Within our bond allocation, we recently shifted some weight from XLB.TO, a Canadian ETF, to LQD, a U.S. ETF. For the one-page PDF, click here.
XLB holds various Canadian government bonds and has an average term of about 22 years and a yield of 4.5%. LQD holds U.S. corporate bonds and has an average term of about 12 years and a yield of 4.9%.
We believe Canada is further along than the U.S. in its economic recovery. It is likely the Bank of Canada will begin raising interest rates before the Federal Reserve. Bond ETFs are hurt by rate increases. The longer we can postpone, the better. The BoC could raise by this summer. The Fed raise is unlikely before 2012.
LQD holds quality U.S. corporate issuers in a wide range of maturities. It has a better yield and lower fees than Canadian bond ETFs. Total return in 2010 was about 9.1%. A good yield and possible currency gains should provide decent returns. We expect to hold it through 2011 but will sell as U.S. conditions improve.
Our archerETF Oscillator puts LQD at a reasonable valuation right now, as the chart below shows. Other details are in the table.
archerETF Metrix: [[LQD]]
Category: U.S. Fixed Income
Benchmark: U.S. Corporate Bonds
Total Holdings: 584 Bonds/215 Issuers
52 Week High: $112.22
Recent Price: $108.46
52 Week Low: $98.97
Avg Daily Volume: 1.20 Million Shares
Avg Daily Volume: ($)$129.70 Million
Total Market Cap: $13.21 Billion
ETF Annual Fee: 0.15%
ETF Trading Currency: USD
ETF FX Exposure: USD
Annual Volatility: 11.1%
Correlation to S&P 500: 0.17
Return to Risk Ratio: 2.78
Use of Leverage: No
Use of Futures: No
6 month Return:1.89%
1 Year Return: 8.78%
2 Year Return: 22.93%
3 Year Return:18.95%
Distribution Yield: 4.87%
Average Coupon: 5.81%
Average Maturity: 12 years
Effective Duration: 7.1 years
Short/Mid/Long Maturities: 27% / 46% / 28%
Average Credit Ratings: 53% High / 47% Mid
Additional disclosure: Long XLB.TO