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.
