It’s time to give bond ETFs a fresh look if you lost faith in them because of the threat of rising interest rates.
Soaring bond yields in the spring triggered a flow of e-mails from readers who worried about falling bond ETF prices. You hold bond ETFs to add stability to a portfolio; to see these securities falling in value can be unnerving. Bond yields fell back in the early summer, then started edging higher again. Longer term, it’s quite possible they will climb still higher and, in turn, push prices for bonds and bond ETFs lower. (Bond prices and yields move in opposite directions.)
That said, there are two quiet trends working in favour of bond ETFs right now, the first being a fee war among ETF providers. BMO ETFs introduced three new bond funds this spring, each of which comes in at a lower fee than you can currently get from competitors.
The BMO Government Bond Index ETF (ZGB) has an estimated management expense ratio of 0.17 per cent, as does the BMO Corporate Bond Index ETF (ZCB). The BMO Short-Term Bond Index ETF (ZSB) has an MER of 0.1 per cent. When you look at competing bond ETF fees, you’ll see that BMO has been aggressive in pricing its new funds.
One example: The Vanguard Canadian Government Bond Index ETF (VGV) has an MER of 0.28 per cent, while the iShares Canadian Government Bond Index ETF (XGB) has an MER of 0.39 per cent.
Another example: The Vanguard Canadian Corporate Bond Index ETF (VCB) has an MER of 0.26 per cent, while the iShares Canadian Corporate Bond Index ETF (XCB) has an MER of 0.44 per cent.
The pricing advantage for BMO’s short-term bond fund is more slight, but you get the point. One ETF company has cut fees in a serious way, and pressure is mounting on competitors to respond. In the big picture, lower bond ETF fees will help improve returns for investors.
The other factor driving better returns for bond ETFs is that same rising-rate trend that spooked investors this year. If you have new money to invest, you can get higher yields than you would have seen earlier in the year. When the bond installment of the Globe’s 2018 ETF Buyer’s Guide was published in late February, the after-fee yield to maturity for iShares' Canadian corporate bond fund was 2.8 per cent; in early August, it was just below 3 per cent. Adding new money to bond ETFs after the next leg higher for interest rates would presumably get you even better yields from bond ETFs.
Rob Carrick