2025 has been a difficult year for bonds so far.The Associated Press
It hasn’t been a great year for bonds to this point. After cutting rates last winter, the Bank of Canada and the U.S. Federal Reserve Board have been sitting on their hands, waiting for a clearer picture of where the economy is heading.
As of Sept. 11, the iShares Core Canadian Universe Bond Index ETF XBB-T was showing a year-to-date gain of 2.69 per cent. Its U.S. equivalent, the iShares US Aggregate Bond Index ETF XAGG-T, was up 2.44 per cent in Canadian dollar terms.
But there is one type of fixed income fund that is doing well in the current environment: High-yield bonds or, as they are known colloquially, junk bonds.
The iShares U.S. High Yield Bond Index ETF (CAD-Hedged) XHY-T has been a recommendation of my Internet Wealth Builder newsletter since 2019. It has done very well this year, with a gain of 5.76 per cent as of Sept. 11.
But another junk bond fund has done even better. It’s the iShares J.P. Morgan USD Emerging Markets Bond Index ETF (CAD-Hedged). The trading symbol is XEB-T. We will add it to my recommended list, with the caveat that investors will incur higher risk in return for superior cash flow. Here are the details.
J.P. Morgan USD Emerging Markets Bond Index ETF (CAD-Hedged)
Type: Exchange traded fund (ETF)
Trading symbol: XEB
Exchange: TSX
Current price: $16.49 (Sept. 12)
Entry level: Current price
Annual payout: $0.768
Yield: 4.66 per cent
Risk Rating: High
Website: www.ishares.ca
The security: This ETF trades on the Toronto Stock Exchange. It is denominated in Canadian dollars.
Performance: The fund is showing a total return of 9.36 per cent year to date, but that doesn’t reflect long-term results. Over the past five years, the average annual compound rate of return is -0.7 per cent. Obviously, there is risk here.
Key metrics: The fund was launched in April, 2011, and has about $25-million in assets under management. The MER is 0.54 per cent.
Why we like it: Most bond funds are struggling to keep their heads above water these days. This is one of the few exceptions.
Distributions: Payouts are made monthly. The current rate is $0.064 per unit ($0.768 annually). Note this is not guaranteed and may vary from month to month.
Risks: Several. For starters, the bond market itself will be under pressure if U.S. inflation spikes as President Donald Trump’s tariffs work their way through the economy. Second, should a global recession develop, the risk of default will rise. Third, bonds issued by developing countries carry a higher credit risk than those of Canada, the U.S. and most European countries. Less than one-quarter of the bonds in this portfolio are rated A or better.
To illustrate what can happen when this type of fund goes sour, this ETF lost almost 20 per cent in 2022.
Who it’s for: This fund is best suited for investors who are willing to accept a higher level of risk in return for superior fixed income returns. Based on the fund’s long-term history, I recommend monitoring it closely. Be prepared to exit quickly if the junk bond market goes into reverse.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.