For investors who need stable income and want to hold bonds, these two bond funds offer exposure to quality holdings with low-fees.

The Bank of Canada is unlikely to raise interest rates any time soon. That’s because low prices for oil should continue to offset government stimulus spending as well as increased exports due to the weak Canadian dollar. The federal government’s tighter mortgage rules should also cool housing markets and further limit the need to raise interest rates.

Even so, interest rates are expected to rise in the long term. That’s because heavy deficit spending and the expansion of the money supply in the past few years make higher inflation more likely.

We continue to advise against investing in bonds right now. Today’s low interest rates make them unattractive, and rising rates will push down their future value. However, if you need stable income and want to hold bonds, these two bond funds offer lower fees and high-quality holdings.

ISHARES CANADIAN SHORT-TERM BOND INDEX ETF (Toronto symbol XSB; buy or sell through brokers) aims to mirror the DEX Short-Term Bond Index.

This index consists of investment-grade federal, provincial, municipal and corporate bonds with one- to five-year terms. The fund holds 455 bonds with an average term to maturity of 2.88 years. The bonds in the index are 66.3% government and 33.7% corporate. The fund’s MER is 0.28%.

The iShares Canadian Short-Term Bond Index Fund yields 2.3%, but the high yield is due to the fact that some of the fund’s bonds pay above-market interest rates. As a result, they trade above their face value. But when these bonds mature, holders will only get the bonds’ face value, meaning the portfolio will incur predictable capital losses. These losses will partially offset the above-market yields.

The key figure when looking at the long-term return of this fund is its yield to maturity. This yield takes into account the series of capital losses the fund will experience as its above-market-rate bonds mature. The yield to maturity for the iShares Canadian Short-Term Bond Index ETF is 1.27%. That’s less than the 2.3% yield but still higher than the 0.56% you’d earn by investing in, say, a one-year T-bill.

Recommendation in Canadian Wealth Advisor: If you want to invest in a bond fund, the iShares Canadian Short-Term Bond Index Fund is a buy.

ETFs: Fund yields 2.7% MER

ISHARES CANADIAN UNIVERSE BOND INDEX ETF (Toronto symbol XBB; buy or sell through brokers) mirrors the performance of the Canadian Universe Bond Index. The 1,134 bonds in the portfolio have an average term to maturity of 10.17 years. The fund’s MER is 0.34%.

The bonds in the Canadian Universe Bond Index are 72.6% government and 27.4% corporate. Most of the corporate bonds are from high-quality issuers such as Toronto- Dominion Bank, Hydro One, Intact Financial and Canadian Pacific Railway.

The fund yields 2.7%, compared to the Short-Term Bond Fund’s 2.3%. Its yield to maturity is 2.04%—0.77 percentage points above the Short-Term Fund. That reflects the added risk of long-term bonds.

Recommendation in Canadian Wealth Advisor: iShares Canadian Universe Bond ETF is a buy for safety-conscious investors who can accept that risk.

For our advice on how to make the most of ETFs,, read Guidelines for making the best ETFs part of your investment portfolio.

For our recent report on ETFs that give you U.S. and international exposure, read 2 low-fee ways to access U.S. funds.