My favourite Canadian bond ETFs
I said last week: while dividend-investing takes some time and effort, investing in some ETF products in my opinion, does not.
For today’s post, I thought I would share some of my favourite Canadian bond ETFs.
My opinion is 98% of investors should have bonds in their portfolio. The well-known Canadian Couch Potato thinks it’s a good idea and my friend who is a Millionaire Teacher thinks it’s a great idea. Those guys are worth listening to. The other 2%? Well, these investors might be diversified enough via tens of holdings of dividend-paying stocks but even then, I’ve talked to a few savvy DIY investors and they’ve got a bunch of GICs to mitigate equity risk instead. While passive dividend-income is nice, so is fixed-income.
For me, maybe it’s because the market is up and down all over the place of late. Maybe it’s because bonds are one of the first things I learned about when I opened my investing account close to 13 years ago. Even when I have 20, 30 or 40 dividend-paying stocks churning out dividends month after month, I’ll probably always have bonds as part of my retirement portfolio. For me, it just makes sense: bonds help me digest any spoiled fare Mr. Market serves up. Over time, while it’s my plan to be diversified with a robust basket of dividend-paying stocks, I’m also focused on keeping part of my retirement portfolio, my RRSP in particular very lazy. Part of my lazy RRSP portfolio strategy is to hold a few exchange traded-funds (ETFs) to keep my investment costs super low, achieve near-market returns and offset a whack of active management risk. Canadian bond ETFs are definitely part of that equation. I hope this post today helps you consider bonds as part of your strategy.
The list below identifies my favourite Canadian bond ETFs, why I like them, and if and when I plan to hold them.
For the last couple of years, I’ve held the iShares DEX Universe Bond Index Fund in my RRSP.
I think this ETF is an excellent product to own. Why? Here are my reasons at the time of this post:
- It tracks the widely followed DEX Universe Bond Index.
- It has excellent diversity; almost 500 holdings.
- Almost 50% of XBB holdings are short-term (1-5 years); less subject to interest rate fluctuations in the short-term.
- Average maturity of holdings is just over 6 years.
- Management Expense Ratio (MER) is low, just over 0.
- Yield to maturity is about 2.3%.
- 10-year return is over 6%.
Given the DEX Bond Index consists of a broadly diversified selection of high-grade Government of Canada, provincial, corporate and municipal bonds, to me this is a great all-in-one bond product for your portfolio.
If you like XBB, except you like to keep your bonds shorter, you’ll love XSB. This fund seeks to provide (monthly) income by replicating, to the extent possible, the performance of the DEX Short Term Bond Index, less expenses of course. The MER for this ETF is 0.
2628%. The average maturity of holdings is about 2.7 years, much better for spikes in interest rates (if and when they occur). It holds about 55% federal bonds; read in, safety. 93% of its holding are within 1-5 years. Again, safety. It has 271 holdings, a broadly diversified basket of investment grade federal, provincial, municipal and corporate bonds. The downside? The yield to maturity is about 1.4%. You can make more than that today with a high-interest savings account. The historical performance is a better story: the 10-year return is just over 5%. Much better.
Disclaimer: I don’t own XSB at this time.
If you like bond ladders, move this one to the top of your selection list. The Claymore 1-5 Yr. Laddered Government Bond ETF seeks to provide a return before fees and expenses of the DEX 1-5 yr Government Bond Index.
What is a bond ladder?
- Money is split into equal portions and invested into fixed-income holdings with variable terms/maturities.
- As each term expires, the released cash is re-invested into another, longer term, another “rung up the ladder” if you will.
Bond ladders are excellent strategies to allow investors, like me, who want to protect capital and stay invested in the highest fixed-income products of the day, based on the ETF objectives. Unfortunately, in this uber-low interest rate environment, there aren’t juicy coupons/interest from the bonds being provided. Other than that, there’s lots to love with this product:
- Provides monthly income.
- Yield to maturity is about 1.4%.
- Average maturity of holdings is just over 3 years.
- 3-year return of the ETF is 4.77%. Long-term, ETF performance should be close to the index it follows, about 5%.
Maybe the best part? CLF has a dirt-cheap MER of about 0.17%. That’s low! Since fees are forever (unless you don’t pay any fees of course) I prefer keeping more of my money: CLF is a winner. Why else do I like CLF? CLF holdings, government bonds, are pretty much as risk-free as it gets. The government can raise taxes or create additional currency in order to redeem the bond at maturity and cover its IOU. Sure, you might be thinking what about the U.S. debt crisis? OK, some governments have defaulted on its debt (Russia, 1998) but this is a very rare event my friends. The U.S. is not going to default on its debt and neither are we in Canada; although both countries have tons of work to do! Government debt is about as safe as it gets. I like that security blanket.
Some folks ZIG, other folks ZAG, and I can see why. The BMO Aggregate Bond Index ETF has been designed to replicate, to the extent possible, the performance of the DEX Universe XM Bond Index. ZAG invests in a variety of debt securities primarily with a term to maturity greater than one year, owning investment-grade debt, consisting of Government of Canada (including Crown Corporations), Provincial and Corporate bonds. Low MER, 0.28%, lower than one of my favourites XBB. Weighted average yield to maturity is good, given our climate today, almost 2.5%. The only reason I don’t own it? The weighted average bond maturity is over 9 years, just a little too long for my liking.
Disclaimer: I like ZAG but I don’t plan on owning it.
Recognizing there are many more Canadian bond ETFs that I didn’t mention above, from other companies than those above, I hope my list of favourites was an excellent starter your own research into this space. Some ETFs I love and a few not as much but all of these should be considered for your retirement portfolio. Do you own research, make choices in line with your own investment objectives and personal finance goals. Personal finance is after all, personal.
Stay tuned for my last post on this theme, my favourite international ETFs within another week or so 🙂
What do you think of my favourite Canadian bond ETFs?
Did I leave any of your favourites out?
Do you own any Canadian bond ETFs yourself and if so, which ones and why?