# What to do with XTR, CBO & CLF



## Karlou (Aug 6, 2013)

Hi, I need your advice again please.

I thought I had a pretty secure portfolio with:

•	iShares Diversified Mnthly Inc Fund ETF (TSE:XTR)
•	Claymore 1-5 Yr Laddered Corporation Bond Exchange Traded Fund (TSE:CBO)
•	ISHARES 1-5 YR LADDER GOVT BOND FUND (TSE:CLF)

But I’m losing money every day with these ETFs

Should I sell and buy GICs?

Or park my money somewhere else (any suggestions?)

Thank you in advance for your input


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## HaroldCrump (Jun 10, 2009)

We are starting to see several such threads on the forum in the last couple of weeks.
These are a result of the rising bond yields.
The benchmark US 10 yr. treasury yield has gone from 1.65% to 2.72% in about 4 weeks (between May to end of June).

This is simply a factor of the change in long term interest rates, which the US Fed does not control directly (but can manipulate indirectly using Q/E, as they have been doing since 2009).

Interest rate risk is perhaps the #1 risk for a fixed income investor, and now that risk is materializing.

To the OP - there is nothing you can do about the rising yields.
It is outside your control.
Unlike stocks, there aren't too many ways to hedge against this.
You shouldn't average down on bond funds since yields are expected to keep rising, esp. after Sep when the Fed is expected to "taper" the Q/E from $85B a month to $65B a month.

Keep in mind that these are fixed _income_ instruments, not fixed _price_ securities.

It seems your FI allocation is entirely in bonds.
If the drop in value from the last few weeks is making you nervous, switch to GICs or HISA.

The other option is to buy bonds directly and hold them to maturity.
However, this requires additional research in selecting individual bonds.
Govt. bond selection is relatively straightforward, but corporate bonds are an entirely different matter.

_Bond funds are not protected from capital loss._


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## KrissyFair (Jul 8, 2013)

Obviously, you need to do what you're comfortable with but here are a few things to think about:

1. We had a market correction in June. It happens and it has nothing to do with whether those funds are good or bad. If you bought those funds just before the correction then obviously it'll look pretty bad on your balance sheet but it doesn't mean the funds will tank perpetually.

2. Know that even though you're seeing a loss, because these are all fixed income funds they actually held their value a lot better than equities did. So if you're nervous about drops (and it seems you are) then you could actually see this as a reason to be happy with your balances given the market.

3. Unless you're a) a trader or b) have a strong stomach, *don't look at your balances every day!* You'll drive yourself batty and you'll increase the chance that you'll make bad, short-sighted decisions. It's like driving a car - if you stare down your hood you'll steer all over the road, but if you aim long you'll go in the direction you intend.

4. Presumably you bought the funds for the income portion right? So remember you're still getting those monthly distributions even though the value of the fund has gone down. If that was your priority when you bought, then it should still be your priority in your ongoing decisions.

Hope that helps


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## Squash500 (May 16, 2009)

KrissyFair said:


> Obviously, you need to do what you're comfortable with but here are a few things to think about:
> 
> 1. We had a market correction in June. It happens and it has nothing to do with whether those funds are good or bad. If you bought those funds just before the correction then obviously it'll look pretty bad on your balance sheet but it doesn't mean the funds will tank perpetually.
> 
> ...


Excellent advice. The XTR has about a 40% equity allocation in the ETF...including XRE, XEI, XUT and XDV etc. I also just keep telling myself that I'm getting a better monthly income with the XTR and CPD etc then I would be if I would have bought a GIC ladder in my non-registered account. 

I'm also trying to ignore the paper losses in my non-registered account and just focus on the monthly income that I'm receiving.


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## KrissyFair (Jul 8, 2013)

Thanks Squash.


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## Karlou (Aug 6, 2013)

Thank you all for your comments

At least now I know what's going on

Just a silly question?

Would it be a good idea to dump CLF and CBO in favor of XTR before September?


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## andrewf (Mar 1, 2010)

XTR was never low risk. CBO and CLF are still sound. As rates rise, the price of these funds will fall, but the yield you receive will rise. As long as you're holding as a long term allocation, I would not be too concerned. That said, GICs offer an attractive risk/yield proposition when compared to investment grade bonds. You get paid a premium for losing liquidity (since GICs are much less liquid than bonds).


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## HaroldCrump (Jun 10, 2009)

Karlou said:


> Would it be a good idea to dump CLF and CBO in favor of XTR before September?


Not at all - among the 3, XTR is the riskiest, IMO.
It is a hybrid ETF, raised from the defunct income trust ETF.
I haven't looked, but it could also be the highest fee one.

If you want a FI allocation with minimal risk, build a 5 yr. GIC ladder on your own.
Or, you can buy individual bonds directly and hold them to maturity.

You have to ask yourself - what is more important - the _income_ or the _risk_ of your portfolio.
There is no right answer.
You may choose to take higher risk to maintain (or increase) your yield.
You may choose to accept lower yield to increase security.


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## KrissyFair (Jul 8, 2013)

HaroldCrump said:


> Not at all - among the 3, XTR is the riskiest, IMO.
> It is a hybrid ETF, raised from the defunct income trust ETF.
> I haven't looked, but it could also be the highest fee one.


A lot higher. Not only in terms of its actual MER, but it's also a fund of funds...

Karlou, I think what you need to do before you make any buy/sell decisions is sit down with a notepad and answer a few questions like:
What is this money for?
When do I _need_ to access it?
What do I need to achieve with my investment decisions?
-> As far as I am able to know, which funds will best help me get to the above answer? (Presumably you felt that these funds answered this question and that's why you bought them).

Write it on paper so that you have a fixed starting point. If you're ever unsure you can run through these questions and your original answers and if you're still answering them the same way, then stick with what you've got. If your needs change or if for some reason you really think these funds are no longer the best way to meet you needs, then change.


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## HaroldCrump (Jun 10, 2009)

Also, keep in mind that when you plan your course of action re. these funds, do _not_ consider the fact that you are currently down on these positions.
_It does not matter_.
If you allow the current -5% loss to sway your decision either way, then you are not making the best decision moving forward.
The loss has already happened, and there is no way to reverse that.

The only way this loss will be undone is if the US Fed decides to significantly _increase_ its Q/E program and start pushing down long term rates very aggressively.
To do that, will require hundreds of billions of $ a month, since the current $85B allocation is clearly not enough.

Also, don't hope to "catch up" your capital losses with distributions - it won't happen.
Even if nothing changes, it can still take 2+ years to recover a 5% loss at current yields.

Final note : when looking at yields, do not look at distribution yields reported on the websites of these products such as XTR because they are _highly misleading_.
For bonds, you need to look at yield-to-maturity and for pref. shares, you should look at yield-to-worst.


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## liquidfinance (Jan 28, 2011)

HaroldCrump said:


> The only way this loss will be undone is if the US Fed decides to significantly _increase_ its Q/E program and start pushing down long term rates very aggressively.
> To do that, will require hundreds of billions of $ a month, since the current $85B allocation is clearly not enough.



I thought this was more a case of the FED potentially reducing the bond buying program.


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## HaroldCrump (Jun 10, 2009)

liquidfinance said:


> I thought this was more a case of the FED potentially reducing the bond buying program.


Yes, which will allow yields to rise automatically.
The primary purpose of Q/E is to reduce mid-term and/or long term rates (depending on flavor of the month).
Twist was designed to increase ST rates and reduce mid term rates.


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## ChrisR (Jul 13, 2009)

Karlou said:


> Hi, I need your advice again please.
> 
> I thought I had a pretty secure portfolio with:
> 
> ...


You are not losing money every day with CLF and CBO. In fact, you're probably not losing any money at all.

If you purchased a single share of CLF on Aug 8, 2012 for $19.92 and sold the share today for $19.47, you would have collected 73 cents in interest payments, leaving you with a total of $20.20. A return of 1.41%, which is close to the posted yield to maturity of this fund (minus fees) of 1.58%.

Likewise, had you purchased a single share of CBO on Aug 8th, 2012 for $20.21, you would have $20.70 to show for it today. (Today's market price + sum of the interest payments received over the last year). A return of 2.42%.

These bond funds have relatively short durations, and are therefore not very sensitive to interest rate risk. If rates rise quickly, you may see a small short term loss on paper, but you're not going to lose money if you're holding them for more than 3 years. (Well, unless one of the bond issuers defaults!)

The greater risk with these funds is their "opportunity cost". If rates don't rise, you miss out on the opportunity to earn a higher rate of interest by holding a bond fund with longer maturity.


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## james4beach (Nov 15, 2012)

Karlou said:


> I thought I had a pretty secure portfolio with:
> •	iShares Diversified Mnthly Inc Fund ETF (TSE:XTR)
> •	Claymore 1-5 Yr Laddered Corporation Bond Exchange Traded Fund (TSE:CBO)
> •	ISHARES 1-5 YR LADDER GOVT BOND FUND (TSE:CLF)


The first thing I suggest you do is calculate your asset class exposures among these holdings (depends on how much $ you hold in each). The ETF web sites will let you easily do this. How much do you have in:

- government bonds
- high grade corporate bonds
- low grade (junk) corporate bonds, e.g. 37% of XTR is junk bonds
- equities (including utilities, REITs, preferreds), e.g. 40% of XTR

Figuring out your % exposures will help you figure out how you want to adjust your risk. I've listed them in order of risk, from safest to most risky. Also you can basically group junk bonds with equities, since they are strongly correlated and have high volatility. XTR alone has 77% in this category which is high risk... almost like 77% equity exposure. Look at your overall exposures and then you can decide if you're comfortable with where your money is.

Today, I think GICs or even savings accounts are superior to both CBO and CLF. Consider the following
CBO ytm is 2.33% - 0.28% MER = 2.05% yield
CLF ytm is 1.75% - 0.17% MER = 1.58% yield

2 year GICs are ~ 1.7% and 3 year GICs ~ 2.0% or more. I think that makes GICs more attractive, at today's prices.

More specifically, I would dump CBO because (a) it's riskier corporate exposure, (b) prices have rebounded so you're not selling at a low, (c) it has a high MER. I would certainly replace CBO with CDIC-insured GICs. This will give you about the same yield, with less risk.


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## james4beach (Nov 15, 2012)

Excellent advice from everyone else too!



HaroldCrump said:


> Final note : when looking at yields, do not look at distribution yields reported on the websites of these products such as XTR because they are _highly misleading_.


More detail on XTR because it's a pet peeve of mine. To see the actual yield it generates you have to look at the underlying holdings and their yields, also considering underlying fees plus extra fees. iShares are bums for not transparently showing this calculation. I calculate XTR's underlying yield today is 4.1% - that's what its portfolio earns in dividends & interest.

True, that's pretty high, but consider how much risk comes with that ... lots of equity exposure and junk bonds. The junk bond index for instance was down 7% in just a month and a half, even after distributions paid. Earning 4.1% yield on something that can swiftly lose 7% value isn't for me, personally.


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## andrewf (Mar 1, 2010)

^Besides the fact that yield doesn't matter....


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## Karlou (Aug 6, 2013)

Thanks again everyone for your precious advice. I think I'll hold to what I have right now.
As XTR represent around 10% of my portfolio, I can assume the risk in return for a higher yield.
I will certainly consider building a GIC ladder with whatever cash I can spare in the future.
It will be easier to sleep at night


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## humble_pie (Jun 7, 2009)

karlou i'm a bit hesitant to mention this because you've been so snowed under with (good) advice & suggestions.

but you've been a trouper, so if you can stand one more nicketty detail, it's the redemption date on your preferred shares. You'd want to look up all the details for this. 

was the price you paid higher or lower than the redemption price? if higher, it's possible there might be a spot of trouble here. Notice carefully, also, the redemption date.

so sorry if i'm in the wrong thread ...


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## Karlou (Aug 6, 2013)

humble_pie said:


> so sorry if i'm in the wrong thread ...


Thank you humble pie
You're probably referring to my thread about TRP.PR.C Why the drop?
It was bought at 25$ in June 2010. Redemption is in 2016
If I understand correctly, I won't loose a cent if I keep them until redemption.
Please correct me if I'm wrong


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## humble_pie (Jun 7, 2009)

Karlou said:


> [re TRP.PR.C] It was bought at 25$ in June 2010. Redemption is in 2016
> If I understand correctly, I won't loose a cent if I keep them until redemption.
> Please correct me if I'm wrong



this really is in the wrong thread! i am so sorry!

still, cmf forum is nothing if not chaotic, so i'll reply here even though it's not logical :tongue-new:

the price you paid - right at the redemption price - plus relatively long time span to redemption date are good news.

but alas, you could lose $$. Nothing forces a company to redeem. If Preferred C trades at $24.99 or lower on redemption day, TRP obviously won't redeem, etc.

the feature you are thinking of is called "retraction." A retraction privilege gives shareholder the right to retract his shares at a certain price. It's similar to a built-in put. But your shares have the corporate redemption right, not the shareholder retraction right.

a shareholder in Preferred C would want to assess the chances of stock trading at or higher than his purchase price, between now & 2016.

a peek at the chart shows what's bothering you. I agree, that is a sudden & sickening lurch downwards in june/13, for what is supposed to be a reliable creature patrolling forward in a straight line, giving off regular dividends like clockwork & otherwise not making a nuisance of itself.

part of the downturn is related to the recent rise in interest rates but probably some can be attributed to recent weakness in TRP common itself, due to renewed doubts about Obama's eventual decision on the keystone.

do you have a view on keystone yourself? i think keystone will be approved in the US, eventually. In the meantime TRP has not only approved one pipe in the all-gas Mainline to be opened to flow oil eastward, but it has also recently announced commercial contracts for this oil with eastern refineries. The project is called Energy East.

some analysts are even calling for Energy East to be more accretive to TRP's future earnings than will the keystone itself, assuming keytone gets built.

i for one am looking to buy a few more TRP common shares, as the common share price wavers downwards these days. If i held the preferred issue that you hold, i believe i'd rest easy & continue to hold for the dividend. 

at a current yield of something like 4.95% on TRP.PR.C, your return is considerably better than the 1.90% available from HISA accounts. In addition, it should be giving you nice dividend tax credits. One could even factor in a notional loss of roughly $2.50-3.00 per share & one would still come out ahead with this preferred dividend yield vs a low-paying HISA account.


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## Karlou (Aug 6, 2013)

Thanks for the precision humble pie.
I think Keystone will finally be approved
Energy east in an other plus for TRP
I'll follow your advice (but I'm not buying anymore...)


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