# Vanguard short-term bond (VSB) bid-ask spread



## james4beach (Nov 15, 2012)

I've been a fan of the iShares XSB for years. But for new purchases I've been thinking of switching to the Vanguard equivalent, VSB. Are any forum members using VSB? Have you found it to be liquid enough for your taste?

VSB: 0.19% MER, 60% AAA quality, average maturity 2.9 years, YTM 1.5% = 1.31% yield after MER
XSB: 0.28% MER, 54% AAA quality, average maturity 3.0 years, YTM 1.6% = 1.32% yield after MER

Fundamentally speaking, VSB looks slightly better: lower MER, higher credit quality, and the same yield to maturity net of MER. [ Aside: at these ridiculously low yields I would still prefer a high interest savings account or ISA, but sometimes people need a bond ETF in their portfolio ]

The downside I see with VSB is the bid-ask spread. For instance right now it shows bid 24.80 ask 24.83, i.e. 3 cent spread, and earlier this morning I saw an even wider 4 cent spread. XSB on the other hand has the tightest possible 1 cent spread.

This has come down from the 7 cent spread I saw in an article when this ETF was new, but at 3 cents that's still very wide... if the NAV is at the midpoint then you're losing 6 basis points (0.06% of yield) by purchasing VSB. That seems quite inefficient to me.

Thoughts? Anyone using it? Is the bid-ask spread normally tighter than what I'm seeing now?


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## CanadianCapitalist (Mar 31, 2009)

james4beach said:


> Thoughts? Anyone using it? Is the bid-ask spread normally tighter than what I'm seeing now?


Depends on whether one is planning on holding VSB for a long time. If we assume that VSB has a one time cost of 12 basis points to buy and sell, holding for just 1 year is break even proposition. Also, as Vanguard scales up, we can expect MERs to drop but iShares is likely to keep its fees where it is now.


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## james4beach (Nov 15, 2012)

CC, could you clarify about the MERs. Why are the Vanguard MERs expected to drop, and not stay fixed?


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## CanadianCapitalist (Mar 31, 2009)

james4beach said:


> CC, could you clarify about the MERs. Why are the Vanguard MERs expected to drop, and not stay fixed?


Vanguard basically operates like a non-profit. As Vanguard ETFs scale up, it is reasonable to expect fees to drop. That's been my experience holding Vanguard US ETFs over the years.


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## andrewf (Mar 1, 2010)

There are some large funds in the US that may eventually have negative MERs, with securities lending income more than covering management costs.


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## james4beach (Nov 15, 2012)

Today I'm seeing VSB bid 24.71 ask 24.77

That's a 6 cent spread. Really, it's unacceptably wide. They've got to do something about that if they want more people to use this product.


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## andrewf (Mar 1, 2010)

Email Vanguard and ask them what's up.

More to the point. Park a limit order in the middle, and wait for a fill. That's usually what I do.


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## GoldStone (Mar 6, 2011)

YTM 1.5% - MER 0.19% = 1.31%. What's the point? You can buy HISA yielding 1.25%. No bid/ask. No commissions. No interest rate risk.


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## james4beach (Nov 15, 2012)

GoldStone said:


> YTM 1.5% - MER 0.19% = 1.31%. What's the point? You can buy HISA yielding 1.25%. No bid/ask. No commissions. No interest rate risk.


I agree, and I'm mostly in the HISA and actual bank savings accounts.

However I've got an Interactive Brokers account with idle money and they don't do HISAs. I don't like leaving idle cash, since any credit cash balances are just loans to the broker and the firm uses the cash for their own purposes. It's safer to have securities in the account, and with IB it's incredibly cheap to just buy some XSB.


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## oedema (Jan 1, 2012)

XSB is actually up and down quite a bit, and I believe down 1% in the past week or so (I hold XSB). For short term holdings I would suggest XFR, but also remember that interactive brokers does pay interest (about 0,5%) on cash balances over 10,000


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## james4beach (Nov 15, 2012)

oedema said:


> XSB is actually up and down quite a bit, and I believe down 1% in the past week or so (I hold XSB). For short term holdings I would suggest XFR, but also remember that interactive brokers does pay interest (about 0,5%) on cash balances over 10,000


Yes XSB does have interest rate sensitivity. I think you're right that it's not appropriate if I'm doing short term cash storage... I got so used to having XSB in core portfolios that I reach for it almost by reflex.

Thanks for pointing me to XFR, that may be a good option for short term cash when HISA is not available.

I realize IB pays (a little bit of) interest on cash, but my preference is to leave my cash balance near $0 because 'cash' is basically an unsecured loan to IB, and not CDIC insured. In fact I think an even better idea will be to transfer out much of the spare cash and just put it in a high interest CDIC-insured savings account somewhere, until I need to transfer it back to IB.


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## mylund39 (Jan 15, 2011)

Oedema,
My take re. XSB is if you are like me who is more interested in distribution at my age XSB with it's short maturity (never mature) pays a monthly cash dist. Of .0645 
Millions of dollars are parked in this etf.
I am all about cash distribution to cover my monthly riff minimum withdrawal and this works well for me.Many other etf's can be used in a similar fashion.
Regards


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## james4beach (Nov 15, 2012)

VSB bid/ask spread this morning was 8 cents ... even wider than when the ETF was first introduced!

Totally unusable. A shame really.


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## andrewf (Mar 1, 2010)

What happens when you park a limit order at NAV? I usually get filled.


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## james4beach (Nov 15, 2012)

I'm not going to bother, I don't trade in illiquid securities as a general rule.

I'm sure you could get a fill somewhere near half the spread, but I'm not comfortable doing that. The bond market has big problems now and I don't want to get trapped in something. Perhaps the widening spread has something to do with general bond market troubles brewing


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## james4beach (Nov 15, 2012)

oedema said:


> For short term holdings I would suggest XFR


I looked into XFR (iShares Floating Rate Note) a bit. Interesting fixed income ETF; could possibly be an alternative when you don't have access to a savings account... but is still inferior to a real savings account.

It holds floating rate bonds / floating rate notes, where the coupon payments are tied to something LIBOR-like (not clearly exactly what the rate is tied to), but basically tied to cash-like rates. The overall duration of the fund is very low at 0.2 which means that it has virtually no interest rate sensitivity. What caught my attention here is that most floating rate funds have a whole bunch of high risk corporate paper in them. But this iShares one has almost entirely government agencies (Housing Trust, provinces, and provincial agencies) and much higher credit quality than other floating rate funds I've seen.

The XFR share price won't decline with rising interest rates so I think it's much better for cash storage than XSB or VSB. However, you certainly still have credit risk. The XFR share price is entirely dependent on the market's risk perception of the underlying debt. Some ugly scenarios would be CMHC having major problems in a housing crash (this would cause Housing Trust paper to decline), or downgrades of provincial debt (certainly looming on the horizon). Either would cause XFR to decline.

But as far as floating rate credit risk goes, I think XFR is much better than similar mutual funds. Way less risk than conventional floating rate funds (some of those mutual funds dropped 20% or more during the '08 crisis). Still, whenever possible, you're still better off in a CDIC insured savings account.


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