New York Stock Exchange trader Frank O'Connell works on the floor, April 13, 2021. Stocks were choppy and mixed in trading Tuesday as a drop in bond yields hurt bank stocks but helped big technology stocks.Nicole Pereira/The Associated Press
Bonds and stocks both had an outstanding year in 2020, but they’ve parted ways this year.
Bonds are getting battered as investors adjust to a rising interest rate outlook, and the results are readily apparent in the exchange-traded funds that many of them use for their fixed income exposure. At the end of March, there was almost $80-billion invested in bond ETFs listed on the TSX.
The declines of bond ETFs vary widely according to the types of bonds held. Zeroing in what’s working and what isn’t can help investors tweak their portfolios to weather further bond market declines. To survey the bond ETF market, we’ll use the well-established funds offered by BlackRock Canada’s iShares lineup.
The entire bond market in one fund
The iShares Core Canadian Universe Bond Index ETF (XBB) was down 4.5 per cent for the year to April 8. This fund holds a mix of government and investment grade corporate bonds with an effective duration of 7.9 years. Duration measures sensitivity to changing interest rates. If interest rates rise by one percentage point, the price of an ETF with a duration of eight years would fall 8 per cent (and vice versa if rates fell).
Short-term bonds
The iShares Core Canadian Short Term Bond Index ETF (XSB) was down 0.5 per cent for the year to April 8, with an effective duration of 2.8 years. This ETF also mixes government and corporate bonds.
Long-term bonds
The iShares Core Canadian Long Term Bond Index ETF (XLB) was down 9.6 per cent, with an effective duration of 15.4 years.
Corporate bonds
The iShares Canadian Corporate Bond Index ETF (XCB) was down 3 per cent, with an effective duration of 6.7 years.
Short-term corporate bonds
The iShares Core Canadian Short Term Corporate Bond Index ETF (XSH) was down 0.3 per cent, with a duration of 2.8 years.
Government bonds
The iShares Canadian Government Bond Index ETF (XGB) was down 5.1 per cent, with an effective duration of 8.4 years.
Real return bonds
The iShares Canadian Real Return Bond Index ETF (XRB) was down almost 7 per cent, with a duration of 15.5 years.
Some quick lessons to be drawn from these numbers: Short-duration bond ETFs are holding up better than others, and corporate bonds are showing more resilience than government issues. If you’re a believer in holding bonds to offset stock market drops – and you probably should be – then these numbers offer some guidance on how to structure your bond holdings.
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