What are we looking for?
Short-term bond exchange-traded funds where you can park cash.
The screen
The thought that Canadians have extra cash laying around might seem far-fetched in the current high-inflation, high-interest-rate environment. However, the reality is that the household savings rate at the end of the first quarter, as reported by Statistics Canada, came in at around 2.9 per cent on a seasonally adjusted basis. That was nowhere near the whopping 26.5 per cent savings rate at the peak during the COVID-19 pandemic, but Canadians continue to squirrel away money, however little.
All this said, it’s worthwhile to consider parking this cash in a short-term investment vehicle such as a money-market fund or high-interest savings account, because elevated interest rates mean higher rates of return even for short-term investors.
Though not a particularly exciting area of investing, cash management is a very important part of overall portfolio strategy and it ensures that you maximize the utility of your assets. For investors who can afford to take on just a bit more risk, short-term bond funds offer exposure to the short end of the yield curve, largely investing in bonds with maturities from one to five years.
Offered as ETFs, these investments can offer exposure to higher yields than money market funds while granting investors liquidity via the ETF structure. To help with ideas in this space, I use Morningstar Direct to screen ETFs that:
- Are classified as Canadian short-term fixed income investments (which means that 90 per cent of fund holdings must be in Canadian-dollar-denominated, primarily investment-grade bonds with maturities between one and five years).
- Have received a four- or five-star Morningstar Rating for Funds, indicating that a fund has historically outperformed its category peers after fees, on risk-adjusted basis. Our data shows that although the star ratings are backward-looking, as a group, funds that have received five stars tend to outperform those that have received fewer stars in periods after receiving the rating. In other words, it’s more likely that a fund manager with a track record of outperforming peers will continue to outperform in the future, as compared to managers who have historically underperformed peers.
- Have received a Morningstar Medalist Rating of gold, silver or bronze, isolating funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (the quality of the management team), parent (the stewardship of the fund company) and process (the robustness of investment decision making).
Only Canadian-domiciled ETFs were considered in this search.
What we found
The ETFs that met the above requirements are listed in the accompanying table, which includes each fund’s MER, historical performance and rating. It is worthwhile noting that several of these qualifiers are passively managed (they follow a short-term bond index), showing that investing passively with a focus on low fees is a concept that applies to short-term bond funds as well as others.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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