The Motley Fool

Retirees: 1 Way to Own Bonds in 2020

Image source: Getty Images.

This turbulent period in the market and the broader economy is stressful for retirees. Some Canadians have seen their retirement portfolios ravaged after a steep market pullback and there’s been a flock to fixed income amid this rout. The flight to bonds has been a major driver of record growth in ETF assets in 2019 and in 2020 so far.

I’d discussed the collapse in bond yields in the summer. This had driven a push to stable income equities. Hydro One and Emera were high performers in 2019. Utilities were hot again after central banks made a policy turn in late 2018. These equities had also benefited from historically low interest rates.

Today I want to look at a few bond-focused ETFs that retirees may want to consider in the month of April.

Let’s jump in.

Retirees: Government bond ETF

Retirees should pursue exposure to ETFs with meaningful assets under management and/or funds that are actively managed in this tumultuous period. Investors should also consider the possibility of negative rates.

The Bank of Canada has dropped the benchmark rate to 0.25%, and we appear to be in the very early stages of this economic calamity. Negative rates are a real possibility going forward.

The iShares 1-5 Year Ladder Government Bond ETF (TSX:CLF) seeks to replicate the performance of the FTSE Canada 1-5 Year Laddered Government Bond Index.

Shares of the ETF have climbed 3% in 2020 as of mid-afternoon trading on April 2. The ETF provides access to investment grade bonds and monthly cash distributions. It can also be used to mitigate interest rate risk.

This ETF has a laddered bond structure with an MER of 0.17%. Laddered government bonds typically have much lower interest rate risk than the traditional bond benchmark. Moreover, retirees who buy into this ETF will be shielded from sudden rate hikes in the future.

Meanwhile, bond ETFs possess other perks for retail investors. Investors in bond ETFs are granted liquidity. This is desirable in the current environment. They also offer diversity of exposure and a lower cost than buying and selling individual bonds.

A short-term bond ETF option

The Vanguard Canadian Short-Term Corporate Bond ETF (TSX:VSC) seeks to track the performance of a broad Canadian credit bond index with a short-term dollar-weighted average maturity.

Shares of this ETF increased 4% in 2019. However, it has fallen 3.3% so far in 2020. The ETF invests primarily in public, investment-grade non-government fixed income securities issued in Canada.

A stabilization in global manufacturing will provide a boost to corporate bonds. However, retirees may still want to stick with short-duration funds like this ETF.

Corporate bonds could take a hit from rising interest rates in the event of a rapid uptick in global growth once this crisis abates. The MER for this ETF is 0.11%.

Retirees should consider moving into these bond ETFs in early April. This bout of economic turbulence may last well into the summer.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Ambrose O'Callaghan owns shares of HYDRO ONE LIMITED.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.