Bond ETFs: A weapon in the fight against low rates?

Key Points Term depositors are facing the prospect of rolling at lower rates Bond ETFs have been marketed as a cash/fixed interest alternative Most investors are better off sticking with TDs    Background Sun Tzu in Current yield is simply a reflection of coupon (interest) rates at the date the underlying bonds were originally issued. If an ETF is paying a premium to face value to buy bonds now (quite likely) then the current yield will be higher than the yield to maturity —the rate of return you’ll actually get. What we should focus on is ‘average yield to maturity...

Sun Tzu in Current yield is simply a reflection of coupon (interest) rates at the date the underlying bonds were originally issued. If an ETF is paying a premium to face value to buy bonds now (quite likely) then the current yield will be higher than the yield to maturity —the rate of return you’ll actually get.

What we should focus on is ‘average yield to maturity (YTM)’ and ‘weighted average term to maturity’. These figures show what the current portfolio is expected to return, and over what time frame.

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