What Are Bond ETFs?

Jonathan Needham: Hello, my name is Jonathan Needham, vice president and director of ETF Distribution for TD Asset Management. Today we’re going to talk a little bit about bond ETFs. So let’s first start by chatting about what is a bond ETF. It’s a type of ETF that enables investors to buy a basket of bonds representative of a particular bond index and/or sector.

In example, treasuries, investment grade bonds, corporate debt, and high yield to name a few. And in this case, like equities, they can be bought and sold on a stock exchange. And now, so since bonds don’t, typically they don’t, in fact, trade on exchange. Using an ETF to get this exposure makes it much easier and more cost effective than trying to build a portfolio of individual bonds. Now, what type of choice do investors here in Canada have to get exposure to fixed income?

Now, within the fixed income ETFs within the Canadian market, they represent about 30% of the market, 30% of about 300 billion. And so Canadians, in fact, today have the choice of over 325 exchange traded funds that are listed here in Canada. So lots of choice, and you can see they are gaining popularity for investors. Particularly for those investors who want to pay lower fees, generate consistent cashflow, maintain liquidity, reduce volatility, and of course, preserve capital, ETFs also make it easy for choosing the type of bond exposure one may want. Do you want government exposure? Do you want corporate? Are you looking to lend money on the short or long-term? Do you want it to be more sensitive to interest rates or not?

Now that all might sound a little complicated. That’s because it can be, and that is why we suggest the ETF vehicle makes it so simple. And the ETF vehicle is great for those end investors because it allows you to outsource the expertise to portfolio managers like the ones at TD Asset Management. So why bonds now and why bond ETFs? Now, I’m getting this question often in this market and in particularly why bonds now? Bonds are back in our view. We’ve got very attractive coupons generated from bonds. One will want exposure to fixed income to ballast that equity volatility. And of course, using the ETF vehicle to get this exposure is the simplest, most cost effective way.

The other reason why you would want to consider fixed income in today’s market, not only to manage the equity volatility and to preserve your capital, but we’re also getting attractive coupons, ones in which we haven’t seen for over a decade. Now of course, we’re also seeing rates have risen quite fast and we’re probably at the tail end of that. And so when rates do start to decrease, this tends to be appreciation for fixed income. So, in fact, in this environment for the next 12 months, TD Asset Management thinks fixed income will outperform equities. And so now is a good time to add bonds to the portfolio, to manage risk, preserve your capital, and have the opportunity to generate some attractive returns again. Thank you for joining me. Greatly appreciated.

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