Although they don’t get much attention in the world of bonds, provincial bonds can be a nice addition to a portfolio.
Provincial bonds come with many of the advantages of federal bonds. A province can always increase taxes to pay for excess borrowings, making them almost immune from default. They come with a great deal of security, yet investors can often get a little better yield than a comparative federal bond.
Look at the BMO Short Provincial Bond Index ETF (TSX:ZPS) as an example. The trailing 12-month yield on that ETF is 3.06%, compared to 1.80% on the equivalent product that tracks federal bonds.
Although that difference may narrow as the provincial bonds held mature and are replaced with new ones, it’ll still likely offer a yield that’s consistently a little better than federal bonds.
The BMO ETF’s top holdings are dominated by provincial bonds from Quebec and Ontario with an average duration of about three years. It also has a low management fee of 0.25%, very reasonable for an actively managed fund.
First Asset, a much smaller ETF provider, also offers a provincial bond ETF. The First Asset Provincial Bond Index ETF (TSX:PXF) is tiny compared to the BMO version, with a market cap only approaching $5 million, compared to more than $550 million for the equivalent BMO product.
This ETF has the same management fee as its competitor with a slightly different mix of top holdings, including a 4.7% position in a New Brunswick provincial bond. It does pay a higher current yield of 3.51%, but it does so by investing in longer-term bonds.
