Last updated: Mar-18-2019

3/18/2019 9:57:16 PM
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By Dave Paterson  | Wednesday, September 20, 2017

The Vanguard Aggregate Bond Index ETF (TSX: VAB) provides broad exposure to the Canadian bond market. It is designed to track the Bloomberg Barclays Global Aggregate Canadian Float Adjusted Bond Index, net of fees. The index is cap weighted and holds a mix of government and investment-grade corporate bonds of Canadian issuers. The ETF received a FundGrade A+® Award for excellence in 2016.

It is much like the iShares Canadian Universe Bond Index (TSX: XBB), with some differences. VAB tracks the Bloomberg Barclays Global Aggregate Canadian Float Adjusted Bond Index and has a higher exposure to government bonds, holding around 77% in governments. But XBB, which tracks the FTSE TMX Canada Universe Bond Index, holds 70% in government bonds. Because of this, the average credit quality is higher with VAB.

A drawback is that the interest rate sensitivity is also higher. The duration of VAB is 7.5 years, compared with 7.4 years for XBB. In practical terms, this means VAB is likely to be hit modestly harder in the event of a bump in yields. Given the market volatility of the past few weeks, this has played out as expected, with XBB dropping by 1.7% for the three months ending Aug. 31, while VAB was down 1.8%.

With the Bank of Canada likely to be moving rates higher before year-end, and much global uncertainty emerging, volatility in the bond markets is likely to remain high. In this environment, expected returns become muted, and costs matter even more. The MER on VAB is listed at 0.13%, which until recently was well below the 0.34% MER of XBB. However, in May of this year, iShares slashed the management fee on XBB to 0.09% from 0.30%, making XBB considerably more attractive from a cost standpoint.

Still, VAB remains an excellent offering for those investors looking for diversified, low-cost exposure to the Canadian bond market.

As we move forward and the pace of economic growth continues to rise, the potential for higher yields will increase. As this occurs, you may want to reduce the interest rate sensitivity of your portfolio. To do this, consider increasing your allocation to short-term bonds, corporate and high yield bonds, or looking towards a high-quality, actively managed bond fund that allows the manager significant flexibility. This can help reduce the headwinds created as bond yields rise.

Vanguard Aggregate Bond Index ETF
Fund company: Vanguard Investments Canada
Trading symbol:
Fund type: Canadian Fixed Income
FundGrade® Rating: C (August)
FundGrade A+ Award: 2016
Style: Capitalization-weighted
Risk level: Low
RRSP/RRIF suitability: Excellent
Manager: Vanguard Investments
MER: 0.13%
Commission: Subject to brokerage commission on trades

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.

Notes and Disclaimer

© 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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