Introduction
In the realm of Canadian investing, bond Exchange-Traded Funds (ETFs) are popular for those seeking stable income and lower risk compared to stocks. Today, we’re comparing two well-known ETFs: BMO Aggregate Bond Index ETF (ZAG) and iShares Core Canadian Universe Bond Index ETF (XBB). Both aim to provide exposure to Canadian bonds, but they have distinct features that may appeal to different types of investors (ZAG vs XBB).
Executive summary
Summary Table: ZAG vs XBB
| Feature | ZAG (BMO Aggregate Bond Index ETF) | XBB (iShares Core Canadian Universe Bond Index ETF) |
|---|---|---|
| Objective | To replicate the Bloomberg Barclays Canadian Float Adjusted Bond Index performance. | To track the FTSE Canada Universe Bond Index performance. |
| MER | 0.09% (On a $10,000 investment, annual fee would be $9) | 0.10% (On a $10,000 investment, annual fee would be $10) |
| AUM | $6.40 billion (indicating higher popularity and potential liquidity) | $4.51 billion (robust but less than ZAG) |
| Diversification | Broad range of government and corporate Canadian bonds. | Similar broad exposure to Canadian government and corporate bonds. |
| Liquidity | Generally higher due to larger AUM. | Sufficient, though slightly less than ZAG due to smaller AUM. |
| Performance | Steady, reflecting overall Canadian bond market. | Aims for consistent income and capital preservation, mirroring broader market. |
| Investment Suitability | Suitable for those seeking a diversified, low-cost bond ETF. Preferred for its slightly lower fees and higher liquidity. | Also suitable for diversified bond exposure with slightly higher fees but robust performance. |
ZAG: BMO Aggregate Bond Index ETF Overview
ZAG is designed to replicate the performance of the Bloomberg Barclays Canadian Float Adjusted Bond Index. It includes a wide range of government and corporate bonds, offering a diversified bond portfolio.
Management Fee: Low, making it an attractive option for cost-conscious investors.
Diversification: Covers a broad spectrum of Canadian bonds.
Performance: Known for steady performance, reflecting the overall Canadian bond market.
XBB: iShares Core Canadian Universe Bond Index ETF Overview
XBB seeks to track the performance of the FTSE Canada Universe Bond Index. Similar to ZAG, it invests in a diversified portfolio of Canadian bonds, including government and corporate bonds.
Management Fee: Slightly higher than ZAG, but still competitive.
Diversification: Similar broad exposure to the Canadian bond market.
Performance: Aims for consistent income and preservation of capital, mirroring the broader bond market.
Key Differences to Consider ZAG vs XBB
Index Tracked:
ZAG follows the Bloomberg Barclays index, while XBB tracks the FTSE Canada Universe. The difference in indices may lead to variations in holdings and performance.
Fees: A Closer Look
The cost of an ETF is reflected in its Management Expense Ratio (MER), a crucial factor for many investors. The MER is a yearly charge deducted from the ETF’s net asset value (NAV), affecting overall returns.
XBB: Features an MER of 0.10%. This means on a $10,000 investment, the annual fee would be $10.
ZAG: Comes in slightly lower at 0.09% MER, equating to $9 annually on a $10,000 investment.
While both ETFs are competitive, ZAG edges out with marginally lower fees, making it a slightly more cost-efficient choice in the long run.
Size and Liquidity: Importance of AUM
The Assets Under Management (AUM) of an ETF are indicative of its size and liquidity. Larger AUM generally means better liquidity, lower bid-ask spreads, and lesser risk of being delisted.
XBB: Boasts an AUM of $4.51 billion, indicating robust trading and stability.
ZAG: Has a higher AUM of $6.40 billion, making it more popular and potentially offering better liquidity.
Both ETFs have substantial AUM, ensuring sufficient liquidity for most investors. However, ZAG’s larger size might provide a bit more confidence for those concerned about liquidity and market presence.
Which One Should You Consider ZAG vs XBB?
Risk Profile and Investment Goals: Both ETFs are suitable for those seeking income and lower risk. Your choice may depend on the specific index you prefer or slight differences in fees and liquidity.
Cost-Sensitivity: If you are particularly sensitive to fees, ZAG might be the more appealing option due to its lower MER.
Diversification Needs: Both offer broad market exposure, but it’s worth looking into the specific bonds each holds to ensure alignment with your diversification strategy.
Both ZAG and XBB are reputable ETFs offering Canadian investors quality bond exposure. The choice between the two might boil down to slight differences:
Cost-conscious investors might lean towards ZAG for its marginally lower MER.
Liquidity-focused investors could prefer ZAG due to its larger AUM, though both ETFs are quite liquid.
Conclusion
Both ZAG and XBB are strong contenders in the Canadian bond ETF space. They offer diversified exposure to Canadian bonds, with slightly different approaches and fee structures. As always, it’s essential to consider your investment goals, risk tolerance, and costs before making a decision. Remember, while ETFs can be part of a diversified portfolio, it’s crucial to understand the underlying assets and risks involved.
Remember to consult with a financial advisor or do further research before making investment decisions. Stay informed and invest wisely!
