The bond market continues to be a challenging place for investors. Coming into 2016, it was near certainty that the Federal Reserve would be moving rates higher several times over the year. However, it now appears that there is only a modest probability that we will see much in the way of increase rates. Closer to home, odds are we may see the Bank of Canada move lower before moving higher.
In this environment, I am adding this short term bond ETF and removing the iShares 1-5 Year Laddered Corporate Bond Index ETF (TSX: CBO). There are a few reasons I am making this change. The first is ZCS offers a slightly higher yield to maturity, which is expected to allow for a higher return, in the event we see rates remain flat.
Another reason for the change is ZCS has a slightly higher duration, coming in at 2.83 years, compared with 2.79 years for CBO. Given the expectation that Canadian rates are on hold for the near term, and potentially moving lower, I am favouring the slightly higher duration because of its increased sensitivity to interest rates. A third reason for the change is the lower cost of ZCS.
Finally, according to Morningstar, CBO tends to trade at a higher premium to its underlying net asset value than ZCS, making it more expensive. For the past 12 months, ZCS has traded at a premium of 0.03% compared with 0.07% for CBO. Ideally, you will want to avoid paying a significant premium for an ETF, particularly in a low return asset class. While premiums may be unavoidable in many ETFs, you can take steps to try to minimize this additional cost.
Combined, these factors lead me to favour ZCS over CBO in the near to medium term.