Best fixed income ETFs for 2018

Overview Canadian U.S. International Fixed-Income All-in-one ETFs

For the most part, the panel saw no reason to make major changes to the existing line-up of All-Star fixed-income ETFs, although we debated adding the two Vanguard international fixed-income ETFs by creating a new sub-category. For 2018, however, we have retained the five existing fixed-income ETFs and added a sixth: iShares Core Canadian Short Term Bond Index ETF (XSB). As Forstrong’s Tyler Mordy says, XSB is cheaper by .01 than VSB but has similar credit risk and rating profiles. In 2017, the panel replaced VAB with ZAG on the All-Star list, because the latter dropped its management fee to 0.09% and undercut its competitors. But as the PWL pair of panelists notes, “since then both XBB and VAB have dropped their fees, too, to 0.08% and 0.09%, respectively. There is now no meaningful difference in cost among these three choices. VAB is 80% government bonds, while ZAB and XBB are 70%. This means VAB is (very) slightly more conservative than the other two.” Dan Bortolotti adds the caveat (one seconded by Mordy) that it’s usually a bad idea to switch ETFs just because a competitor has dropped its fee by a couple of basis points. “In many cases, the original ETF will go on to drop its own fee soon after, and then you have made two transactions for no reason. Costs are always important, but chasing a few basis points is counterproductive. Remember that 0.05% in MER is just $5 a year on every $10,000 invested.” The panel was intrigued by what the new Vanguard ETFs revealed about international fixed income. Just as many Canadians are underweight global equities and US technology, arguably many are also underweight international fixed income. The new AA ETFs help redress the latter but of course investors are free to work with their advisors to tweak international fixed income exposure further by directly owning VBG (Vanguard Global ex-US Aggregate Bond Index) and/or VBU (Vanguard US Aggregate Bond Index), both of which are hedged back to the Canadian dollar. Panelist Alan Fustey reviewed these two ETFs using the criteria of the potential value add for the All-Star model portfolio, given the rising interest rate environment we expect to continue into 2019. He found VBG has an average Duration of 7.8 years, with an effective yield to maturity of 0.96% while VBU has an Average Duration of 6.1 years with an effective yield to maturity of 2.94%. “Of the four existing traditional fixed-income holdings in the model portfolio (ZAG, VSB, ZDB and BXF) ZAG is the most directly comparable product to VBG and VBU since the other securities are short duration,” Fustey said. ZAG has an Average Duration of 7.36 years with an effective yield to maturity of 2.59%. “ZAG is similar to both VBG and VBU in terms of duration but has a modestly lower effective yield to maturity than VBU. As a result, we do not believe there is a compelling reason to add either VBG or VBU to the model portfolio [All-Stars] at this time.”

FIXED INCOME	Ticker	Management Fee	# of Holdings	Description
BMO Aggregate Bond Index ETF	ZAG	0.09	921	Replaced VAB in 2017 edition but VAB and XBB matched low fee
Vanguard Canadian Short-term Bond Index ETF	VSB	0.1	369	Government and corporoate bonds
BMO Discount Bond Index ETF	ZDB	0.09	108	Tax-friendly alternative for non-registered accounts
First Asset 1-5 Year Laddered Government Strip Bond Index ETF (BXF)	BXF	0.2	25	Unique structure beats other short-term bond funds after tax
BMO Laddered Preferred Share Index ETF	ZPR	0.45	191	Five-year ladder of "rate reset" preferred shares
NEW! iShares Core Canadian Short Term Bond Index ETF	XSB	0.08	503	Cheaper than VSB by 0.01, similar credit risk and rating profiles

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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Comments Cancel reply

jattiindato says:

October 19, 2020 at 10:05 pm

i am looking for Canadian bond investment where i can make some passive tax free income any suggestions experts which investment i should be looking at and what are the risks and rewards i should be looking for

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1. MoneySense Editors says:
  
  November 12, 2020 at 11:13 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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