The rise of exchange traded funds (ETFs) over the past decade or so has invited many equity investors to switch from hiring money managers or actively investing money themselves toward passively investing in the stock market through funds which track movements in the market. With the majority of ETFs offering investors options to invest in index-tracked equity funds or equity sectors, some investors may lose perspective on appropriate portfolio balancing (having a 100% equity portfolio may entail more risk than an investor may want to hold). Having a significant percentage of fixed income securities or alternative investments is a great way to diversify some of the market-related risk specific to equities.
One such ETF which may be perfect for Canadian investors is the iShares Core Canadian Short Term Bond Index ETF (TSX:XSB), an ETF with a well diversified and defensive assortment of both government bonds as well as corporate debt. This ETF is a great low cost option for investors worried about fees eating away at profits, with a management expense ratio (MER) sitting at slightly more than 0.1%.
With interest rates rising, investors considering short term bonds may be better off, given the fact that longer dated debt tends to perform worse in rising interest rate environments, on the whole. Having a bond ETF in one's portfolio, a strategy which has generally not been profitable in recent years, is one of the best ways to provide some downside protection in the case of a serious market selloff.
Invest wisely, my friends.