Jan 222018
 

Why Bonds Are So Important

A fundamental skill to successfully managing wealth is knowing how to diversify our assets. This means we must own both equity and fixed income, with the correct weighting and balance. There isn’t a single solution that fits everyone’s situation. But in general bonds help to protect our wealth against volatility when the stock market goes crazy, which it tends to do once in awhile.

Some kind of mix between safe assets such as bonds, and growth assets such as stocks, has proven to work very well in good economic times and bad. For example, a mix of 80% stocks and 20% bonds in a diversified portfolio would have returned about 8% on average over the past decade, which is not bad since that includes the stock market crash of the 2008 financial crisis.

Financial problems are often cited as the number one reason for divorce. But having some solid bond exposure can bring stability to a relationship. It’s clear that couples are more likely to stay together if they have strong bonds. 😎

The Best Bond Exchange Traded Funds

So what’s the best way to buy bonds? Personally I like to invest in bond ETFs, which hold individual bonds so I stay diversified within this asset class. The following funds are the best Canadian bond ETFs to buy for investors looking at a medium or long term time horizon. I’m no expert but these funds are the best in their categories that I can find. 🙂

  • BMO Aggregate Bond Index ETF (ZAG) 
    A broad index fund that holds both government and corporate bonds. Very diversified.
  • BMO Mid Corporate Bond ETF (ZCM)
    An index fund that holds only corporate bonds with maturities between 5 to 10 years.
  • iShares Canadian HYBrid Corporate Bond Index ETF (XHB)
    Holds lower quality corporate bonds (Mostly BBB rated) with a minimum maturity of 1 year.
  • Horizons Active Corporate Bond ETF (HAB)
    Actively managed corporate bond fund that seeks moderate capital growth and generate high income.
  • BMO Long Corporate Bond Index ETF (ZLC)
    An index fund that holds only corporate bonds with maturities over 10 years.

Here’s a table so you can easily compare all of them. 🙂

Comparing Bond ETFsZAGZCMXHBHABZLC
Price/unit on Jan 2018$15$16$20$11$18
Gov’t / Corporate %72 / 280 / 1000/ 1000 / 1000 / 100
Net Assets (billions)$3.4$1.4$0.5$0.6$0.4
MER (fees)0.14%0.34%0.51%0.60%0.34%
Weighted Avg duration7.5 years6.3 years5.9 years6.2 years13.3 years
Annual yield3.00%3.10%4.00%3.10%4.10%
Avg YTM2.50%3.30%4.00%3.20%3.90%
% Credit AAA410020
% Credit AA3213051
% Credit A173303861
% Credit BBB1054805138
% Credit BB or Lower002000
1 year total return1.5%1.2%3.3%2.6%5.9%
3 year avg return1.4%2.3%3.3%2.5%3.4%
5 year avg return2.7%3.6%3.9%3.2%5.1%
Additional informationMorningstar: 4

Federal 37%
Provincial 35%
Corporate 28%
.
.

Avg coupon: 3.2

$6,300 to DRIP

Morningstar: 5

Energy 31%
Financial 26%
Real estate 12%
Commun 12%
Other 19%

Avg coupon: 3.5

$6,300 to DRIP

Morningstar: 3

Energy 30%
Commun 23%
Industrial 17%
Financial 13%
Other 17%

Avg coupon: 4.7

$6,200 to DRIP

Morningstar: 5

Financial 43%
Energy 18%
Infrast 16%
Commun 10%
Other 13%

Avg coupon: 4.0

$4,200 to DRIP

Morningstar: 5

Infrast 43%
Energy 33%
Commun 10%
Financial 7%
Other 7%

Avg coupon: 5.4

$5,600 to DRIP

 

  • The Average duration refers to how sensitive the ETF is to changing interest rates. Longer duration bonds offer higher yields, but are also more sensitive to interest rate movements.
  • The weighted average yield to maturity (YTM) includes the interest payments and any capital gain or loss that the investor will realize by holding the bonds to maturity.
  • The Credit rating is how risky a bond is. The lower the rating, the more likely the company is to default on its debt obligations.

My personal top pick for 2018 would be the BMO Long Corporate Bond ETF (TSE:ZLC.) Last year ZLC returned about 8% to investors despite a 0.50% interest rate hike by the Central Bank. Out of the five ETFs here I believe ZLC stands the best chance at making the most return not only in 2018, but more importantly in the next 10 years. But this is only based on my personal situation. 🙂 Everyone should do research on their own before risking their hard earned money.

There are dozens of bond ETFs on the market to choose from. Which bond fund do you like?

 

 

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Random Useless Fact

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16 Comments on "The Best Canadian Bond ETFs of 2018"

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Carla Custance
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Carla Custance

I’m really curious why you chose ZLC which has longer duration bonds. Usually when interest rates rise the longer durations don’t do as well. Also curious why you didn’t include short term bond or laddered bonds in your analysis like CBO andCLF?

What percentage of your holdings are in bonds?

Do you hold any prefereds like CPD?

Tom from Dividends Diversify
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F35, I have a healthy allocation to different types of bonds through ETFs and funds. VCIT is a good one for US Corporate Bonds. Tom

Financial Orchid
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-2% total return for me so far on a bond index, but only a small holding and it does smooth out the ride. Balanced allocation is more priority for me

Tom
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Tom

liquid, check out FIG and FSB by First Asset – i think an actively managed solution is where you want to be putting your money in today’s bond market

beth
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beth

I have just started shopping for my first bond etf. I have room in my RRSP and TFSA for it. Where do you keep yours? I am not sure how to proceed.

Ben
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Ben

you’d most likely want your highest growth potential asset in your tfsa over rsp, so assuming your other investments are more growth oriented than bonds you’d go bonds in rsp. that being said don’t contribute the funds to your rsp just for that reason.

PwedePadala
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When it comes to asset allocation, do you follow the rule of subtracting 100 to your age equals the percentage that should be invested in bonds? I’m thinking of trying HMMJ than adding more to my bonds since I’m far from retirement age but would love to retire earlier.

GYM
Guest

I initially followed the asset rule of bonds=your age but now my bond yield is under 18% (and I’m not 18 haha, it would be nice though if I were younger but also wise). I have Bond ETFs too, but not the ones you mentioned.

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[…] BMO’s corp bond ETF is good for long term bond exposure. I explained why I like this particular ETF in my post last month on bond funds. […]