Bonds are safer but a cannabis ETF offers more growth potential.
John Bogle passed away last month. He was the creator of index funds, a man who believed in keeping investments simple and costs low.
When he started his first index fund for individual investors in 1976, he could not possibly have imagined how the concept would catch on. Today, U.S. based index-based mutual funds and ETFs have more than US$3.6 trillion in assets under management. Canadian ETF assets at the end of December were $156.8 billion. The total number of Canadian ETFs is 660, with more being added each month.
That’s a lot to choose from. Some of the choices are simple funds that track major indexes, which is what Mr. Bogle originally envisaged. Some are highly specialized, providing investors with an opportunity to place bets on specific areas of the market. And some are sheer crap games, offering leveraged plays on commodities that can swing wildly in value.
Here are four ETFs that I am recommending as buys right now. They are quite different in nature, as you’ll see. Three are for conservative investors while the fourth is only for those who are willing to take some risk.
1. iShares Core Canadian Universe Bond Index ETF (TSX: XBB)
Background: If you only want to own one Canadian bond mutual fund or ETF, this should be it. The fund tracks the performance of the FTSE TMX Universe Bond Index, net of expenses. That means you have exposure to all domestic bonds, both government and corporate, with maturities ranging from less than five years to more than 20.
Performance: Despite the drag of rising interest rates, the fund delivered a gain of 1.28 per cent in 2018. The ten-year average annual compound rate of return is 3.86 per cent.
Key metrics: This is a big fund, with $2.3 billion in assets under management (AUM). About 72 per cent of the portfolio is in government bonds (mainly federal and provincial with a small holding of municipals). The rest is in corporate issues. More than 99 per cent of the assets are investment grade bonds (rated BBB or higher), so the credit risk is extremely low. The MER is 0.19 per cent.
Distributions: Payments are made monthly. The January distribution was $0.074 per unit ($0.888 annually). It has remained at that level since last September. At that rate, the current yield is 2.9 per cent.
Conclusion: This fund should be the keystone of the fixed-income segment of your portfolio. However, be aware that the distribution level is gradually eroding the fund’s net asset value.
2. iShares Convertible Bond Index ETF (TSX: CVD)
Background: The goal is to replicate the performance of the FTSE TMX Canada Convertible Bond Index, net of expenses. Convertible bonds can be switched for common stock under the terms of each specific offering.
Performance: The fund is coming off a weak year, having lost 1.03 per cent in 2018. The five-year average annual return is a more respectable 3.12 per cent. The fund is off to a good start this year, with a gain to Jan. 24 of 2.06 per cent.
Key metrics: This is a relatively small fund, with $116 in AUM. It was launched in June 2011 and has 44 holdings. Some of the positions are unusually large, such as a 10.31 per cent weighting in Element Fleet Management and 9.12 per cent in the convertible bonds of Chemtrade Logistics Income Fund. The MER is 0.5 per cent.
Distributions: Paid monthly. The January distribution was $0.07 per unit, which if continued would work out to $0.84 per year. That would yield 4.7 per cent at the recent price.