This low-risk bond Exchange Traded Fund (ETF) ladders its portfolio

Here’s a bond exchange traded fund (ETF) that arranges its portfolio in the same way you should if you’re setting up your own fixed-income portfolio. Its yield-to-maturity is low but it offers a high degree of safety.

Long-time readers of The MoneyLetter know that we regularly advise you to avoid bond funds and buy fixed-income securities directly.

But when it comes to bond exchange traded funds, or ETFs, we’re prepared to make exceptions.

One thing we like about bond ETFs is that their management expense ratios, or MERs, are far lower than those of managed bond funds. The median MER for fixed-income funds, for example, is 1.79 per cent.

Another thing we like about the bond ETF we’re recommending, is that it structures its portfolio the same way we recommend you structure a fixed-income portfolio if you buy these securities directly.

And that is to stagger your maturities over a one- to five-year period, so you have predictable, stable income coming due on a regular basis every year. This approach gives you the certainty of getting a predetermined amount of money back when you need it.

It’s also the approach that iShares 1-5 Year Laddered Government Bond Index ETF (TSE-CLF, $19.31) takes.

It attempts to track the FTSE TMX Canada 1-5 Year Laddered Government Bond Index, less fees and expenses. This index consists of government bonds with laddered maturity levels from one to five years.

The ETF invests in 38 securities issued by the federal, provincial and municipal governments of Canada. Credit quality is very high, with 42 per cent of the portfolio invested in AAA-rated bonds, 32 per cent invested in AA-rated bonds, and 25 per cent in A-rated bonds.

The ETF’s MER is 0.17 per cent, which has certainly helped the fund produce category-leading results. Over its six-year history, the ETF’s compound annual growth rate is 3.5 per cent, which ranks in the top quartile of the Canadian fixed-income category. The ETF has also achieved top-quartile positions in each of the past one-, three- and five-year periods.

On a year-by-year basis, the ETF was a top-quartile performer in five years, and a third-quartile performer in one year.

Volatility is extremely low, as the fund’s volatility rating is just one out of 10.

But if you’re looking for a high yield, this ETF will certainly disappoint you. Its weighted average yield to maturity is 1.32 per cent. Subtract the 0.17-per cent MER, and your share is 1.15 per cent.

Keep in mind, though, that its duration, which is a measure that assesses a bond’s risk to capital loss from changing interest rates, is low. At 2.42, the ETF’s duration suggests that its value will decline by about this amount for each one-per cent rise in interest rates.

By way of comparison, the FTSE TMX Canada Universe Bond Index has a duration of 7.04.

Here is the fund’s performance and rankings:
1-yr. — 1.7% — 1/4;
3-yr. — 2.9% — 1/4;
5-yr. — 2.7% — 1/4;
Volatility: 1/10;
MER: 0.17%

*Our Advice: iShares 1-5 Year Laddered Government Bond Index ETF is a low-risk buy for investors seeking mainly income from short- to medium-term government bonds.

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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