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
Vanguard Investments Canada
Canadian Fixed Income
FundGrade A+ Award:
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
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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