Michael Herring iShares Cdn Corp Bond ETF XCB-T TOP PICK Apr 28, 2009

Corporate bond ETF’s. Corporate bonds are somewhat interest rate sensitive, so you want to watch where interest rates are going. When you look at long-term treasury yields, they are going to stay low for longer and he doesn’t see a substantial move in interest rates.

The average maturity of a corporate bond index would probably be 6-7 years. Doesn’t like the iShares product line, and prefers the laddered ETF’s to the street corporate bond ones. Nevertheless, corporate bond yields have widened out so far from government bonds, that he thinks there is going to be a very good compounding effect by owning corporate bonds from this point on, especially in the low inflation environment.

How will this and XGB be affected by a possible interest rate hike? He is not sure that if the Bank of Canada raises short rates, it will have a huge impact in Canada. The bigger question is what the Federal Reserve is going to do with their bond portfolio. If they start to focus on the longer part of the yield curve, that is going to be a negative for Canada. He would prefer corporates over governments and would hang on to this one, using XGB to go into another part of the market, such as a preferred share ETF, or look into the US market.

Better than XBB? He's using the US investment-grade bond index from BMO (can't remember the ticker) rather than XCB. He owns the unhedged version. Buy the hedged one if you don't want to take the currency risk.

Problem with corporate bonds is that they also went down 25% in March, so you're not getting the diversification you think. Replace this with a sovereign bond ETF. If you're worried rates will go up, go with inflation-protected bonds. If you think rates will go down, HTB will give a better balance to the rest of your equity portfolio.

As a DIY investor, it's really hard to get access to the best-quality bonds. Generally if you buy them on the secondary market, you're buying at a premium. He'd be comfortable owning bond funds through ETF structures such as XCB or XLB on the TSX. 

When Covid hit, and bond yields were super-low, bonds did not protect client portfolios because yields were starting to rise. If inflation is going to be more persistent, and bond yields are going to be where they are now or slightly higher for the next 6-12 months, then bonds are not a safe part of your portfolio from a total return perspective. 

If you're 70 years old and in 100% equities, then yes you probably should have some fixed income in your portfolio. Look at an XCB or something like that that's shorter term. There are some ETFs that are income-oriented for older folks.

First, make a distinction between individual bonds and bond funds, because the former have a fixed maturity date so regardless of rates, as that bond approaches maturity the price will go to par. In the latter, the fund or ETF those bonds within those products will mature and go out and buy other bonds. If you have good corporate bonds with a staggered maturity, keep them.