Top Canadian Bond ETFs for your portfolio

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.

Top Canadian Bond ETFs for your portfolio

iShares DEX Universe Bond Index – XBB

This is a great product, that I used to own. 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.

iShares Short Term Bond Index – XSB

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%.

Vanguard Canadian Short-Term Bond Index – VSB

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%).

iShares DEX Real Return Bond Index – XRB

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.

BMO Aggregate Bond Index – ZAG

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?

9 Responses to "Top Canadian Bond ETFs for your portfolio"

    1. Hey Adam,

      VAB is a good product but didn’t make my personal short-list of favourites for these reasons:

      -Avg. duration over 7 years, this means this product is more susceptible to interest rate spikes/changes, by just a bit, over XBB.
      -XBB follows THE benchmark for bonds in Canada, DEX vs. the other, “the Barclays Capital Global Aggregate Canadian Float Adjusted Bond Index (or any successor thereto).” To this end, if you’re looking for a single fund that covers the Canadian investment-grade bond market, look for one that tracks the DEX Universe.

      This said, VAB does run a bit cheaper than XBB, so by no means is VAB not a good consideration for any investors portfolio. I just choose XBB and have held it for a few years so there is likely some bias there. My investment returns with XBB have been just over 5% since I’ve owned it. I will gladly take that going forward; 10-year returns of XBB are also just over 5%. The jury is still out on the historical performance of VAB.

      Happy Investing!

  1. Right now I have trouble deciding between bond funds and GICs for the fixed income portion of our investments, so we have some of both. We get excellent MERs for our PH&N bond funds because we buy them through our work DC plan. It’s worth checking the MERs on work pension plans before making decisions as they are often substantially lower than “retail” MERs. (We balance across our DCs and our RRSPs rather than treating them as separate accounts.)

    When the markets last crashed we were very happy we had a safety net of fixed income investments. Some of my husband’s co-workers looked pretty grey-faced for a few months then: you could tell who was 100% in equities….

  2. You missed CLF, which has a dirt cheap MER of 0.17%. I’m curious why iShares continued to offer this ETF after buying out Claymore, considering that it accomplishes the same purpose as XSB, which has a higher MER of 0.28%.

  3. I like the point about providing portfolio and mental stability. Mental stability is probably much more important for most investors since it will help them stick with their investment plans when things go wrong.

    I think you’re probably playing bonds correctly by staying in the 1-5 year space. It will hurt a bit in the short-term when rates are rising with some principal losses, but not as bad as the longer dated funds and the ETF will reinvest at the future higher rates.


Post Comment