# Bond ETFs



## leeder (Jan 28, 2012)

I'm thinking of transitioning the bond component (25% weighting of my portfolio) in my RRSP from the TD e-Series (TDB909) to a bond ETF. I know bond ETFs are not exactly popular these days due to the low interest environment, but I want something that will produce some fixed income. Not to mention, the TD909 has a long duration according to TDW and is more expensive now that I have a bigger portfolio.

I'm currently looking at the investing that portion in corporate bond ETFs (to get more yield) and would appreciate your opinions and any other suggestions you may have:

1) CBO - Ishares 1-5 year Laddered Corporate Bond Index Fund (38 holdings; MER: 0.28%; Duration: 2.82 years; Weighted YTM: 2.12%)
2) XSH - Ishares DEX Short-term Corporate Universe & Maple Bond Index (241 holdings; MER: 0.28%; Duration: 2.92 years; Weighted YTM: 2.21%)
3) VSC - Vanguard Short-term Corporate Bond Index (80 holdings; MER: ~0.18%; Duration: 3.00 years; Weighted YTM: 2.1%)
4) PSB - Powershares 1-5 year Laddered Grade Corporate Bond Index ETF (25 holdings; MER: ~0.28%; Duration: 2.79 years; Weighted YTM: 2.15%)
5) ZCM - BMO Mid Corporate Bond Index ETF (121 holdings; MER: 0.34%; Duration: 5.85 years; Weighted YTM: 3.06%)


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## arc (May 19, 2012)

XBB has a higher YTM and is personally my favourite


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## dubmac (Jan 9, 2011)

https://www.google.ca/finance?q=TSE:CHB&ei=dy_qUPCrAcW_qgGjmQE
CHB - iShares advantaged Hy Bond. The yield appears to be in the 6.5% range (0.12/unit per month) I don't know anything about this fund and I own no units.


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## mrcheap (Apr 4, 2009)

I have 20% of my portfolio as fixed-income + cash. Originally I had xsb but I've been buying vsb more recently (for the lower MER).


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## gibor365 (Apr 1, 2011)

I hold CHB for more than 2 years and like it...very good yield , however this is junk-bonds ETF and not really fixed income.
Also I have CBO, imho it's the best option for short-term bonds


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## leeder (Jan 28, 2012)

arc said:


> XBB has a higher YTM and is personally my favourite


I would normally go with XBB, but I find the duration is too long and may not react well if and when interest rates rise. That's why I listed out funds that had lower duration.



mrcheap said:


> I have 20% of my portfolio as fixed-income + cash. Originally I had xsb but I've been buying vsb more recently (for the lower MER).


VSB had interested me, but the return seems really low... How are you finding the performance on XSB and VSB and would you go for corporate bond ETFs instead?


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## leeder (Jan 28, 2012)

gibor said:


> I hold CHB for more than 2 years and like it...very good yield , however this is junk-bonds ETF and not really fixed income.
> Also I have CBO, imho it's the best option for short-term bonds


The laddering approach is definitely interesting for CBO. Would you say the laddering approach is better or worse than a non-laddering approach? I ask this because CBO and XSH seems very similar, but one is ladder and the other is non-ladder.


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## james4beach (Nov 15, 2012)

arc said:


> XBB has a higher YTM and is personally my favourite


I don't think XBB is worth it. As of January 4, the expected yield you would get is ytm 2.38% - 0.33% mer = 2.05% yield after fees

Its average maturity is 10 years, a mix of federal, provincial, and corporates. But the 10 year government bond yields 1.90% (I know this because I looked it up Friday, and that's the yield net of fees at a discount brokerage).

So when I can get 1.90% on a pure 10 year government bond, why would I accept 2.05% (only 0.15% more yield) for XBB, along with all its provincial and corporate risk (it's 31% corporate)? You're not getting any compensation at all for the extra risk in XBB.


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## andrewf (Mar 1, 2010)

Why not GICs/HISA, at these yields?


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## leeder (Jan 28, 2012)

@ andrewf: You make an astute point about GIC and HISA. However, all my RRSP is in TD Waterhouse invested in TD e-Series (currently... starting to move to ETF because of lower fees). I don't really want to have my investments all over the place, and TD GICs and HISA have lower returns than bond ETFs, even if those ETFs pay 1.7%!


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## gibor365 (Apr 1, 2011)

leeder, if you have RRSP in TWD , you can buy third-party GIC with higher rate...call them and ask.... I bought last year 3rd party GIC on CIBC investor edge account online, in TD you cannot do it online - you should call and ask... also TDW has e-series bond fund TDB909 that performing not worse than ETF amd have reasonable MER


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## james4beach (Nov 15, 2012)

@ leeder , yes in your TD Waterhouse account you can also buy GICs. They have a redesigned fixed income section and if you click through to that, you'll actually see the GIC rates posted. You'll have to phone in to actually purchase one of them. I agree that given the current rates, you're better off in a GIC (I would go with a big five bank) or, as I mentioned before, the government bond directly. All of these can be done through TDW.


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## leeder (Jan 28, 2012)

Yeah, I currently do have TDB909 and am trying to move away from it, namely because: 
1) According to TDW, the bond fund has long duration. I'm thinking it is similar to XBB or VAB, though they don't specifically specify the # of years. I want to have shorter bond durations in my portfolio. 
2) A low MER bond ETF, such as the ones I listed earlier, plus trading commission would be less than what I pay if I hold or add to my position in my TDB909.

I've actually never talk to the TD reps about buying GICs before. Do you have to pay any commission to them for buying 3rd party GIC through them?

@james4beach: Thanks. I just took a look through the GIC section (just shows how little features I use on TDW!). From a 1-year standpoint, the highest rate offered is 1.65%. I guess the debate for me is, would I get more out of a bond ETF as opposed to the GIC?


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## 44545 (Feb 14, 2012)

leeder said:


> @ andrewf: You make an astute point about GIC and HISA. However, all my RRSP is in TD Waterhouse invested in TD e-Series (currently... starting to move to ETF because of lower fees). I don't really want to have my investments all over the place, and TD GICs and HISA have lower returns than bond ETFs, even if those ETFs pay 1.7%!


Canadian Direct Financial offers HISAs paying 1.9% interest and they're CDIC insured. Why put capital at risk on anything yielding less than that?


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## leeder (Jan 28, 2012)

CJOttawa said:


> Canadian Direct Financial offers HISAs paying 1.9% interest and they're CDIC insured. Why put capital at risk on anything yielding less than that?


The 1.9% is only for nonregistered savings. The portion I want to invest is RRSP. Their RSP savings account only offers 0.3% for anything above $2,500. And their best GIC that they offer is probably their 13-month 1.65%. TDW does not offer this GIC in their fixed income section (not sure if they would offer it if I phone in).


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## gibor365 (Apr 1, 2011)

Yes, TDW redesigned GIC section and at least you can see rates.... CIBC is more convenient as you can buy GIC online.
As far as I know TDW doesn't charge any fees for buying 3rd party GIC, but they have minimum of 5K.
You wouldn't be able to buy GIC from institution that is not listed.

btw, not sure if you're aware, but you can buy TDB8150 that gives you 1.25% and you can redeem anytime.
imho for non-registered accountsthe best HISA in ING (if you have kids under 18)...they offer 2%


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## 44545 (Feb 14, 2012)

leeder said:


> The 1.9% is only for nonregistered savings. The portion I want to invest is RRSP. Their RSP savings account only offers 0.3% for anything above $2,500. And their best GIC that they offer is probably their 13-month 1.65%. TDW does not offer this GIC in their fixed income section (not sure if they would offer it if I phone in).


Fair enough. They have a TFSA paying 2.55% (People's Trust's TFSA is 3%) if you have TFSA contribution room left.


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## arc (May 19, 2012)

Is there some funny business going on with the chart on ishare's website, it looks nothing like that of globe investors's
http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=cbo-T
http://ca.ishares.com/product_info/fund/overview/CBO.htm


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## brad (May 22, 2009)

I'm a little confused about the role that GICs would play versus bonds in a portfolio when you want to rebalance. I thought the point of having bond ETFs is that when you rebalance your portfolio you can easily move allocations from bonds to equities and vice versa as necessary to maintain your target allocations over time. Wouldn't this be harder with GICs since they're locked in for specific time periods?

It's also possible to use TDW's HISA in an RRSP account (see http://www.canadiancapitalist.com/high-interest-savings-accounts-at-discount-brokers/) if you prefer to go that route.


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## andrewf (Mar 1, 2010)

arc: iShares shows the total return (price changes+reinvested distributions), while the globe is show price changes only. I personally prefer total return--that's what matters, after all.

brad: True, you should keep some of the fixed income allocation liquid to facilitate rebalancing. This can be done with HISA. But you'll never need ALL of the fixed income allocation for rebalancing. Particularly during asset accumulation.


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## gibor365 (Apr 1, 2011)

I like more CBO as it`s has the shortest duration and i think the highest current yield 4.8%, also , maybe I`m wrong, but I like laddered structure. Advantage CBO over GIC , except liquidity, it`s compaunding, as every month I get additional shares from dividends...


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## andrewf (Mar 1, 2010)

CBO's _coupon_ rate is 4.8%, not its yield. The bonds pay higher coupons than their yield because the bonds sell at a premium to their face value. So the value of the bonds fall as you get closer to the maturity, since at maturity all you get is the face value. The actual YTM (2.12%), less the MER, is a better measure of the return you can expect longer term.

The reason why bond funds have been doing better than this YTM is that yields have been falling. That can't, and won't, go on forever.


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## leeder (Jan 28, 2012)

gibor said:


> Yes, TDW redesigned GIC section and at least you can see rates.... CIBC is more convenient as you can buy GIC online.
> As far as I know TDW doesn't charge any fees for buying 3rd party GIC, but they have minimum of 5K.
> You wouldn't be able to buy GIC from institution that is not listed.
> 
> ...


I am aware of the HISA of 1.25%. Considered putting that fixed income portion of my RRSP in it, but just can't get over that it's such a low return. Pretty sure a CBO or any other bond funds could give me better returns than 1.25%.



andrewf said:


> CBO's _coupon_ rate is 4.8%, not its yield. The bonds pay higher coupons than their yield because the bonds sell at a premium to their face value. So the value of the bonds fall as you get closer to the maturity, since at maturity all you get is the face value. The actual YTM (2.12%), less the MER, is a better measure of the return you can expect longer term.
> 
> The reason why bond funds have been doing better than this YTM is that yields have been falling. That can't, and won't, go on forever.


Just to clarify then, would you say that what those websites put on their 'YTD performance' is misleading? After all, they are only measuring the YTD performance based on capital appreciation/depreciation plus the yield.


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## james4beach (Nov 15, 2012)

leeder said:


> Just to clarify then, would you say that what those websites put on their 'YTD performance' is misleading? After all, they are only measuring the YTD performance based on capital appreciation/depreciation plus the yield.


Technically speaking I think they're accurate in stating the YTD performance. They're talking about performance of the NAV -- the value of the fund. If you hold a bunch of things that go up in value (i.e. bond prices rising as interest rates fall) then your NAV does perform well, no question.

I suppose one way to look at it is that if you were a short-term trader, maybe holding ETFs for a few weeks at a time, those performance figures are pretty relevant to you. But if you hold the fund "long enough" (which in my mind means when you hold it anywhere close to the average maturity of the fund) only the yield-to-maturity is going to be relevant.

ETF companies have benefited a lot from the general confusion and complexity inherent in a bond portfolio. It's tricky stuff! This is a reason I generally advise people to stay away from bond funds. If more shareholders knew exactly what they were buying and what kinds of yields to expect, I don't think so many people would be keen on funds like XSB and XBB - which at current low interest rates just aren't worth buying compared to GICs or even cash savings accounts!


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## gibor365 (Apr 1, 2011)

leeder said:


> I am aware of the HISA of 1.25%. Considered putting that fixed income portion of my RRSP in it, but just can't get over that it's such a low return. Pretty sure a CBO or any other bond funds could give me better returns than 1.25%.
> 
> 
> 
> Just to clarify then, would you say that what those websites put on their 'YTD performance' is misleading? After all, they are only measuring the YTD performance based on capital appreciation/depreciation plus the yield.


Agree with you about 1. , this is why I hold CBO and in TDB8150 I park cash that planning later to invest into stocks.
YTD performance is correct, you can trade CBO like any other ETF/stock...like buy at 20.12 and sell 20.40 and book the gain. My understanding that if buy today and hold to average maturity (3.08 years for CBO) -> your return will be published 2.12%. andrewf can correct me if I'm wrong.
P.S. maybe now it's not a bad time to buy CBO as it closed to 52 weeks low


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## andrewf (Mar 1, 2010)

It's not misleading as long as you remember: past results are not indicative of future performance. That was the actual return, so it is valid to say what the actual return was. It's all in the interpretation of the numbers they show you--I would argue that the fund providers could be more honest and explain how to interpret the numbers. It seems a large % of people think the distributions they get from their bond funds are a sustainable yield, which is not the case.

We are at the peak of a bond bull market that's been going on for 30 years, and is running out of room to continue.


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## gibor365 (Apr 1, 2011)

james4beach said:


> . If more shareholders knew exactly what they were buying and what kinds of yields to expect, I don't think so many people would be keen on funds like XSB and XBB - which at current low interest rates just aren't worth buying compared to GICs or even cash savings accounts!


this is an utopia  majority doesn't know what are they buying, this is why mutual/seg funds industry exist


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## andrewf (Mar 1, 2010)

Well, it's 2.12 less the mer, of 1.85% or so. It also depends on what happens to interest rates. If they don't rise, you can expect that return, but if they do, your return will be less.

This is relevant in a taxable account, too. You pay taxes on the coupon. You will/may get a capital loss to claim when you sell that will somewhat offset. But paying tax on 4.5% for a 2.1% yield is not tax efficient.


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## gibor365 (Apr 1, 2011)

Are you sure that YTM published exclude MER?
Just checked...I hold CBO approximitely 1.5 years and with distributions my return is 5.5%, so I could've book this gain if I'd like...


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## andrewf (Mar 1, 2010)

Some of that is due to yields falling.

On the other hand, CBO should return a bit more than the YTM, since it sells bonds about 1 year before maturity. 

It's hard to say exactly, but the returns should be closer to 2% than 4%. The return has to come from somewhere, and it's not the yield.


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## james4beach (Nov 15, 2012)

gibor said:


> Are you sure that YTM published exclude MER?


For the iShares, I'm sure because I once ran the numbers on XSB's portfolio holdings. The raw portfolio YTM that I calculated indeed matched the iShares quote which means it does not factor in the MER. I also did the same thing with one of BMO's dividend ETFs (not a bond fund, though) and found the raw portfolio dividend yield matched the BMO quote. So at least for iShares and BMO, the quoted yields ignore MER and you have to deduct MER yourself.

Beware though, their phone representatives don't seem to know this. Phone reps from both iShares and BMO told me the opposite, but my calculations disproved it. There are also many resources on the internet that say you should subtract MER from the quoted YTM or portfolio dividend yield.


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## gibor365 (Apr 1, 2011)

imho, there are too many investors like leeder or myself  who is not satisfied with hisa/gic rates and investing into ETF like CBO thus pumping the price up.... when interest rates goes up (and nobody know when it gonna happen) , GIC will offer higher rates and those bond ETFs will go down.

James, you are right, found article about it on globeinvestor...

btw, in your opnion it's better to DRIP bond ETF distribution or to get cash?


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## andrewf (Mar 1, 2010)

There is a chance that these bonds funds will outperform GICs still, but only if rates fall even further. I don't think that is a likely scenario, but it is possible.


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## james4beach (Nov 15, 2012)

gibor said:


> btw, in your opnion it's better to DRIP bond ETF distribution or to get cash?


I'd rather take the cash, and not DRIP. The DRIPs are additional purchases and with bond prices so high -- near an actual ceiling (the 0% yield) -- I wouldn't want to buy more. If bond prices were much lower I would probably do things differently and let them reinvest at the good yields.


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## brad (May 22, 2009)

There's some interesting analysis of this question here:

http://canadiancouchpotato.com/2012/07/03/how-will-rising-rates-affect-bonds/


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## leeder (Jan 28, 2012)

gibor said:


> imho, there are too many investors like leeder or myself  who is not satisfied with hisa/gic rates and investing into ETF like CBO


Yup 

The thing is if rates go up and I have locked into a GIC paying me 1.5%, there may still be a chance that the bond fund outperform the 1.5% (albeit slightly). That's why I want to keep the duration as short as possible and why I listed out 4 of 5 bond funds that had a duration of 3 years or less. At the same time, if interest rates remain constant, I'm sure bond funds will trump GIC. Just my opinion...


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## brad (May 22, 2009)

I guess my question is whether any of this is really relevant for long-term investors who plan to hold their shares in bond funds for 10-15 years or longer? Maybe I'm not understanding it correctly, but I always assumed shares in bond funds work pretty much the same ways as shares in equity ETFs: it doesn't matter what they're worth today, or whether their value goes up or down over the short term, if you're not planning to sell those shares until many years down the road -- the ultimate return you receive will depend on their value when you sell them. Is that right or am I completely misunderstanding? As bonds in these funds reach maturity they'll continue to be replaced with new ones; it doesn't seem like I'd be locking myself into losses if I buy bond ETFs today and sell them 20 years from now when who knows what their share price will be.


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## My Own Advisor (Sep 24, 2012)

Big fan of XBB as well.


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## gibor365 (Apr 1, 2011)

those yields are confusing to me....
if now CBO has 2.2% YTM and duration is 3 years, the possible scenarios are, i 3 years:
1. CBO price jumps to $40 with current Dividend per Share.
2. CBO price stays the same and dividend cut about 50% (from 0.074 to 0.038 per month)
3. CBO price drops and dividend cut more 50% accordingly.

Which scenario most likely to happened?


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## gibor365 (Apr 1, 2011)

What do you think about Preferred Share ETFs as an alternative to bonds/GIC? ZRP, XPF or CPD? Yield more than 4% and much less riskier than common stocks...


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## leeder (Jan 28, 2012)

brad said:


> I guess my question is whether any of this is really relevant for long-term investors who plan to hold their shares in bond funds for 10-15 years or longer? Maybe I'm not understanding it correctly, but I always assumed shares in bond funds work pretty much the same ways as shares in equity ETFs: it doesn't matter what they're worth today, or whether their value goes up or down over the short term, if you're not planning to sell those shares until many years down the road -- the ultimate return you receive will depend on their value when you sell them. Is that right or am I completely misunderstanding? As bonds in these funds reach maturity they'll continue to be replaced with new ones; it doesn't seem like I'd be locking myself into losses if I buy bond ETFs today and sell them 20 years from now when who knows what their share price will be.


I think you are correct in a sense; however, I think it's safe to say that interest rates will eventually rise from the current levels. If it is not this year, it may be next year. Who knows? The threat is there. By investing in shorter duration bonds, we will be a bit better insulated from interest rate risks compared to longer duration bonds. And until interest rates rise to a level that is historical norm, bond duration above 5 years, imo, is not the place to be. So, it boils down to buying short duration bond funds or GIC. I personally think GICs, while safe, do not generate sufficient return. Not to mention, I think most GICs are less liquid than bond ETFs (unless you buy cashable GICs, which have a lower rate of return).


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## leeder (Jan 28, 2012)

gibor said:


> What do you think about Preferred Share ETFs as an alternative to bonds/GIC? ZRP, XPF or CPD? Yield more than 4% and much less riskier than common stocks...


Wouldn't this react similar to mid to long duration bond ETF, maybe with more downside risk if rates go up? I don't really have an opinion on this, to be honest....


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## gibor365 (Apr 1, 2011)

leeder said:


> Wouldn't this react similar to mid to long duration bond ETF, maybe with more downside risk if rates go up? I don't really have an opinion on this, to be honest....


to be honest, I also don't really understand preffered shares, but I think that they much more similat to regular equity ETFs , but less risky...I just check the charts....performance of CPD practically the same like XIU for 3 and 5 years.... the only difference that CPD yield usually high by 2% and that's pretty significant


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## james4beach (Nov 15, 2012)

Two replies at once,



gibor said:


> What do you think about Preferred Share ETFs as an alternative to bonds/GIC? ZRP, XPF or CPD? Yield more than 4% and much less riskier than common stocks...


I disagree that they're much less risky than common stocks. Preferred shares are generally not very liquid, and the ETF structure is entirely based around liquid underlying securities. Even bonds are kind of a stretch for ETFs... these things were originally created to hold liquid common stocks. The problem with preferred shares is what happens during times of distress if you want to get out. With stock ETFs, you can always price them. But if preferred shares become very illiquid, the price of a preferred shares ETF is going to stop tracking what's inside it, and may even drop substantially more than the preferred shares themselves do. This same thing happened in the credit crisis with corporate bond ETFs. Many of the major corp bond ETFs (LQD comes to mind, ironic given its name) at times traded 5% or further below their NAV! They weren't able to track illiquid underlying securities, and that's bad.



brad said:


> Maybe I'm not understanding it correctly, but I always assumed shares in bond funds work pretty much the same ways as shares in equity ETFs: it doesn't matter what they're worth today . . . the ultimate return you receive will depend on their value when you sell them.


Kind of. Stocks can generally trade anywhere... AAPL could be worth $1,000 soon, who knows -- if a stock's revenue increases continually, it could go higher for a long time without ever being overpriced. There is no "limit" on stock prices. But bonds have more strictly defined parameters. A bond price has a ceiling. If you buy a bond at 6% yield, its price can go up but eventually its yield becomes 0% (i.e. people are willing to lend money to the company for free). At that point the bond price has hit a maximum and can not increase further.

Similarly, a bond fund shares those characteristics even though the portfolio is turning over and getting new bonds all the time. I'll try to illustrate this for a typical corporate bond fund. Replace "0%" in my text with whatever the minimum turns out to be... I suspect around 2%

1. Early, the bonds it starts buying trade at maybe $85 (that is much below 100 face) with yield 7%
2. Interest rates keep falling, so bond prices rise. The fund NAV steadily increases
3. New bonds the fund acquires now are around $95 with yields around 4%
4. The fund NAV still keeps increasing as yields drop further. Amazing performance due to bond price increase
5. The bonds in the portfolio are now priced near $100 with yields near 0%
6. NAV creeps higher as the fund occasionally buys something with a bit higher yield
7. Old bonds mature and roll out. Now you only hold bonds acquired near 0% yields
8. Any new bond they buy has 0% yield. The price has now hit an absolute peak.
9. If interest rates rise, the bond prices (and fund NAV) can now drop by a lot. It can't ever go up.

I think we're at #5 - #6 now. We've seen excellent performance from all the preceding and yields on corporate bonds have still been dropping. This is really a question of how low corp bond yields can go... right now they're around 3% for investment grade and fund NAVs are still increasing with dropping yields. But let's say 2% is in fact the limit... at this point your bond fund can only rise at 2% (the yield-to-maturity) but can't experience ANY further gains.

This is why yield-to-maturity is an important figure. If we're close to the max bond price (min bond yield) as most of us suspect, then *YTM tells you your best-case return scenario*.


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## brad (May 22, 2009)

Thanks, but aren't government bonds a slightly different animal? My understanding is that government bonds and stocks tend to have lower correlation than that of corporate bonds vs. stocks, which is why a balanced portfolio of stocks and government bonds (not corporate bonds) tends to be recommended. Of course there aren't many bond index funds here that are only in government bonds, but there are many that are weighted heavily toward government bonds. In general if the value of the shares in your bond funds is dropping, the value of the equities in your portfolio should be rising. The mix of bonds and equities is supposed to dampen volatility if you're bothered by volatility. I know there are many people who try to maximize their returns every year; I'm not one of them so I guess I'm okay with the risk that the value of my bond shares will drop for a period of time as long as it's balanced by an increase in growth on the equities side of my portfolio.


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## Belguy (May 24, 2010)

Information re U.S. bond ETF's:

http://investorplace.com/2012/12/the-best-bond-etfs-for-2013/

http://finance.yahoo.com/news/bond-etf-bubble-burst-2013-153638451.html

Any thoughts?


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## james4beach (Nov 15, 2012)

True, gov bonds are a bit different and they do offer better diversification mixed with stocks. But they have the same 0% limit (actually government bonds sometimes have slightly negative yields). And if you get near that limit, even a pure government bond fund is going to hit a ceiling and not gain any further beyond that.

The bond portfolios that I manage for myself & others are 100% government and I hold all bonds to maturity. I strongly recommend this technique: there's no risk the value will decline (as a bond ETF can), you know *exactly* what your return will be, and the fees are lower than in an ETF.


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## brad (May 22, 2009)

Belguy said:


> Information re U.S. bond ETF's:
> Any thoughts?


See http://canadiancouchpotato.com/2012/03/01/ask-the-spud-should-i-hold-us-bonds/


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## brad (May 22, 2009)

james4beach said:


> The bond portfolios that I manage for myself & others are 100% government and I hold all bonds to maturity. I strongly recommend this technique: there's no risk the value will decline (as a bond ETF can), you know *exactly* what your return will be, and the fees are lower than in an ETF.


It makes sense, but when I read this it suggests that I'd still be better off in a bond ETF:

http://canadiancouchpotato.com/2010/03/29/bonds-v-bond-funds/


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## james4beach (Nov 15, 2012)

brad said:


> It makes sense, but when I read this it suggests that I'd still be better off in a bond ETF:
> 
> http://canadiancouchpotato.com/2010/03/29/bonds-v-bond-funds/


That article neglects to analyze the 0% yield wall (the ceiling) that I've outlined here. The article points out that _at traditional interest rates_, the bond fund offers the benefit that they will pick up new bonds at good yields. And I agree! If rates were 4% or higher, I would buy a bond ETF in a heartbeat.

Their argument is invalidated by near-zero rates; anything the bond fund buys these days is going to be purchased near its peak possible price. And that's the main problem: it's a dumb idea to purchase securities very close to their maximum possible price


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## brad (May 22, 2009)

james4beach said:


> Their argument is invalidated by near-zero rates; anything the bond fund buys these days is going to be purchased near its peak possible price. And that's the main problem: it's a dumb idea to purchase securities very close to their maximum possible price


I think that point is discussed in this post on the CCP site, as well as in the many interesting comments that were made subsequent to the post: http://canadiancouchpotato.com/2012/07/03/how-will-rising-rates-affect-bonds/


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## doctrine (Sep 30, 2011)

I'm less concerned about the effects of interest rates, which should be minimal especially on short term bonds. What I, and everyone else, should be concerned about, is the incredibly low rate of return on bonds. 2% on long term government bonds, and lucky these days to get 3% on an investment grade corporate. All bond ETF buyers must look at the Average Weighted Yield To Maturity. That is your expected return, over the Average Weighted Term in the ETF. CBH, holding a 1-10 ladder of corporates, is down to 2.5% YTM - on corporates!


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## Belguy (May 24, 2010)

Bonds can still act as a rudder when the equity seas get rough and reduce the volatility of your portfolio during such times. This can be a comfort whenever stocks are crashing as they are prone to do on occasion.

Anyway, that is why my portfolio allocation is 50 per cent equities/40 per cent fixed income/10 per cent cash.

When the next crash comes, I will be able to sleep a little better knowing that I have put some tools in place to help to preserve the value of my portfolio and to help to steady it in rough seas.:sleeping::sleeping::sleeping::sleeping:

It is during the periodic market crashes that many investors, who may have become too greedy along the way, discover that their risk tolerance was not nearly as great as they had estimated it to be. After all, it is not comforting to see your portfolio decline in value by 40 per cent or more as it did for many as recently as 2007 and as it will do again sometime in the future given all of the uncertainties in the world today.

Sure, growing your portfolio is one of your objectives but, for many, so is capital preservation and reducing portfolio volatility. The older that you get, the more importance the latter take on.


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## brad (May 22, 2009)

Belguy, I think what people are saying here, though, is that the fixed-income portion of your portfolio is perfectly capable of losing value. One hopes that as bonds drop in value, equities will rise in value, and it usually happens that way. But not always. Just because they're "fixed income" doesn't means bonds are not without risk.


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## james4beach (Nov 15, 2012)

If the market does crash again, keep in mind that many companies you find in these corporate bond funds will get downgraded or even go broke... and you could incur severe losses in bond funds, even if interest rates don't move.

The SPREAD between corporate bond yields and government bonds is pretty much at a historical minimum right now. I would never touch corporates or anything with corp bond exposure... it's just not worth it. You're not getting any compensation for the risk.


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## arc (May 19, 2012)

so in other words XBB and other bond ETFs holding government bonds is a much better deal for a balanced portfolio?


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## gibor365 (Apr 1, 2011)

james4beach said:


> And that's the main problem: it's a dumb idea to purchase securities very close to their maximum possible price


Probably I don't understand something....but now CBO trades practically on 52weeks low


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## gibor365 (Apr 1, 2011)

james4beach said:


> If the market does crash again, keep in mind that many companies you find in these corporate bond funds will get downgraded or even go broke... and you could incur severe losses in bond funds, even if interest rates don't move.
> 
> The SPREAD between corporate bond yields and government bonds is pretty much at a historical minimum right now. I would never touch corporates or anything with corp bond exposure... it's just not worth it. You're not getting any compensation for the risk.


It all depends  after last year US gov downgrade, many of the solid companies have better rating


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## andrewf (Mar 1, 2010)

Esp. investment grade corps, though high yield spreads are on the low end as well.


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## andrewf (Mar 1, 2010)

gibor said:


> Probably I don't understand something....but now CBO trades practically on 52weeks low


Think underlying assets (ie, the bonds that CBO holds).


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## fatcat (Nov 11, 2009)

james4beach said:


> If the market does crash again, keep in mind that many companies you find in these corporate bond funds will get downgraded or even go broke... and you could incur severe losses in bond funds, even if interest rates don't move.
> 
> The SPREAD between corporate bond yields and government bonds is pretty much at a historical minimum right now. I would never touch corporates or anything with corp bond exposure... it's just not worth it. You're not getting any compensation for the risk.


i just don't agree ... if you look at BMO ZCM with a duration of 5.84 and a YTM of 3.15, it has just about every major canadian company in there and like 120 holdings ... the federal bond fund ZFM has a duration of 6.54 and a YTM of 1.9, i wouldn't call that a minimum spread (you can get 1.9 in fully insured HISA) ... with the ZCM you are at least 1.5% ahead of inflation roughly ... with ZFM you are basically just covering inflation ... everything in ZCM is BBB or above and BBB still has very low default rates ...CBO is rated A or above which means minuscule default rates but a YTM of 2.06 which just isn't enough 

you either have the choice of going broke slowly by seeking the ultimate safety net or taking on some risk and staying ahead of inflation at least

if CBO or ZCM won't work for you then you are better off with a GIC ladder and we see that all the little GIC speciality shops are doing great business right now (but their customers are fighting it out tooth and nail with inflation)


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## gibor365 (Apr 1, 2011)

What is your opnion on BMO ZXB (2015 Corporate Bond Target Maturity ETF) or ZXA comparing to short term laddered bonds like CBO? I need to invest into fixed-income and debating over: target bond etf, laddered bond etf (I hold it already - CBO) and preffered shares ETF (like XPF or ZPR)


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## Freddie (Sep 11, 2009)

brad said:


> Belguy, I think what people are saying here, though, is that the fixed-income portion of your portfolio is perfectly capable of losing value. One hopes that as bonds drop in value, equities will rise in value, and it usually happens that way. But not always. Just because they're "fixed income" doesn't means bonds are not without risk.


Something I found very useful from this article: http://augmentedtrader.wordpress.co...ive-headwind-for-asset-allocation-strategies/

The Fed’s policies since 2009 (low interest rates and bond buying) have served to drive investment to stocks in two ways:

Low bond interest rates force investors to look to stocks and risky fixed income assets for reasonable return.
Low interest rates enable investors to borrow money to buy more stocks and risky bonds than they might buy otherwise.

This combination of factors has contributed significantly to the bull market since 2009. Now, if and when interest rates rise these connections will trigger a steep decline across stock and bond assets as follows:

Higher interest rates on new bonds will trigger price drops on existing bonds.
New bonds will become more attractive, spurring rotation out of stocks.
As borrowing costs rise, investors will have to unwind (sell) their positions in stocks and risky fixed income positions.

Those 3 factors taken together result in a simultaneous drop in bond and stock prices. We saw in May and June that the mere suggestion that the Fed might tighten money policy triggers this process. 

*Article was written on Nov. 11, 2013...Quite interesting I thought.*


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## gibor365 (Apr 1, 2011)

leeder, so what did you buy instead of TDB909?


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