Bond ETFs – Ways to Invest in the Traditional Asset Class
An effective way for Canadians to add exposure to bonds is through bond ETFs.
Bonds have had a rough year as rising interest rates have eroded the prices of bonds. However, as prices fall, future expected returns increase, and many investors may see the current environment as a good time to start adding capital to bonds. An effective way for Canadians to add exposure to bonds is through bond ETFs.
Bond ETFs: What are they?
Bonds are well documented as one of the leading traditional asset classes, along with equities and cash equivalents. There are also other asset classes such as commodities and real estate. However, bonds are one of the most stable asset classes, owing to their alternative moniker, “fixed income.”
Bond ETFs are funds that are committed to investing exclusively in bonds. They hold a portfolio of fixed income securities per the strategy established at the fund's inception.
Types of Bond ETFs
There are various types of bond ETFs that investors may want to gain exposure to, such as:
- Treasury Bond ETFs
- Corporate Bond ETFs
- International Bond ETFs
- Floating Rate Bond ETFs
- Convertible Bond ETFs
Why Invest in Bond ETFs?
Investors can purchase bond ETFs fairly easily on stock exchanges. The benefits of ETFs, such as higher liquidity, greater transparency, and lower costs, make it an attractive way for retail investors to gain access to the asset class.
It is challenging for retail investors to purchase individual bonds since it requires a relatively large amount of capital. The bonds must be purchased over-the-counter instead of on a standardized exchange. It is much easier for institutional investors with a pooled amount of capital and dedicated traders to trade individual bonds. For this reason, retail investors have outsourced their trading of bonds to institutional investors such as mutual funds.
With ETFs, the bond market is more democratized in that any retail investor can gain exposure to bonds through the use of ETFs. Some benefits bond using bond ETFs are:
- Fixed payments on a regular schedule from coupons of underlying bonds
- Strong diversification tool, especially when holding a portfolio of equities
- ETF benefits of greater liquidity, higher transparency, and lower costs
There are some issues underlying bond ETFs though, such as:
- Remaining liquid since bonds are more thinly traded than equities
- There is no maturity date for ETFs, so there is no guarantee of principal repayment
- Bond ETFs are subject to market factors such as interest rate changes and supply and demand for bonds as an asset class
Examples of Bond ETFs
For Canadians looking to invest in bond ETFs, some of the largest bond ETFs are as follows:
ZAG (BMO Aggregate Bond Index ETF)
- AUM: $5,921M
- Expense Ratio: 0.09%
- YTD performance: -12.0%
XBB (iShares Canadian Universe Bond Index ETF)
- AUM: $4,622M
- Expense Ratio: 0.10%
- YTD performance: -12.0%
VAB (Vanguard Canadian Aggregate Bond Index ETF)
- AUM: $3,188M
- Expense Ratio: 0.09%
- YTD performance: -12.0%
XSB (iShares Canadian Short Term Bond Index ETF)
- AUM: $3,160M
- Expense Ratio: 0.10%
- YTD performance: -4.4%
CSAV (CI First Asset High Interest Savings ETF)
- AUM: $2,617M
- Expense Ratio: 0.15%
- YTD performance: +0.5%
Data for this article is as of July 6th, 2022.
Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.
