# Fixed income into TFSA for a long term



## gibor365 (Apr 1, 2011)

I need to allocate some of the fixed-income money into TFSA, most likely I won't be touching those money for at least 10 years...
What options can you recommend?
I'm in doubt.... I was thinking about GIC, but I don't want to lock money more than 2 years, and the best 2 years GIC I can buy is less than 2%....
Another options:
- just buy ATL5000 at 1.25% and wait ...for something....
- buy short term bond ETF - but YTM is about 2% on all of tem (less if substruct MER)
- buy bond index ETF like XBB - but YTM is not much higher..
- buy preferred shares ETF, like XPF or ZPR , yield a little higher 4-5%, but more risky
- buy high-yield bond ETF, ZHY or CHB , respective YTM 5.4% / 5.13% ,
btw, for high-yield bonds what duration is preferable: 4.6 years (CHB) or 6.7 (ZHY)?
-
Considering amount I need to invest, I can select maximum 2 investments... what do you think?


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## leeder (Jan 28, 2012)

Have you considered HISA? Canadian Direct Financial offers 2.55% for TFSA. If interest rates go up, you have some liquidity when it is in HISA and no risk. 

If you are set on bond ETFs, my preference based on my research are: 
- VSC/CBO (short duration, slightly higher yield than govt bond ETFs) 
- ZCM (mid corporate. Performed very well last year and should be ok this year if interest rates don't change)
- VAB/XBB (longer duration, but diverse) 

I don't know much about high yields and preferred shares, but why take on such high risk with fixed income portion of your investment? The highest risk I would go with my fixed income component would be investing in corporate bond ETFs. I previously was looking around for short-term bond ETFs to fill my fixed income component; however, I realized that 2.55% HISA offers no risk and reasonable return in this low interest environment.


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## My Own Advisor (Sep 24, 2012)

10 years? All in XBB.


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## Squash500 (May 16, 2009)

Maybe a combination of XTR and XBB for your TFSA. In this low interest rate climate....XTR is a pretty good ETF IMHO. XTR is made up of approx 60 % fixed income and 40 % Equities. XTR also has an MER of only 55 basis points.


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## andrewf (Mar 1, 2010)

You can look into HISAs for the next year or two, gambling on the chance that rates will rise.


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## gibor365 (Apr 1, 2011)

Squash500 said:


> Maybe a combination of XTR and XBB for your TFSA. In this low interest rate climate....XTR is a pretty good ETF IMHO. XTR is made up of approx 60 % fixed income and 40 % Equities. XTR also has an MER of only 55 basis points.


XTR is probably a good option, pretty good diversified ETF with nice and stable dividend....


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## james4beach (Nov 15, 2012)

gibor said:


> XTR is probably a good option, pretty good diversified ETF with nice and stable dividend....


If you go with XTR, just be aware that it is more or less an actively managed mutual fund. They don't have a rigidly defined mandate, so can pretty much use any investments that they see fit. That's not necessarily a bad thing, but be aware that unlike most ETFs it is not a simple index ETF. It's a fund-of-funds and the managers have all the discretion of what they want to invest into. Personally, I'd be hesitant to buy it for the long term, because I have no clue what they're going to put into it. Nobody knows. So short-term maybe, but not good for the long term.

Here is what they hold right now, basically a 60/40 bond & stock mix:

37% junk bonds (corporate bonds)
20% higher rated corporate bonds
15% dividend stocks
10% utilities
9% REITs
6% preferred shares
3% long-maturity government bonds

If you like their composition, I would suggest just buying the underlying ETFs instead of XTR. That way you know what you're holding, and it won't suddenly change on you. I like the dividend stocks, utilities, and government bonds. I don't particularly like the rest of it, especially the 37% junk bond exposure.


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## none (Jan 15, 2013)

gibor said:


> I need to allocate some of the fixed-income money into TFSA, most likely I won't be touching those money for at least 10 years...
> What options can you recommend?
> I'm in doubt.... I was thinking about GIC, but I don't want to lock money more than 2 years, and the best 2 years GIC I can buy is less than 2%....
> Another options:
> ...


Here is a good TFSA article I read this morning: http://www.greaterfool.ca/2013/01/20/the-gift-2/


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## gibor365 (Apr 1, 2011)

james4beach said:


> If you go with XTR, just be aware that it is more or less an actively managed mutual fund.
> 
> 37% junk bonds (corporate bonds)
> 20% higher rated corporate bonds
> ...


I don't see sense in buying separate ETFs, as my TFSA new contribution is limited to 5.5K... generally I like allocations (except REIT as I'm fully invested into it) , I'd like to see a little bigger exposure to preferred ETF and a little less (like 20%) junk bonds, but I cannot do anything about it.... 
on other hand, in interest rates start going up, high - yield ETF (IMHO) will be in better shape than some government bonds. Isn't it true?

What I'm a bit cautious....XTR hit 52 weeks high, and I don't like buying at those levels, on other hand ratio 52 week high/low less than 5%...


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## gibor365 (Apr 1, 2011)

none said:


> Here is a good TFSA article I read this morning: http://www.greaterfool.ca/2013/01/20/the-gift-2/


Agree with author about ING's 2.5% TFSA... after 90 days they will slash it in half and you cannot withdraw money to re-contribute until 2014.... After I had such experience with ING couple of years ago, I switched everything to Investor edge


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## GoldStone (Mar 6, 2011)

XTR is a balanced fund. 59.14% fixed income, 40.65% stocks.

http://ca.ishares.com/product_info/fund/holdings/XTR.htm

If you want pure fixed income, XTR is not the answer.


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## Squash500 (May 16, 2009)

gibor said:


> I don't see sense in buying separate ETFs, as my TFSA new contribution is limited to 5.5K... generally I like allocations (except REIT as I'm fully invested into it) , I'd like to see a little bigger exposure to preferred ETF and a little less (like 20%) junk bonds, but I cannot do anything about it....
> on other hand, in interest rates start going up, high - yield ETF (IMHO) will be in better shape than some government bonds. Isn't it true?
> 
> What I'm a bit cautious....XTR hit 52 weeks high, and I don't like buying at those levels, on other hand ratio 52 week high/low less than 5%...


Here's how I look at it. Again just my opinion. True XTR has just hit a 52 week high of 12.60. Still with $5500---you could buy approx 436 shares of the XTR for your TFSA....with a distribution of $26.16/month----which equals $313.92/yr for a yield of 5.70%. You could also monthly drip the xtr shares through a discount brokerage as well. XTR Distribution based on .06 units x 436 shares= approx $26.16. Also that .06 monthly distribution has stayed quite consistent lately.

On the other hand take the same $5500 and invest it in a 1 year GIC with today's best rate of 1.55%....which only gets you a paltry $85.25. Therefore even with the XTR at a 52 week high IMHO your still far ahead of the game by investing in the XTR for your TFSA. IMHO bond etfs such as XBB, XSB and XCB are a waste of time in this low interest rate environment.


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## GoldStone (Mar 6, 2011)

Squash500 said:


> Therefore even with the XTR at a 52 week high IMHO your still far ahead of the game my investing in the XTR for your TFSA. IMHO bond etfs such as XBB, XSB and XCB are a waste of time in this low interest rate environment.


Apples and Oranges. XBB, XSB and XCB are pure fixed income ETFs. XTR is a monthly income balanced fund. You cannot compare the two categories head to head. They are different beasts.

XTR distributes $0.06 monthly or $0.72 annually. 5.71% distribution yield based on today's close of $12.61.

XTR currently owns 59% bonds, 41% stocks. Given that bond yields are so low these days, how you think it's able to yield 5.71%???

Answer: It has to rely on equity returns to maintain monthly distribution. If equities don't perform at certain level, monthly distribution may be cut. This in fact happened in the past. Look at the history of XTR distributions:

http://ca.ishares.com/product_info/fund/distributions/XTR.htm

Dan Hallet wrote about this subject a few times:

How to test whether cash payouts will still be there tomorrow

Putting monthly distributions to the test


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## Squash500 (May 16, 2009)

GoldStone said:


> Apples and Oranges. XBB, XSB and XCB are pure fixed income ETFs. XTR is a monthly income balanced fund. You cannot compare the two categories head to head. They are different beasts.
> 
> XTR distributes $0.06 monthly or $0.72 annually. 5.71% distribution yield based on today's close of $12.61.
> 
> ...


Thanks for posting those excellent articles GoldStone....I'm going to read them very carefully. You make some good points....but it seems that that .06 distribution has been with the XTR for quite awhile. Also the fact that the XTR only has an mer of 55 basis points also helps. Another good thing about the XTR is that you can also sell it literally the same day if interest rates start going up.....unlike these DSC or 90 day penalty mutual funds etc.


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## gibor365 (Apr 1, 2011)

GoldStone said:


> XTR distributes $0.06 monthly or $0.72 annually. 5.71% distribution yield based on today's close of $12.61.


Mostly because of the high-yield bonds , preferred shares and REIT


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## gibor365 (Apr 1, 2011)

GoldStone said:


> XTR is a balanced fund. 59.14% fixed income, 40.65% stocks.
> 
> http://ca.ishares.com/product_info/fund/holdings/XTR.htm
> 
> If you want pure fixed income, XTR is not the answer.


That's correct, but if I split new contribution between XTR and GIC 50/50, I'll have 80% ficed income that is OK with me....even though, high-yield bond is not exactly fixed income...


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## GoldStone (Mar 6, 2011)

Putting XTR distribution to the test using Dan Hallett's method:

Distribution yield: 5.71%
MER: 0.55%
Total Return required to maintain distribution: 5.71% + 0.55% = 6.26%

Bond allocation: 59%
Bond YTM: 2.35% ***
Bond contribution to Total Return: 2.35% * 0.59 = 1.39%

Stock allocation: 41%
Needed stock contribution to Total Return: (6.26% - 1.39%) / 0.41 = *11.88%*

Dan Hallett wrote:



> If the required return from stocks is under 10% (before fees), the distribution is probably safe. *If it’s between 10% and 15% annually, the distribution is at risk.* For a fund with a sky-high required return from stocks (i.e. 15% or more per year), I would say it’s simply a matter of time before distributions are cut.


*** I used XBB YTM to estimate the yield of XTR bond component.


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## Eder (Feb 16, 2011)

I would buy this 


Issuer:
Wells Fargo Fin
Coupon:
3.46%
At Maturity:
Jan 24, 2023
Type:
Bond
Class:
Mid Term Note
CUSIP #:
94975ZBN5
Credit Rating:
AA
Payment Frequency:
Semi-Annual
Instrument Currency:
CAD
Yield:
3.353% Semi-Annual, 3.381% Annual
Face Value:
$20,000.00
Price (Per 100):
$100.9016
Accrued Interest:
$0.00
Exchange Rate:
1.0
Estimated Cost:
$20,180.32
Settlement Date:
Jan 24, 2013




or this




Issuer:
FAIRFAX FINANCIAL
Coupon:
5.84%
At Maturity:
Oct 14, 2022
Type:
Bond
Class:
Corporate
CUSIP #:
303901AV4
Credit Rating:
BBB
Payment Frequency:
Semi-Annual
Instrument Currency:
CAD
Yield:
5.142% Semi-Annual, 5.208% Annual
Face Value:
$20,000.00
Price (Per 100):
$105.2807
Accrued Interest:
$323.20
Exchange Rate:
1.0
Estimated Cost:
$21,379.34
Settlement Date:
Jan 24, 2013

Credit Rating:
AA
Payment Frequency:
Semi-Annual
Instrument Currency:
CAD
Yield:
3.353% Semi-Annual, 3.381% Annual
Face Value:
$20,000.00
Price (Per 100):
$100.9016
Accrued Interest:
$0.00
Exchange Rate:
1.0
Estimated Cost:
$20,180.32
Settlement Date:
Jan 24, 2013


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## GoldStone (Mar 6, 2011)

gibor said:


> Mostly because of the *high-yield bonds* , preferred shares and REIT


I missed very large allocation to high-yield bonds. I need to redo the above exercise where I used XBB YTM to approximate XTR's bond yields. It's too low and overestimates stock return requirement.


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## Squash500 (May 16, 2009)

GoldStone said:


> Putting XTR distribution to the test using Dan Hallett's method:
> 
> Distribution yield: 5.71%
> MER: 0.55%
> ...


GS thanks for posting this....your definitely on the right track---however XTR is made up of 19.85% XHB---19.73% XCB---16.92%XHY---U.S High yield bond index and 2.96% XLB. Therefore hopefully the stock return requirements will be much lower?


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## GoldStone (Mar 6, 2011)

Squash500 said:


> GS thanks for posting this....your definitely on the right track---however XTR is made up of 19.85% XHB---19.73% XCB---16.92%XHY---U.S High yield bond index and 2.96% XLB. Therefore hopefully the stock return requirements will be much lower?


Yes, as I mentioned in the post right before yours. I need to redo the exercise using a blended yield of XHB/XCB/XHY/XLB combo.


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## Squash500 (May 16, 2009)

GoldStone said:


> Yes, as I mentioned in the post right before yours. I need to redo the exercise using a blended yield of XHB/XCB/XHY/XLB combo.


 I really appreciate your help GS.. in posting those Dan Hallett articles in the first place....because in all honesty I had no clue what stock returns were needed to maintain the distributions etc....as obviously I'm not a licensed financial advisor etc.


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## GoldStone (Mar 6, 2011)

Here you go. Putting XTR distribution to the test, *Take 2*.

Distribution yield: 5.71%
MER: 0.55%
Total Return required to maintain distribution: 5.71% + 0.55% = 6.26%

XHB allocation: 19.85%
XHB YTM: 4.43%
XHB contribution to Total Return: 0.88%

XCB allocation: 19.73%
XCB YTM: 2.86% 
XCB contribution to Total Return: 0.56%

XHY allocation: 16.92%
XHY YTM: 5.12%
XHY contribution to Total Return: 0.87%

XLB allocation: 2.96%
XLB YTM: 3.37%
XLB contribution to Total Return: 0.1%

Total contributions from bonds: 2.41%

Stock allocation: 41%
Needed stock contribution to Total Return: (6.26% - 2.41%) / 0.41 = *9.4%*

9.4% is "probably safe", per Dan Hallett's definition:



> If the required return from stocks is under 10% (before fees), the distribution is probably safe. If it’s between 10% and 15% annually, the distribution is at risk.


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## Squash500 (May 16, 2009)

GoldStone said:


> Here you go. Putting XTR distribution to the test, *Take 2*.
> 
> Distribution yield: 5.71%
> MER: 0.55%
> ...


Thanks GS.... your help is much appreciated.


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## james4beach (Nov 15, 2012)

GoldStone said:


> Needed stock contribution to Total Return: (6.26% - 2.41%) / 0.41 = *9.4%*
> 
> 9.4% is "probably safe", per Dan Hallett's definition:


Thanks for the calculation and for posting those articles.

But I disagree that 9.4% stock return is sustainable. He's using the older (traditional) belief pre-2000. Even Buffett lowered his stock return expectations post-2000, as it's widely believed the boom days for the Americas are over. Many of us, including myself, think viable stock returns are more like 3% to 6%. For example, I think guests on BNN often quote a number around 5% when they talk about long-term expectations.

Myself, I don't buy XTR or other "income funds" because I don't think those distributions are sustainable... if I held one, I think that after paying out the constant distribution for a while, eventually the share price will start to drop rather quickly while the distribution is cut too. You could easily end up with a capital loss.


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## mrPPincer (Nov 21, 2011)

andrewf said:


> You can look into HISAs for the next year or two, gambling on the chance that rates will rise.


People's Trust's People's Choice e-Savings Account is paying 3% in TFSA HISAs and it's not a teaser rate, it's been 3% since Feb.16/2009, almost 4 years now.
I think it's the highest paying TFSA HISA in Canada right now and it is CDIC insured.
http://www.peoplestrust.com/main/?en&today_rates


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## GoldStone (Mar 6, 2011)

GoldStone said:


> 9.4% is "probably safe", per Dan Hallett's definition:





james4beach said:


> But I disagree that 9.4% stock return is sustainable. He's using the older (traditional) belief pre-2000. Even Buffett lowered his stock return expectations post-2000, as it's widely believed the boom days for the Americas are over. Many of us, including myself, think viable stock returns are more like 3% to 6%. For example, I think guests on BNN often quote a number around 5% when they talk about long-term expectations.


I agree!! That's why I put "probably safe" in quotes, with an attribution to Dan.



james4beach said:


> Myself, I don't buy XTR or other "income funds" because I don't think those distributions are sustainable...


I own a tiny amount of TD Monthly Income in the RESP account. The entire RESP is invested in a bond ladder (_gotta play it safe... we will need the money in 3 years_). I use TD Monthly Income to mop up the coupon payments thrown by the ladder. TD Monthly Income looks perfectly sustainable. It distributed $0.4077 in the trailing 12 months. 2.3% yield based on today's close.


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## gibor365 (Apr 1, 2011)

I will need one RESP in 1 year, so about 70% in money market now, a little bit TD Monthly income, TD High-yield bond, TDB909, TD short term bond and TD mortgage....


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## james4beach (Nov 15, 2012)

gibor said:


> I will need one RESP in 1 year, so about 70% in money market now, a little bit TD Monthly income, TD High-yield bond, TDB909, TD short term bond and TD mortgage....


Hi gibor, I don't know if you literally meant money market mutual funds but from what I've seen the HISA (high interest savings account) products are much better than money market mutual funds. The HISA pays higher rates, like 1.2%, and is CDIC insured whereas the money market pays about nil, and has zero insurance of any kind.


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## Squash500 (May 16, 2009)

james4beach said:


> Hi gibor, I don't know if you literally meant money market mutual funds but from what I've seen the HISA (high interest savings account) products are much better than money market mutual funds. The HISA pays higher rates, like 1.2%, and is CDIC insured whereas the money market pays about nil, and has zero insurance of any kind.


I still think that the XTR is a reasonable ETF for a TFSA. IMHO to get only 1.25% for the TDB 8150 investment savings account is a total waste of time. As usual....just my opinion.


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## gibor365 (Apr 1, 2011)

james4beach said:


> Hi gibor, I don't know if you literally meant money market mutual funds but from what I've seen the HISA (high interest savings account) products are much better than money market mutual funds. The HISA pays higher rates, like 1.2%, and is CDIC insured whereas the money market pays about nil, and has zero insurance of any kind.


I know, but my mutual fund RESP in TD bank (not TDW), I called them and was told that I cannot buy TDB8150 that pays at leat 1.25% or even TDB963.... It sucks but I don't have another choice...


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## gibor365 (Apr 1, 2011)

Squash500 said:


> I still think that the XTR is a reasonable ETF for a TFSA. IMHO to get only 1.25% for the TDB 8150 investment savings account is a total waste of time. As usual....just my opinion.


I also think so, I'm waiting for some small pullback to buy 1st tranche


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