The redemption of bond ETFs could not be more timely.
As you’ll see in the second instalment of the 2025 Globe and Mail ETF Buyer’s Guide, returns from exchange-traded funds holding Canadian government and corporate bonds were strong in the past 12 months. This is encouraging news for investors looking for portfolio stability in a trade war.
It’s a foundational principle of investing that holding bonds is the best hedge against falling stocks. But the experience of the past several years eroded investor faith in the dependability of bonds. The benchmark FTSE Canada Universe Bond Index fell in both 2021 and 2022, the latter decline coinciding with a bad year for stocks.
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Falling interest rates have revived bonds. Bond prices decline when rates move higher and rise when rates fall. A trade war could trigger more rate cuts, potentially boosting returns for investors holding bonds and bond ETFs. If stocks fall hard, bonds could further benefit from their traditional role as an equity market counterbalance.
With their low fees and diversification, ETFs are a convenient way for investors to get exposure to the broad Canadian bond market. The funds covered in this guide could all serve as your main bond ETF, or as a complement to other holdings.
Now for a quick tutorial on bonds and bond ETFs that covers some of the terms used in the guide:
Risk: The key measure for evaluating how much bonds and bond ETFs can fall in price if rates rise is duration, which is expressed in years. If interest rates rise by one percentage point, the price of an ETF with a duration of five years would fall 5 per cent (and vice versa if rates fall); the higher the duration, the more risk there is if rates rise. And more potential benefit if rates decline.
Yield: The best measure of the yield you can expect from a bond ETF is the after-fee yield to maturity of the underlying bonds, not the backward-looking yield data you get on stock-quote websites.
Returns: Bond returns have two components: price appreciation or declines and interest paid by the bonds in the portfolio. Together they produce the total return that ETF issuers use to document the performance of their products. Returns are shown over one-, three- and five-year periods. Long-term returns are more informative, but many ETFs have not been around for a decade. Included in this year’s guide is a special look at returns for 2022, a standout bad year where the benchmark FTSE Canada Universe Bond Index lost 11.7 per cent.
Maturity: While individual bonds may fluctuate in price, they are redeemed at their issue price on a set date; the bond ETFs covered here do not mature and pay you your money back, so expect cycles of rising and falling unit prices over the years you own them. There is a small subset of bond ETFs that do mature – they’re called target maturity funds.
Fees: The measure of how much it costs to own a bond ETF is the management expense ratio (MER); returns are shown on an after-fee basis both here and on ETF company websites.
Download the source excel here.
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