Bond ETFs

Bond ETFs: charting a course

Many individual investors turn to bond ETFs because they provide an opportunity to build a diversified portfolio of bonds at a lower cost. Typically a bond ETF tracks interest rate trends, rising when rates fall and dropping when rates rise.

There is a variety of bond ETFs available in Canada, which can provide diversified exposure to various types of government and corporate bonds. For example, you can buy a bond ETF that covers the broader bond market, one that invests in either government or corporate bonds, or bond ETFs based on different time horizons. The oldest bond ETF in Canada is the iShares Canadian Universe Bond Index ETF, symbol XBB on the Toronto Stock Exchange, which was launched in November 2000. Vanguard and other ETF issuers also offer similar broad bond ETFs.

Investors can also choose short, medium or long-term bond ETFs. For example, the Vanguard Canadian Aggregate Bond Index ETF, symbol VAB, offers broad exposure to medium- to long- term bonds. The Vanguard Canadian Short-Term Bond Index ETF, symbol VSB, offers, as the name suggests, exposure to short-term bonds.

Investors can also choose a bond laddering approach with ETFs, where each security matures at a different date. This helps to minimize interest-rate risk and increase liquidity. Investors can buy individual bond ETFs and create their own laddering strategy, or purchase bond ladder ETFs with varying maturities, which reinvest maturing bonds for you.

Another option for investors is real return bond ETFs, which aim to protect against rising inflation. They have long maturities but pay extra interest if inflation rises. iShares and other providers offer real return bond ETFs in Canada.

When it comes to selecting bond ETFs, most investors choose diversified products with different types of bonds that mature at various times. However, investors seeking higher yield may favour corporate bonds, while investors expecting inflation to rise might turn to real return bond ETFs. Investors should also consider the amount of fixed-income products they want in their portfolio overall, as well as their appetite for risk.

To get you started, you can find Canadian and U.S. fixed income ETFs in the Qtrade ETF Centre. Once logged in, select Quotes & Market Info > ETFs. Click on the ETF Screener tab and select the Fixed Income tile to obtain a list.