Of course, the bond market globally is bigger than the stock market, and seasoned bond investors have all manner of strategies to play it. Long-duration bonds usually generate higher than average income but can be volatile. Conversely, short bonds can save investors from taking a loss, at the cost of lower yields. Government bonds have the lowest risk and lowest returns, high-yield bonds the highest.
Out picks for the top fixed-income ETFs
The strategy our panel of judges this year more or less agreed on is opting for aggregate bond funds that represent a cross-section of the Canadian bond market, including government and corporate issues of all durations. Their favourite, collectively, was the Vanguard Canadian Aggregate Bond Index ETF (VAB), which tracks the Bloomberg Global Aggregate Canadian Float Adjusted Bond Index for a modest MER of 0.09%. Remember, fees are especially important when yields and overall returns are expected to be slim.
Our judges also called attention to the TD Canadian Aggregate Bond Index ETF (TDB), which has an even lower MER, as well as BMO’s Canadian Aggregate Bond Index ETF (ZAG). “ZAG is the largest and one of the cheapest broad aggregate Canadian bond ETFs with an average duration of about seven years. For a core fixed-income allocation it is hard to beat on cost and liquidity,” said panellist Ioulia Tretiakova.
Again, when you expect your returns to be modest, it’s important not to pay even a few pennies too much for a fund because of its bid-ask spread. Hence, liquidity matters.
Watch: ETF Academy Lesson 10
Michael is a financial writer and editor in Duncan, B.C. He’s a former managing editor of Canadian Business and editorial director of Canada Wide Media. He also writes for The Globe and Mail and BCBusiness.
I tend to prefer short term bond instruments (municipal, provincial t-bills etc to corporate bonds. True they move a bit slower than equities but I notice a lot of the top corporate bond ETFS are still within the .80 -1.0 + beta range and the goal of a bond ETFS should be to reduce volatility. I think a key issue is the beta, monthly dividend and price. If the 3 year beta is lower than .5, the dividend over 4% monthly the price lower than $30 and the etf stays away from junk bonds & high yield instruments it’s your best bet. Only a good ETFS screener can give you that list. To my mind, Pimco and CIBC are offering the best fixed income ETFs. BMOs are safe and move well when stocks do but many are priced too high and more volatile than others.