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XSH - Canadian Short Term Corporate + Maple Bond

12K views 34 replies 8 participants last post by  james4beach 
#1 ·
I bought some XSH (iShares Core Canadian Short Term Corporate + Maple Bond Index ETF)

It has wide bid/ask spreads, which isn't so great. I placed a limit buy order using the NAV and it eventually filled.

This has a mgmt fee of 0.12% and thus MER around 0.14%, which is awfully cheap for a bond fund. Compared to my beloved XSB, the XSH is also short term maturity but has lower grade exposure, is all corporate debt and a higher yield.
 
#2 ·
Does anyone else own this?

I recently made a graph of the different corp bond ETFs. On the x-axis I put the % exposure to sub-A grade paper. On the y-axis is the yield. After adjusting for maturity length, there is a nice ... almost linear ... line on this graph. I think it's a nice illustration of risk vs reward. For instance, at the extreme end are junk bonds with 100% exposure to sub-A paper and the highest yield.

I like XSH's position on that grid; it's near the left of the graph. It has a bit more risk and bit more reward than the conservative corp bonds, but nowhere close to the junk bonds. It's just a spot that I like on the corporate risk/reward spectrum.
 
#3 ·
The yield-to-maturity of XSH is now 2.0%. That seems pretty attractive for a short-term bond fund (avg 3 year maturity, effective duration 2.77), I'm buying more.

For instance XSB and VSB have the same maturity/duration, but their yields are much lower at 1.3% and 1.2% respectively
 
#10 ·
(back on 2015-11-20) The yield-to-maturity of XSH is now 2.0%. That seems pretty attractive for a short-term bond fund (avg 3 year maturity, effective duration 2.77), I'm buying more.
XSH has performed amazingly well. Since this post of mine in November, it's a 1.64% total return or 3.1% return annualized. Just crazy; these are short term bonds but this is twice the return of XSB in the same period!

I still plan to buy more XSH in the future but I'm going to sit and wait in HISA right now
 
#7 · (Edited)
Just beware, XSH has lower credit quality than XSB. So it is a bit riskier, and that's why it has a higher yield.
2% sheesh! Can't understand buying XSH (or any of those bond funds, for that matter). Instead of XSH, why not buy a basket of corporate bonds or convertible debentures? Or even split preferreds with a fixed maturity? Not hard to get more than double the yield of XSH, probably at about same risk? And little to no chance of capital loss. YMMV.

But of course, everyone has a different view . My aim is to have portfolio yield that exceeds our withdrawal rate (well into retirement). Worked out so far!
 
#13 ·
Yeah I'm also doubtful of technical analysis on a bond ETF.

I just watch the YTM both of a bond fund, and of the bond market in general. As it fluctuates over time, I try to buy debt when yields are on the high side -- assuming it's debt I want to buy anyway. This is totally analogous to more aggressively buying stocks at times the market is depressed (again assuming you are going to buy stocks anyway over time).

This is what led me to the good entry point on XSH ... I could see that the YTM was significantly higher than XSB's at the time. Indeed that turned out to be a great buying point!

I apply the same logic when looking at GICs vs corp bonds vs government bonds. They don't all move in lock step, so at any given time one of them tends to be a better deal than the others
 
#14 ·
This thing continues to be a real winner. Although I still heavily use GICs, I'm increasingly thinking short term corp bonds may be a great place to park my cash component long term. Just beware that the ETF causes very large distributions and is very tax inefficient in a taxable account.

Here are the last few annual returns of XSH:

Code:
2012:  3.79%
2013:  2.23%
2014:  3.39%
2015:  2.62%
2016:  2.17%
And the last 1 year's return is 2.74%.

XSH is steadily beating XSB over the years, which I find very interesting. Perhaps when the economy slows down and credit risk rises, the reverse will be true? Any thoughts from others?
 
#15 ·
Yield on XSH has increased with this recent rate hike. The YTM is now 2.31%, subtract 0.10% MER and the expected yield = 2.2%. That 2.2% is still quite a bit higher than you get in VSB/XSB. There are some troubled banks with GICs that yield that much, but XSH is liquid (unlike a locked in GIC).

Trailing performance is available here, and shows performance up to yesterday.

Yes, the price fell with the recent rate hike, but notice that year-to-date return is still positive +0.12%, and the one year return is also positive +0.96%

It's hard to not like this! Warning, XSH (all corporates) is still riskier than short term bond ETFs with higher quality bonds. That's why it returns more!
 
#16 ·
XSH had a pretty rough drop in the recent credit market event, due to its heavy exposure to corporate bonds. To check up on its performance, I looked at XSH returns versus PSA, which holds cash at credit unions. Here is how they stack up, with annualized return figures from Morningstar as of May 5:

1 year: XSH = 3.51% , PSA = 1.96%
3 years: XSH = 2.28%, PSA = 1.70%
5 years: XSH = 2.38%, PSA = 1.43%

So there's definitely a performance advantage of short term corporates versus cash, as there should be. But that comes with more risk and volatility.

Today, XSH's yield to maturity is 2.01%, subtract 0.10% MER, leaving you with 1.91% expected performance going forward roughly 3 years.

PSA/cash rate is 0.65%. So it looks to me like at current prices, XSH offers a pretty significant performance over cash, assuming we don't have another crisis in corporate bonds.
 
#25 ·
Check out XSH today! The yield to maturity is 5.17%

Is that crazy or what? The fund has 3 years average maturity. Some extra yield is coming from the credit risk as you can see in the ratings profile. These are all corporate bonds.

AAA3%
AA7%
A56%
BBB34%

They are flirting with some of the riskier paper at BBB. It's not really my cup of tea, since BBB corporates (and possibly even A) are vulnerable in a recession.

XSB is a similar fund that's safer, since most of its paper is AAA and AA. But then the yield drops to 4.44%
 
#27 ·
And I can see the argument that this credit risk is worth it. I took a look at the risk-adjusted returns using Portfolio Visualizer, for XSB vs XSH (the main difference being the credit risk). I'm looking at the sortino ratio which is a good measurement. A higher number means a better risk-adjusted return.

Since 2012, XSB has a sortino ratio of 0.49 and XSH has a ratio of 0.73

So it looks like XSH was the better deal (in terms of risk versus reward) at least for this time period. It was more volatile due to the BBB paper but it also had a higher return.
 
#32 ·
I apologize for my poorly worded post. Please allow me to try again with a different twist.

Why do you suppose they don't publish the total shares, periodically? Perhaps daily or even weekly? The underlying assets should have an inherent value. They do publish the NAV but that number is useless without knowing how many shares exist to claim ownership.

Wouldn't you think it would be a tad more ethical to publish the number of shares and the asset value, so people can know what they are buying?
 
#33 ·
They don't focus on total units because of the mechanism that forces convergence of the NAV to FMV. On a continuous basis an investor can deliver to the ETF manager a basket of the holdings in the ETF and receive in return units of the ETF. This mechanism keeps the value of the ETF in check with the value of the ETF portfolio constituent components. (Because of the scale required this is typically done by institutional investors that specialize in this type of arbitrage.)

Re; total return. It is important to note that this ETF, as is typical for most bond ETFs, has a fixed target duration. It maintains a weighted average duration that tracks its index. As such it continually sells off bonds as they get to lower tenors and recycles the capital to buy longer dated bonds. When the yield curve is stable or rates are dropping all is well. However, when the bonds become younger and worth less than expected due to higher rates their price return is a drag on total performance. Along the way they continue to provide coupon income.

In contrast if one held a bond directly they would earn the expected return known at the time of purchase, save and except for some variation in the reinvested cash from coupon payments and any losses from default of the bond.
 
#34 ·
A bit of an aside, but I also wanted to point out that XSH has returned 1.5% annually (positive) over the last 5 years. That really isn't bad in a period with sharply rising interest rates. Over that period, corp bond yields went from a bit over 2% to around 5%.

So while a single year's return can be terrible, it does seem that over a handful of years XSB and XSH are doing an OK job.
 
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