Over 1,100 ETFs, Yet Only One That Focuses On Canadian Bonds

canada bond fundsHow many ETFs and mutual funds are there?  According to ICI fact book at the end of 2011, the number of mutual funds stood at 8,644 mutual funds and the number of ETFs was 1,166. With this incredible number of choices, one would expect that there would be a mutual fund or ETF for any investment idea. Sadly, this is not the case. In a recent search for a short-term Canadian bond ETF or bond mutual fund, I came up almost empty.
To see a list of high yielding CDs go here. As I wrote about last week, I wanted to buy Canadian government bonds via a mutual fund or ETF. While there are many international and regional bond funds, such as Latin America bond funds, there are very few bond funds that focus on a single country. In fact, I was only able to find one that invested in Canadian bonds. The PIMCO Canada Bond Index ETF (CAD) is a passive etf that holds government related bonds.   However, there is a big problem with this ETF. The average maturity of the bonds it holds is over 13 years. This is a little over twice the maturity of most US core bond funds. As a result, the etf is very sensitive to changes in interest rates.
The etf would lose almost 10% its value for every 1% rise in interest rates.

Unfortunately, Canada’s central bank  has been making noise about raising interest rates. While most is think its more talk than action for now, most believe that Canada will be the first G-7 country to raise rates. Even if Canada only raises rates a half percent over the next two years, the loss in the fund’s value would wipe out all the interest received during the two years. The fund has an SEC yield of around 2%.

While there aren’t any other Canadian bond funds, there is a Canadian currency etf which essentially holds Canadian dollars in a savings account at a major bank.  The name of the ETF is the CurrencyShares Canadian Dollar Trust  ETF (FXC). While this ETF will lose no value if interest rate rise, it has a different problem than the PIMCO ETF. It pays virtually no interest, a  paltry 0.12%.


Could I combine these funds to create the investment that I wanted?

What would the yield and interest rate risk be for an investment which was 50% FXC and 50% CAD. The yield would be a little over 1% and the investment would lose about 4.5% of its value for every 1% move in interest rates. Besides yield and interest rates, there are two other factors which will determine the return on this investment: fees and currency rate movements.

The annual expense fees on FXC is 0.40% and CAD is .45% for an average of 0.425%. I am starting not to like this investment. If there are no interest rate moves and no currency moves, my annual return after fees (yields minus fees) will be around 0.60% I could get better than than with a CD.

Now lets look at the expected return with assumptions about interest rates and currency moves. I believe over the next 2 years Canadian Interest rates will rise by ½ a percent and the currency will rise by about 6%.  This would result in a gain in 6% from the currency appreciation and a loss of 2.25% in the value of the bonds, for a gain of 3.75% over two years. If I am right about everything, the investment with will have a total return of about 2.5% a year. This doesn’t seem like a fantastic return given the downside if the Canadian dollar doesn’t rise in value or the interest rate increase is more dramatic. I think I’ll pass on this trade.

Bottom Line: There isn’t a good way to invest in short-term Canadian bonds through a US mutual fund or ETF.

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Marc Prosser


    • Hi James, Thanks for the comment. We don’t know too much about trading on non US exchanges but here are some concerns that we have. First many US brokers do not offer access to TSX. Second there are additional tax considerations when owning foreign securities that we are not 100% versed in. Finally when investing in foreign securities you are at the mercy of your brokerage firm for the exchange rate that they give you, which can really eat into returns. If there is an efficient way to do this that we aren’t aware of though let us know. Best Regards, Dave

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