The ETF tracks the Bloomberg Barclays Global Aggregate Canadian
Government/Credit 1-5 year Float Adjusted Bond Index which uses a passively
managed, index-sampling strategy to gain exposure to the short-term,
investment-grade Canadian bond market.
Credit quality is high, with nearly 57% of the fund rated AAA, 24% rated
AA, and the balance A or BBB. About 70% is in government bonds, with the
balance in corporate bonds. A little more than 25% comes due within one to
two years, with the rest is pretty evenly spread across the other maturity
buckets. This results in an average maturity of 2.9 years, and a duration
of just 2.8 years. The average yield to maturity is a mere 1.2%.
The fund looks rather similar to the
iShares Canadian Short Term Bond Index (TSX: XSB), with comparable asset mix, credit quality, and duration. The cost is low,
with a management fee of 0.10%. Until recently, this was well below the
iShares’ offering; however, recently iShares cut the management fee on XSB
to 0.09%. In an asset class with such low expected returns, costs matter.
As we enter the latter part of the year, the outlook for short-term bonds
remains muted, with Canadian short rates likely to remain on hold. However,
recent numbers suggest that the Bank of Canada may consider moving rates
higher sooner than generally expected.
Short-term bonds can still be an excellent way to reduce overall volatility
within a portfolio, as the shorter duration makes them less sensitive to
interest rates, and less volatile than medium- and long-term investment
grade bonds, making them a solid choice for very conservative investors.
Further, with the higher credit quality offered by this ETF, it is likely
to benefit from periods of market volatility on a flight-to-safety trade if
we see any periods of extreme uncertainty in the equity markets.
Vanguard Canadian Short Term Bond Index ETF
Vanguard Investments Canada
Canadian Short Term Fixed Income
Passive, Cap Weighted
Vanguard Investments Canada
Dave Paterson, CFA, is the Director of Research, Investment Funds for
D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due
diligence on a variety of investment products. He is also the publisher
Dave Paterson’s Top Funds Report,
offering regular commentary and in-depth analysis of Canada’s top
investment funds. He uses a unique analytical approach to identify
funds with strong, risk-adjusted returns, and regularly publishes his
insights and analyses in Fund Library.
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