Bond funds have been out of favour these days, especially with the threat of rising interest rates. With dividend stocks paying juicy yields, and returning phenomenal capital appreciation, investors have been reluctant to purchase fixed income securities. Investors forget that when times are good, that all of that can change on a dime! This week the TSX and S&P 500 are already showing signs of a correction, with some dividend stocks off 10% from their highs. This should be a reminder to investors of why asset allocation is important.
That’s where short term bond holdings come into play! Bonds with a duration of 1-5 years, are in opposite movement with the stock market – in other words they are uncorrelated. When markets fall, short term bond funds do very well. And unlike corporate bonds or long-term bonds, short term bonds are less sensitive to interest rate increases.
Claymore 1-5 Year Govt. Laddered Bond ETF (CLF) is a short-term bond ETF, traded on the TSX, and a core holding in my portfolio. This ETF has a very low MER of only 0.17% with a current yield of 4.5%. It provides an excellent hedge against market declines, or a great place to park funds while you are waiting to purchase stocks at discount. I covered Claymore CLF back in October last year, in Buying Bonds? Think Short Term. I feel more than ever investors should take a second look at short-term bonds as a harbour of safety.
Disclaimer: I am long Claymore CLF