If you like to keep the fixed-income side of your portfolio as safe as possible, there’s lots to like about the Claymore 1-5 Year Laddered Government Bond ETF (CLF). It carries one of the lowest management fees of any ETF in Canada at a paltry 0.15%. Its default risk is essentially zero, and its short duration means it’s not too vulnerable to rising interest rates. Finally, the ETF uses a laddered structure to spread out interest-rate risk.
However, for many income-hungry investors, the most attractive thing about CLF these days is its 4.5% yield. Indeed, Gordon Pape recommended CLF last month in a Moneyville article, arguing that it was far superior to the “negligible” returns from GICs. Unfortunately, this a classic example of how investors — and commentators who should know better — too often focus on yield while ignoring total return. In fact, CLF is not likely to outperform a comparable ladder of GICs in the foreseeable future. It may well do worse.
Here’s why yield can be an illusion. The bonds held by CLF all have fairly high coupons (ranging from 4.25% to 6.10%),