What are we looking for?
Canadian Exchange Traded Funds that grant exposure to global bond markets.
The screen
For the DIY investor, individual stock picking is a popular approach as it offers the potential for significant returns and the thrill of choosing winners. However, maintaining a diversified portfolio which includes both stocks and bonds is an approach that reduces the rollercoaster ride that accompanies a stock-only portfolio and in many cases, a better path to reach financial goals by reducing risk. This said, individual bonds can be complex to manage, requiring some understanding of credit ratings, maturity dates and interest rate fluctuations. This is where bond ETFs shine. Through these products, investors gain exposure to a diversified portfolio of bonds within a single ticker, thus simplifying the investment process but also reducing risk and providing access to a broad range of bond investment opportunities.
With this in mind, today we look at top-performing ETFs within the Global Fixed Income category (defined as those that invest less than 90 per cent of their fixed income holdings in Canadian dollar issues and invest primarily in investment-grade fixed income securities i.e. BBB or equivalent rating or higher). This category houses a whopping 108 ETFs. To help narrow down to a list of reasonable ideas, I used two screens:
- The Morningstar Ratings for Funds – which is a look back at historical risk-adjusted after-fee returns, putting emphasis on the most recent three years of performance history. The ratings are indeed backward-looking, however our data show that on average, funds that receive five stars outperform those that receive four stars, which outperform three-star funds, and so on, in periods after receiving the rating. Today’s screen looks for four- or five-star rated ETFs within the Global Fixed Income category (which includes both mutual funds and ETFs).
- The Morningstar Medalist Rating – which is Morningstar’s assessment of a fund’s ability to outperform peers in the future. This forward-looking rating asseses three core pillars of the investment: (1) People (the quality, experience, and tenure of the management team, (2) Parent (the stewardship qualities of the fund company) and (3) Process (the robustness of risk mitigation and resource availability).
Only Canadian-listed ETFs in the Global Fixed Income category were considered in this search.
What we found
The ETFs that met the above requirements are listed in the table accompanying this article, alongside their MERs, ratings, trailing performance, and a breakdown of the credit ratings on the bonds held in their portfolios.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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