As Canadian Capitalist reported, BMO has come out with several new exchange-traded funds, including some bond ETFs. Any investor considering these bond ETFs should check whether it is cheaper to buy a bond directly.
The safest of the new bond ETFs are ZFS (0.2% MER) which invests in Canadian 1-5 year bonds, and ZPS (0.25% MER) which invests in provincial 1-5 year bonds. These MERs are a huge improvement over the typical bond mutual fund MERs, but they can still be high for large investments.
An alternative to these ETFs is to simply buy a bond directly. Discount brokers allow investors to buy bonds that make periodic payments, or buy another type of bond called a coupon that just pays a fixed amount at a given end date. The safest of these bonds are backed by the Canadian government or provincial governments.
Let’s suppose that you want to invest $20,000 in Canadian bonds for 5 years. You could buy ZFS and pay 0.2% each year for a total of about 1% after 5 years. The total fee would be around $200 plus the trading commissions. Or you could buy a bond directly.
Discount brokers don’t make it obvious what commissions you pay on a bond trade. You need to figure out how many bond units you can buy with your $20,000 and look at the gap between the buy and sell price for that number of units. The total cost of buying and then selling the bond will be equal to this gap. Of course, if you keep the bond to maturity, you won’t have to pay the selling half of the commission. With this information you can compare costs and decide on the cheaper approach.
Many investors are unaware that they can buy bonds directly. An advantage of this approach is that the final bond value is guaranteed. With a bond fund or ETF, you get no guaranteed future value.