- Management Expense Ratio (MER) is low (0.33%).
- 10-year return is over 5%.
Given this ETF holds high-grade federal, provincial, corporate and municipal bonds this is a great all-in-one bond product to hold for the long-term.
If you like XBB but you like to keep your bonds shorter to protect yourself against a sharp rise in interest rates, you’ll love XSB. Here are some more reasons to own it:
- Great diversity.
- More than 90% of holdings are short-term (1-5 years).
- MER is low (0.28%).
- 10-year return is around 4%.
If you like XSB but want a lower fee, this might be the bond for you. Here are some more reasons to own it:
- Solid mix of government and corporate bonds.
- Holdings are short-term (<5 years).
- MER is dirt low (0.19%).
This is another great product from iShares. Recall real return bonds pay you a return that is adjusted for inflation. Unlike regular bonds; real return bonds help maintain purchasing power by paying interest a) semi-annually based on an inflation-adjusted principal and b) at maturity in inflation-adjusted dollars. Just be mindful because of the long-term holdings within XRB, with bond yields rising now the price of XRB is sinking rather quickly.
ZAG invests in a variety of debt securities primarily with a term to maturity greater than one year, debt from our federal government, provincial government and corporate bonds. This fund doesn’t cost much (MER = 0.20%) and returns since inception are over 5%.
There are many more bond products to consider but I’d recommend you start your research with these if you’re going to own bond ETFs in your portfolio.
What do you make of these ETF options? Do you own bonds and if so, do you own any of these products?