Best fixed-income ETFs for 2021

Overview Canadian U.S. International Fixed-Income All-in-One Desert-Island Picks

While fixed income typically provides investors a bit of sleep-at-night ballast along with modest flows of income for retirees, early in 2021 the bond market provided more than its usual share of anxiety as investors again fretted that a strong economic worldwide recovery would bring with it inflationary scares and a rise in interest rates. In fact, in the U.S., when  the benchmark 10-year Treasury rose from 0.91% to 1.6% in early 2021, tech stocks and the Nasdaq 100 entered correction territory.

While our panel as a whole continues to take a “stay with the program” approach to its fixed-income All-Star picks, we did cut back slightly on the number of bond ETFs this year.  Only six of the eight previous fixed-income All-Star picks returned: ZAG, VAB, VSB, ZDB, XSB and VGAB. One added last year, TLT, did not return, and long-time pick BXF also did not make the cut in 2021. (Refer to the accompanying charts for full ETF names.)   

Speaking personally, panellist Yves Rebetez views bonds as a “total waste of time when yields rise 35 basis points too far on the 10-year, and the market just about has a heart attack. Not to mention negative rates once inflation is factored in.” In the current environment, bond ETFs compound virtually zero return, he says, “and we reached return-free risk a while ago.” 

As we discuss in the All-in-One asset allocation ETF section below, both VAB (Vanguard’s aggregate Canadian bond fund) and VSB (short-term Canadian bonds) are long-time All-Stars but investors who worry that interest rates are set to rise by 2023 or so may prefer to have more VSB than VAB. 

Corporate bond ETFs might provide a bit more in credit spreads, but not much. In this environment, Rebetez would prefer “ladder ETFs” with shorter duration, last year’s pick of TLT or a Canadian-listed equivalent. The only role for bonds in this environment is to offset the next potential market tumble. As a result, he’s also skeptical about any of the popular one-decision asset allocation ETFs that are skewed too much to long-term bonds (such as VCIP, XINC or ZCON).

New panelist Mark Seed of the My Own Advisor blog similarly calls for more selectivity in bond ETFs. He figures that if you want bond ETFs, you should go domestic if you plan to retire in Canada and, “more importantly, bonds could be considered your safety parachute when equity markets fall. Otherwise, go with more equities in your portfolio for growth if you have a multi-year investing time horizon.” Apart from helping dampen stock market volatility, Seed says bonds can be used to rebalance your portfolio. “Keep your portfolio aligned to your investing risk tolerance, and help you adjust it back to its target asset allocation (i.e., keeping a balanced mix of stocks and bonds). Finally,” he notes, “bonds can help protect against deflation.”

MoneySense Investing Editor at Large Jonathan Chevreau is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]