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Conservative Vanguard Canadian Short Term Bond Index ETF boasts high credit quality, low volatility
9/22/2017 4:44:39 PM
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DUE DILIGENCE
Objective research, analysis, and insight on investment funds in Canada from an acknowledged industry expert



By Dave Paterson  | Wednesday, June 21, 2017


 

The Vanguard Canadian Short Term Bond Index ETF (TSX: VSB) provides exposure to a portfolio of Canadian government and corporate bonds with maturities that range between one and five years. The index is weighted by market capitalization, and is marked by high credit quality and low volatility, which would make it an attractive component of conservative portfolios.

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
Fund company: Vanguard Investments Canada
Fund type:
Canadian Short Term Fixed Income
FundGrade Rating: C
Style: Passive, Cap Weighted
Risk level: Low
RRSP/RRIF suitability: Excellent
Manager: Vanguard Investments Canada
MER: 0.11%
Trading symbol: TSX: VSB

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 of 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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© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

 

 
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