Fixed-income ETF All-Stars 2017

The best, low-cost fixed-income ETFs for your portfolio

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Four of our five fixed-income picks are back. The big change, almost unanimous by the panel members, was the removal of VAB, Vanguard Canadian Aggregate Bond Index ETF, and its replacement by ZAG, the BMO Aggregate Bond Index ETF. Our panelists from PWL Capital championed this swap, but the whole panel endorsed it. As Tyler Mordy, president and chief investment officer at Vancouver-based Forstrong Global Asset Management, explains that the lower MER (0.09% versus 0.12% for VAB) was a factor, although “both funds have great liquidity and tight spreads.”

coins_v3In a blog comparing the two ETFs, PWL Capital investment advisor Dan Bortolotti said “BMO’s aggressive cost-cutting has made ZAG the cheapest bond ETF in the country, with a management fee of just 0.09%” that has been in place since June 2016. One benefit of ZAG is that BMO offers a companion fund designed for taxable accounts: the returning All-star BMO Discount Bond Index ETF (ZDB). So by using ZAG in registered accounts and ZDB in taxable accounts, investors can get similar bond market exposure with maximum tax efficiency.

However, Bortolotti cautions that VAB and ZAG have slightly different risk exposures: ZAG has 30% in corporate bonds versus VAB’s 20% corporates, which is why ZAG has slightly fewer government bonds and hence a slightly higher yield to maturity. ZAG now has more than $2.1 billion in it, passing XBB, the granddaddy of Canadian bond ETFs.

The Vanguard Canadian Short-term Bond Index ETF (VSB) retains its All-star status. While interest rates may or may not have bottomed it doesn’t seem a great time to go long yet in the bond market; as always, investment costs matter and Vanguard remains a cost leader, with VSB the cheapest in its category, according to Mordy. It’s also the most liquid such fund in the secondary market.

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BXF, First Asset’s 1-5 Year Laddered Government Strip Bond ETF, is back for a second year, based largely on its tax efficiency in non-registered accounts. And the panel retained ZPR, the BMO Preferred Share Index ETF, although Rebetez made a strong case for an actively managed alternative, HPR, the Horizons Active Preferred Share ETF. In his view, while ZPR enjoyed stronger returns in recent months, for 2016 overall, “HPR bested it, which could happen again this year.”

Fixed Income ETF All-Stars 2017


ETF Ticker Management Fee # of Holdings Description
BMO Aggregate Bond Index ETF ZAG 0.09% 617 NEW! Lowest-cost bond ETF in Canada, replaces VAB
Vanguard Canadian Short-term Bond Index ETF VSB 0.10% 336 Government and corporate bonds with average term of three years
BMO Discount Bond Index ETF ZDB 0.09% 79 Tax-friendly alternative for non-registered accounts
First Asset 1-5 Year Laddered Government Strip Bond Index ETF (BXF) BXF 0.20% 25 Unique structure beats other short-term bond funds after tax
BMO Laddered Preferred Share Index ETF ZPR 0.45% 170 Five-year ladder of "rate reset" preferred shares

7 comments on “Fixed-income ETF All-Stars 2017

  1. Here for ZAG etf, it says MER is 0.23% and maximal annual management fee of 0.09%. Any clarifications would be peachy. -https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=%2FfundProfile%2FZAG%23overview#fundUrl=%2FfundProfile%2FZAG%23overview

    Reply

    • The 0.09% MER is correct. They can’t update the number until next year due to regulations.

      Reply

  2. I purchased both VSB and VAB bonds this past year, based on your recommendations. You have given these ETFs all-star status. But the prices have dropped recently. I am sure you rank them higher for a good reason. Can you help me understand please? Thank you.
    From a neophyte.

    Reply

    • Most bond prices by nature will drop when there are anticipated interest rate hikes. Use Google Finance to look up XSB which is similar to VSB. It’s price has fluctuated about 5%.

      Check out this link for more bond info http://canadiancouchpotato.com/category/bonds/

      Reply

  3. Isn’t it better to buy strip bonds at staggered amounts say 8 to 30 years at 2.9% to 3.6% simple interest yields but held to maturity range from 3.2% to 6.3% after compound interest is taken into account.
    The other 1-7 years can be made with GIC’s as they pay higher than provincial strip bonds. These GIC’s are around 1.8% to 2.5% simple interest but after compounding taken into account, 1.80% to 2.70%.

    Using TFSA’s and RRSP’s, even some RESP’s and RDSP’s all have tax free,. tax deferred compound interest advantages.

    Maxing out these plans can easily make a $750,000 to $1,000,000 strip bond, GIC staggered investment portfolio possible by or near retirement late 50’s, early 60’s for someone in their late 20’s early 30’s.

    Reply

  4. Peach is correct regarding the MER of ZAG. The management fee is the lowest at 0.09 however the actual MER is 0.23 according to the BMO website. That makes VAB the all-star with an MER of only 0.12.

    Reply

  5. I would probably go XPF instead of XPR. Rate Resets have a tainted past ie. Lowes (RONA), plus I’m sure there are more to come.

    Reply

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