This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: Vanguard Total International Stock ETF (Nasdaq: VXUS)

The index: The ETF tracks the MSCI All Country World ex-USA Investable Market Index, which includes virtually every country with a significant stock market, except the United States. This covers 44 developed and emerging markets in Europe, Asia, South America and Africa, as well as Canada.

What sets this index apart from other all-world benchmarks is that it includes small-cap stocks as well as large and mid-cap stocks. As a result, it’s made up of an astounding 6,435 companies. If there is a larger equity index in the world, I’m not aware of it.

The cost: The fund’s MER is 0.20%.

The details: This ETF was designed as one-stop shopping for US investors who want to hold international equities in their portfolio. The rough country breakdown is 43% developed markets in Europe, 25% developed Pacific markets (mostly Japan and Australia), 25% emerging markets, and 7% Canada. The fund includes 54% large-cap stocks, 33% mid-cap stocks, and 13% small caps.

VXUS was just launched on January 28, and I normally take a wait-and-see approach with new products. It often takes time for an ETF to acquire all of the stocks in its index and, as a result, many resort to representative sampling, which can lead to large tracking errors. But there’s no need to worry about that with this ETF, because it is simply a new share class of the Vanguard Total International Stock Index Fund, a mutual fund that has been around for 12 years and has $51 billion in assets.

Last fall, this mutual fund switched its benchmark to the MSCI index, and then the managers set about gradually buying up the 4,000-plus small-cap stocks it needed to fully replicate it. That took about four months. When the acquisitions were complete, Vanguard launched the ETF version. So this fund hit the ground running.

Over the last 10 years, the mutual fund’s tracking error has amounted to a mere 0.09% annually, and since its inception in 1999, the fund has returned 5.15%, three basis points more than its benchmark index. That is a exemplary track record for an index fund.

The alternatives: There are a number of other ETFs that cover the entire world outside of the US. Vanguard’s own FTSE All-World ex-US ETF (VEU) is one of them: it has an almost identical country allocation, but it holds only large- and mid-cap companies. VEU has 2,858 stocks and a fee 0.25%. To get most of the small-cap component, you would have to add the Vanguard FTSE All-World ex-US Small-Cap ETF (VSS), which has 2,700 holdings and MER 0.40%.

The iShares MSCI ACWI ex-US Index Fund (ACWX) also has the same country breakdown, but it includes only 834 holdings and has an MER of 0.35%.

State Street Global Advisors offers the SPDR MSCI ACWI ex-US ETF (CWI), which tracks the same index as its iShares competitor, but holds a larger sample of 1,800 stocks (its MER is 0.34%). Incidentally, it may also be the only exchange-traded fund on the planet whose name is made up entirely of acronyms.

Bottom line: VXUS may be the most important new ETF to come along in the last couple of years: it’s a significant improvement over every competitor. Not only has Vanguard combined VEU and VSS into to single fund, it’s gone two steps further by adding hundreds more small-cap stocks and lowering the management fee.

In my opinion, VXUS is now the best international equity ETF on the market, and the only one most Canadian investors will ever need. As a result, I’ve decided to make it a core holding in my Complete Couch Potato portfolio, where it replaces Vanguard’s VEA, which holds European and Pacific stocks, and VWO, which coveres emerging markets. (Because VXUS holds 7% in Canadian stocks, it’s not a perfect substitute, but the difference is trivial.) This reduces the complexity of the portfolio and adds more diversification through the small-caps, with essentially no change in the cost. What’s not to love?

Disclosure: I do not currently hold VXUS in my own portfolio, but when I next rebalance, I plan to use it to replace VEA and VWO.



This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: Claymore Global Monthly Advantaged Dividend ETF (CYH)

The index: Zacks Global Multi-Asset Income Index, which was created specifically for Claymore. It combines the Zacks Multi-Asset Income Index (made up of U.S. securities) and the Zacks International Multi-Asset Income Index, which includes developed and emerging countries outside the U.S.

This is a “strategy index,” which means it is not designed to passively track the whole universe of dividend-paying stocks. Rather, the securities are hand-picked “using a proprietary model based on dividend growth, the capacity to increase the current dividend, liquidity, and dividend yield.” The methodology is not made public.

The most important thing to understand about the Zacks index is that it is not limited to common shares of dividend-paying companies. Almost half the index is made up of preferred stocks, American depositary receipts (ADRs), real estate investment trusts (REITs), master limited partnerships, and closed-end funds.

The cost: The fund’s MER is 0.67%, but the prospectus says that the forward agreement (explained below) will add about 0.50% more to the cost.

The details: This is no plain-vanilla dividend ETF. It’s a complicated product, and if you’re considering investing in it, take the time to understand how it works.

CYH is based on two US-listed ETFs from Guggenheim, Claymore’s parent company: 40% is allocated to the Guggenheim Multi-Asset Income ETF (CVY), which covers the US, and 60% to the Guggenheim International Multi-Asset Income ETF (HGI), whose largest allocations are to the UK, Canada and France. In all, CYH holds a widely diversified portfolio of 283 companies with no stock comprising more than 2% of the fund.

The holdings include blue-chip names in many sectors — Nokia, Allianz, Novartis — but the fund is highly skewed to the energy sector. This isn’t obvious if you look at the fund’s fact card, which shows a 20% weighting to financials. In fact, most of the companies classified as financials are income trusts in the oil and gas sectors, not banks or insurance companies.

Now for the complicated part. CYH doesn’t actually hold the two US-listed ETFs upon which it’s based. Instead, it has teamed up with National Bank of Canada to create a type of derivative called a forward agreement. It works like this: Claymore invests CYH’s assets in a portfolio of Canadian non-dividend-paying stocks. Then they periodically swap the returns from these Canadian stocks with National Bank at prices determined by the performance of the Zacks index.

Why such a convoluted structure? Because foreign dividends would be subject to a 15% withholding tax and are fully taxed as income. Thanks to the forward agreement, CYH’s distributions can be characterized as return of capital, which is non-taxable, or as capital gains, which are taxed at half the rate of regular income. (While this sounds like financial sleight of hand, forward agreements are common in the industry and not a cause for concern.)

When CYH was launched in January 2008 it had a yield of almost 9%, but that year it lost about 41% — of course, so did a lot of other equity funds. In 2009 the fund returned 47.5%, considerably more than the overall equity markets. The ETF’s tracking error was high in both years: –3.2% in 2008, and –1.5% in 2009. So far in 2010 it has returned just over 6%, most of which has come from its monthly distributions (the fund currently yields 4% annually). The ETF hedges foreign currency exposure, so the index returns are measured in Canadian dollars.

In the liquidity department, this ETF has some concerns. Given the wild popularity of dividends these days, I’m surprised the daily trading volume averages only about 13,000, compared with more than 100,000 for Claymore’s S&P/TSX Canadian Dividend ETF. It’s also common to see a large gap between the fund’s net asset value (NAV) and its market price. If you’re considering investing in CYH, you’d be wise to place a limit order.

The alternatives: No other Canadian ETF provider offers an international dividend-focused index fund. However, Horizons AlphaPro recently launched the actively managed Global Dividend ETF (HAZ), which is approximately 50% in US stocks, 11% Canadian and 39% international.

There are innumerable ETFs in this category from US providers such as Vanguard, iShares, PowerShares, State Street Global Advisors and WisdomTree.

Bottom line: CYH has a lot to offer investors who are looking to earn current income in a non-registered account, such as retirees who are living off their portfolio. The fund allows these investors to diversify outside Canada and get extremely favourable tax treatment on a healthy 4% yield.

However, it is far less attractive for investors who do not need current income or the tax-advantaged structure — which includes anyone investing an RRSP. The actively managed Zacks index is completely opaque, and the forward structure adds an extra layer of complexity and cost that is unnecessary in a tax-sheltered account.

There’s also no reason to focus on dividends in an RRSP, where total return is all that matters. With that in mind, you can get much more complete exposure to US and international equities at a fraction of the cost with truly passive broad-market ETFs.

Disclosure: I do not own CYH in my own portfolio. The US and international equity holdings in my RRSP are Vanguard ETFs.

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: TD Balanced Index (TDB965)

The index: This index mutual fund tracks a blended benchmark made up of 48% DEX Universe Bond Index (Canadian bonds), 32% S&P/TSX Composite (Canadian equities), 9% S&P 500 (US equities), 9% MSCI EAFE (European/Pacific stocks), 2% DEX 91 Day T-Bill Index.

The cost: The fund’s MER is 0.83%; as of July 2010, the HST makes the total cost of the fund 0.94%.

The details: The TD Balanced Index fund is an all-in-one portfolio that holds several other TD index funds. It holds half of its assets in fixed income and half in equities. Here’s the breakdown as of August 31:

Both the US and international funds are hedged to Canadian dollars to remove currency risk.

The fund has a minimum investment of just $100, and subsequent contributions must also be at least $100. This makes it accessible for investors who have only a small amount to invest and would like to set up a simple index portfolio with just one fund.

Here is the fund’s performance since 2000 (the 2010 figure is as of August 31):

The fund’s annualized return for the decade 2000–09 was 3.79%. That doesn’t sound like much, but it’s good enough to rank in the second quartile (that is, above average for Canadian balanced funds) according to Morningstar. GlobeFund gives the fund four out of five stars compared with its peers over the last 10 years.

SEDAR only has reports going back to 2005, and since that time the fund’s tracking error has averaged –1%, or 17 basis points higher than its MER.

The alternatives: There are only two other balanced index funds available: the CIBC Balanced Index Fund, with an MER of 1.09%, and the ING Streetwise Balanced Fund, with an MER of 1%.

Only a small number of actively managed balanced funds can compete on fees. The notable ones are the Mawer Canadian Balanced Retirement Savings Fund (MER 1.01%), the McLean Budden Balanced Growth Fund (MER 0.95%), the Phillips Hager & North Balanced Fund (MER 0.86%). These funds are available through discount brokerages, but they require minimum investments of $5,000 to $10,000.

All five of these competing funds have a strategy of 60% equities, compared with 50% in TD’s fund. All but the PH&N fund also divide the equity portion more or less equally between Canada, the US and overseas. (The PH&N and TD funds have a much higher weighting to Canada.) Keep these differences in mind when comparing the funds’ performance over the past 10 years. Any fund with a lower allocation to US and international stocks will have performed better during the dreadful 2000–09 period:

ING’s Streetwise Balanced Fund has only a two-year track record: it returned –14.1% in 2008 and 10.7% in 2009, considerably worse than the TD fund.

The bottom line: The TD Balanced Index is a low-cost, well diversified fund with a decent, though not outstanding track record. Clearly index investors who want exposure to these four asset classes can do better by assembling the portfolio themselves, either with TD’s own e-Series funds or with ETFs.

However, the fund is a good option for beginning indexers who have a very small sum to invest but want to begin making a regular monthly contribution. With just one preauthorized plan to set up and no rebalancing necessary, this would be a convenient way to get started.

This fund might also help ETF investors who are looking for a way to use dollar-cost averaging. If you have an all-ETF portfolio, you likely don’t want to add money to your positions more than once or twice a year in order to keep trading costs to a minimum. But of you’re making monthly contributions to your account, you may have several thousand dollars lying around in cash for much of the year. (This idea was discussed earlier this month in Dollar-Cost Averaging With ETFs: Part 1 and Part 2.)

By setting up a preauthorized contribution to this fund, you’ll be maintaining exposure to both the stock and bond markets throughout the year. Then you can withdraw money from the fund whenever necessary to rebalance your ETFs.

Disclosure: I do not own the TD Balanced Index fund in my own portfolio.

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The funds: The Claymore Balanced Growth CorePortfolio ETF (CBN) and Claymore Balanced Income CorePortfolio ETF (CBD), a pair of ETF wraps made up of equity, fixed-income and commodity ETFs and designed to serve as complete portfolios.

The indexes: Both ETFs track versions of the Sabrient Global Balanced Index, a custom benchmark created for Claymore. The index “comprises a mixture of approximately 10-20 (or more) existing ETFs selected, based on investment and other criteria, from a defined set of exchange-traded funds trading on the Toronto Stock Exchange.”

There are Growth and Income versions of the index, each specifying a range for each asset class. For example, in the Growth index, Canadian, US and international equity must all make up 15% to 20% of the portfolio. The Income index must include 20% to 25% government bonds and 17.5% to 22.5% Canadian dividend stocks.

According to the funds’ literature, “weightings are adjusted and rebalanced quarterly to the optimal asset class mix depending on economic conditions and relative value of income and equity securities.” Translation: the fund uses tactical asset allocation, albeit based on quantitative rules and not a manager’s own forecasts.

The cost: The MERs of the CorePortfolios are 0.68% for CBD and 0.82% for CBN. This includes the cost of the underlying ETFs as well as an additional management fee of 0.25%.

The CorePortfolios are also available through advisors—indeed, more than 40% of their assets are in “advisor class” shares, which add an extra 1% trailer fee. This advisor fee will wipe out any cost advantage the ETFs would have had over balanced mutual funds.

The details: Like a balanced mutual fund, these Claymore ETFs are suitable for investors who want a globally diversified portfolio without having to select a number of individual funds.

Claymore’s Balanced Growth CorePortfolio is currently made up of 14 other Claymore ETFs, plus two iShares ETFs that cover REITs and real-return bonds. It’s most significant holdings are international, US and Canadian equity ETFs, each of which makes up about 17% of the portfolio. CBN also includes an allocation to emerging markets (9%), real estate (8%), government and corporate bonds (13%), and a trivial smattering of infrastructure, water and agriculture. The one significant commodity allocation is 8% to gold, via the Claymore Gold Bullion ETF (CGL). Overall, it is an aggressive fund with about 75% in equities.

The 11 ETFs that make up the Balanced Income CorePortfolio have a more Canadian and more conservative focus. The fund holds 20% in short government bonds, another 10% in real-return bonds and more than 12% in corporate bonds. Almost 50% of the fund is in dividend-paying stocks, more than half which are Canadian.

You can criticize the narrow sectors in the Growth fund (why does anyone need 2.5% in a global water ETF?) and question why there’s gold in the Income fund (last time I checked, bullion pays no income), but these are quibbles. Overall the asset allocations are sensible: well diversified, but not overly complex. The indexes prescribe narrow ranges for each asset class, so the asset allocation should not change much from quarter to quarter.

Claymore launched the CorePortfolio ETFs in June 2007, which was terrible timing. That turned out to be the 10-year peak for the US and international stocks, and while the TSX eventually climbed a bit higher before the crash, global stock  markets are still way below where they were in mid-2007. So you can’t be too hard on CBN for posting a return of –9% since its inception. The more conservative CBD managed to eke out a tiny gain (less than 0.2%) over the same period.

The recent performance of both funds has been outstanding. In 2009, the Growth ETF returned 29.2%, while the Income ETF returned 25.6%. (By way of comparison, the Mawer Canadian Balanced Retirement Savings Fund, perhaps the best balanced mutual fund in Canada, returned 16.4% last year.) And that doesn’t include their distributions: currently CBN yields about 2.5%, while CBD throws off an income of more than 4%. Distributions are paid monthly and can be reinvested using Claymore’s DRIP plan.

The alternatives: The most direct competitors of the Claymore CorePortfolios are the similarly named iShares Conservative Core Portfolio Builder Fund (XCR) and iShares Growth Core Portfolio Builder Fund (XGR). I have reviewed these ETF wraps in a previous post — suffice it to say I don’t like anything about them, despite their low MERs (0.63%).

The bottom line: There is a lot to like in Claymore’s CorePortfolio ETFs, and I think either one would be an good choice for do-it-yourself investors who want an all-in-one solution at low cost compared with a balanced mutual fund. However, if you’re working with an advisor who is using the advisor-class shares, he or she is skimming 1% of your assets in return for buying one ETF. That’s not a good deal.

The CorePortfolios are especially appealing for small accounts: building a portfolio with ETFs is not usually cost-effective with less than $30,000 to $50,000. But these wraps allow you to get an instant portfolio with one initial purchase (maximum price $29), and you can set up preauthorized contributions and a dividend reinvestment plan and avoid all further brokerage fees. The ETFs rebalance themselves quarterly, which also saves brokerage commissions and makes life easier. All considered, you’ve got an extremely simple and inexpensive way to become a Couch Potato.

If you’re considering investing in either of these ETFs, first read the prospectus.

Disclosure: I do not own CBN or CBD in my own portfolio.

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: BMO Real Return Bond Index ETF (ZRR)

The index: The fund tracks the DEX RRB Non Agency Bond Index, which consists of inflation-linked bonds issued by the Government of Canada. It seems to have been created specifically for this ETF.

The cost: The ETF’s management fee is 0.25%. As with other BMO funds, the actual MER will be higher because it includes GST/HST and some other expenses.

The details: This brand-new ETF (it started trading on Wednesday, May 26) holds five real-return bonds issued by the federal government, each making up about 16% to 23% of the fund’s assets.

Real-return bonds — or Treasury Inflation-Protected Securities (TIPS), as they’re called in the US — are an important asset class, and some financial experts recommend them as a core holding.

Both the principal and the interest payments of real-return bonds are tied to the Consumer Price Index, so they go up with inflation. Here’s an illustration of how this might work, courtesy of Bylo Selhi:

On a $1,000 bond, if the coupon interest rate is 3% and inflation is 1% after six months, the principal is adjusted to $1,010. You then receive a semi-annual interest payment of $15.15. If inflation rises to 3% by year end, the principal is adjusted to $1,030. You then receive another interest payment of $15.45. Assuming similar inflation over 10 years, you will receive $351.64 in interest payments while the principal will have risen to $1,343.92.

Real-return bonds typically have long durations: the maturity dates of the five in this ETF range from 2021 to 2041. Since real-return bonds were introduced in 1992, the average annual return has been 8.2%, which falls between that of short-term (6.6%) and long-term bonds (9.5%) over the same period.

The alternatives: Real-return bonds are an under-served asset class: until ZRR was launched, the iShares Real Return Bond Index Fund (XRB) was the only ETF of its kind in Canada. There are only two no-load mutual funds devoted to them — TD’s Real Return Bond Fund and Phillips Hager & North’s Inflation-Linked Bond Fund — and both are actively managed.

ZRR has undercut its iShares competitor in price — XRB charges 0.35% — although we’ll have to wait for the first Management Report of Fund Performance to learn what its all-in cost will be. TD’s mutual fund charges an onerous 1.42%; PH&N’s has a super-low fee of 0.53%, but brokers may require a minimum investment of $5,000.

What’s most interesting is that all of these funds have very similar holdings. The reason is simple: there just aren’t many real-return bonds to choose from. The federal government has just five issues, all of which are held by BMO’s fund. These five also also make up 86% of XRB, 60% of TD’s fund, and 80% of Phillips Hager & North’s. The only other significant issuers of real-return bonds are Ontario, Quebec and Manitoba, and provincial governments aren’t included in the index ZRR tracks.

The bottom line: It’s too early to pass judgment on ZRR: it will take at least a year to see if it’s able to keep its expenses down and track its index closely. But if it performs well, it will be an attractive alternative to iShares’ XRB, which currently holds over $594 million in assets. Given the extremely limited inventory of real-return bonds, performance of funds in this asset class really comes down to who can keep their costs lowest.

If you’re considering this new ETF, first look through the prospectus.

Disclosure: I do not own ZRR in my own portfolio. I have a small position in TD’s Real Return Bond Fund (too small to make an ETF cost-effective).

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The funds: iShares Conservative Core Portfolio Builder Fund (XCR) and iShares Growth Core Portfolio Builder Fund (XGR)

The indexes: Both XCR and XGR are actively managed funds that do not track an index.

The cost: The MER of each fund is 0.63%. This is the all-in cost, as the MERs of the underlying funds are waived so investors are not charged twice.

The details: The iShares Core Portfolio Builders are ETF wraps: all-in-one portfolios made up of iShares ETFs in various asset classes: bonds, equities, and commodities. They appear to be designed for investors who like the idea of investing with ETFs, but aren’t comfortable building their own portfolios from scratch.

Although their names suggest quite opposite strategies, both ETFs are extremely bond-heavy: the Conservative version (XCR) currently holds 76% in bonds, 19% in equities, and 5% in commodities. The Growth fund (XGR) is 63% bonds, 26% equities, 9% REITs and 2% commodities.

It’s important to understand that both XCR and XGR are actively managed funds: the building blocks are index-tracking ETFs, but the asset mix is adjusted regularly based on market forecasts. If you’re a believer in the Couch Potato strategy—which is founded on choosing an asset allocation and sticking with it over the long term—this should make you turn and run away.

Indeed, the managers don’t simply make little tweaks: sometimes the moves are huge. At the time of its last quarterly report on December 31, 2009, XCR held a whopping 42% in short Canadian bonds, while today that asset class is only 8.4% the fund. Even more striking is how much both Core Portfolio Builders currently devote to foreign bonds: the single biggest holding in each is a 20% allocation to Treasury Inflation-Protected Securities (TIPS), which are the American equivalent of Canadian real-return bonds. XGR adds another 13% in emerging market bonds, while XCR holds 16% in US corporate bonds.

The US currency is hedged, but it’s still hard to see why a Canadian investor would want so much foreign fixed income. Diversifying internationally is important with equities because our stock market is small and focused on a few sectors, but Canadian investors can do just fine holding only domestic bonds. A smattering of foreign bonds might add some benefit, but more than one-third of the entire portfolio? It’s way too much.

Not surprisingly, the asset allocation decisions for the Core Portfolio Builders are handled in the US, even thought the products are marketed to Canadians. Last month, I criticized BMO’s model ETF portfolios, which are also grossly overweight in US bonds. I’ll make the same comment about these iShares ETFs: the fund managers in New York clearly don’t appreciate why holding so much foreign fixed-income makes no sense for Canadian investors.

The alternatives: Claymore also offers a pair of all-in-one ETF portfolios: the Balanced Income CorePortfolio (CBD) and the Balanced Growth CorePortfolio (CBN). I’ll look at these in detail in this post.

The bottom line: The ETF wrap is a good concept, but iShares hasn’t found the formula. The Core Portfolio Builders might be a better choice than run-of-the mill balanced mutual funds, which can carry MERs four times higher. But with an hour of research on this blog, you can build a simpler, cheaper and more appropriate indexed portfolio on your own, even with a small initial investment. The marketplace seems to agree: both Core Portfolio Builders have only a few million dollars in assets and are very thinly traded, which means they have large bid-ask spreads that make them even less attractive.

Disclosure: I do not own XCR or XGR in my own portfolio.

This post is the first in a planned series called Under the Hood, where I’ll take a detailed look at a specific ETF or index fund.

The fund: Claymore 1–5 Year Laddered Corporate Bond ETF (CBO)

The index: CBO tracks the DEX 1-5 Year Corporate Bond Index, which appears to have been custom-made for this fund. The index lays out a set of rules for building a laddered portfolio of short-term, investment-grade corporate bonds. It includes 25 bonds divided into five equal “buckets”: five of the bonds have a term to maturity of 1–2 years, five others have terms of 2–3 years, and so on up to 5–6 years.

The cost: The MER is 0.28% as of June 2009, including a management fee of 0.25%.

The details: Claymore launched this ETF just over a year ago and it has been very popular, with an average daily trading volume of about 115,000 shares. It’s a well-designed index: the laddering technique is an excellent way to achieve a balance between good yield and a minimum of interest-rate risk. (In most cases, bonds with longer terms have higher yields, but their market value will fall more sharply when interest rates go up.)

CBO currently pays a quarterly distribution of $0.24, which works out to a yield of about 4.6%. However, the average yield to maturity is about half that. Without getting too deeply into bond math, what this means is that all of the bonds were bought at a premium (a price higher than their face value). Eventually the fund will probably suffer a series of small capital losses as these bonds are sold, so the total annual return on the ETF may be lower than that 4.6% yield suggests. That’s not a knock against CBO specifically: with interest rates at rock bottom and likely to rise this year, just about every bond fund is in this boat.

I was confused when I looked at the individual bonds in this fund. Because this is a short-term fund, I was expecting to find only bonds with maturities between 2010 and 2015. In fact, one matures in 2020, and two are dated 2049. I contacted Claymore to ask why, and they explained that these bonds are callable within five years, which means that the issuer can redeem them before the maturity date. In the past, these bonds have always been called by the banks after five years, so for all intents and purposes, they behave like short-term bonds.

The alternatives: CBO’s closet competitor in the marketplace is BMO’s Short Corporate Bond (ZCS). BMO’s fund is more diversified (it holds 66 bonds rather than just 25), but it’s also more expensive (0.35% MER) and it doesn’t use the laddering strategy.

iShares Canadian Corporate Bond (XCB) and iShares Canadian Short-Term Bond (XSB) are similar, but with important differences. XCB holds mid- and long term corporate bonds as well those with less than five years to maturity; XSB is about 70% government bonds and only 30% corporates.

The bottom line: Claymore’s 1–5 Year Laddered Corporate Bond ETF is an excellent choice for the corporate bond portion of a Couch Potato portfolio. I feel that its low cost and laddered structure give it an edge over its competition. It’s also eligible for Claymore’s dividend reinvestment plan (DRIP), which is a nice feature in a bond fund that pays a substantial yield.

Disclosure: I own CBO in my own portfolio.