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.

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