# Is This The Wrong Time To Be Investing In Bond Funds ?



## dogleg (Feb 5, 2010)

I have some ETF bond funds like CBO, XBB and XSB . The question is whether to add to them ??? And if so are they a good fit for a TFSA.


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## mrcheap (Apr 4, 2009)

From a speculation perspective, this is a terrible time to buy bonds (they're likely as overvalued as they're going to get). Keep in mind a "bond crash" isn't like an equities crash (http://andrewhallam.com/2012/11/why-bond-prices-dont-concern-me/).

I think this is the wrong perspective.

From an asset allocation perspective, you should maintain (buy or sell) your bond allocation based on your desired risk (http://en.wikipedia.org/wiki/Asset_allocation).


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## scomac (Aug 22, 2009)

This question came up late last year and I addressed it here: http://canadianmoneyforum.com/showt...on-a-bond-fund?p=157698&viewfull=1#post157698

Start reading from that post onward as there is further discussion on the subject. If you are intent upon adding to your fixed income holdings this should be of benefit to you.


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## Squash500 (May 16, 2009)

scomac said:


> This question came up late last year and I addressed it here: http://canadianmoneyforum.com/showt...on-a-bond-fund?p=157698&viewfull=1#post157698
> 
> Start reading from that post onward as there is further discussion on the subject. If you are intent upon adding to your fixed income holdings this should be of benefit to you.


Thanks for posting that Scomac. Your bond explanation is excellent. I'm going to re-read that last year's thread very carefully.


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## fatcat (Nov 11, 2009)

that is the 64K question
as others have said, it's all about tolerance for risk and asset allocation
i need to place to some fixed income funds in a couple of months and i like this new bond fund: http://www.theglobeandmail.com/glob...-risk-route-to-higher-returns/article7608386/

it has ytm of 2.8 and an mer of .25

i think his argument below is spot on: 


> Federal debt yields so little in part because it is viewed as the safest, least risky security valued in Canadian funds. It also helps that the Bank of Canada quite literally has a licence to print money. Provinces, with no central banks and historically higher deficits relative to their size than Ottawa, are viewed as less credit-worthy and therefore have to pay more to borrow.
> 
> But Mr. Gordon believes the market is mispricing the riskiness of the provinces, which he considers to be in a “too big to fail” category where Ottawa wouldn’t allow a default. If Canada’s financial problems were so extreme that the provinces were going broke, it would also indicate a financial apocalypse that would take down Ottawa too, in his opinion.
> 
> “I don’t think the average Canadian thinks that the federal government is going to let any province default on its debt obligations,” he says. “Under what circumstances could you see the provinces of Canada defaulting that the government of Canada wasn’t also in default?”


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## Belguy (May 24, 2010)

From what the Bank of Canada said today, I don't see any rise in interest rates until at least 2015.

I feel that bonds still have a place in a well diversified portfolio--and so do most of the experts.

"The yield generated by bonds these days is pitiful: at current inflation levels, bond investors are losing purchasing power. Taxes make the situation even worse. (Ideally bonds should be sheltered in RRSP's and TFSA's.) However, bonds are still a useful bulwark, because they offer some stability in a portfolio and, unlike stocks, they're unlikely to plummet in value quickly. You probably won't make much money from bonds these days, but you're not likely to lose 50% either. Stocks can't make such promises. At a minimum investors should have at least 25% in stocks and 25% in bonds, tilting your portfolio one way or the other based on personal preference. If you're aggressive and have a long time horizon, you might want to go 75% stocks, while more conservative investors might lean to 75% bonds. Older investors with shorter time horizons should similarly opt for more bonds that younger investors. But, these are rules of thumb and individual circumstances might call for different allocations."

--Norm Rothery/MoneySense Magazine


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## doctrine (Sep 30, 2011)

Based on Belguy's/Norm Rothery's argument above, if your justification for losing your money to inflation is stability in a portfolio, then you may as well just hold cash. That way, if stocks fell, you could rebalance into more equities, but you wouldn't have to suffer the combined losses of a decreasing stock market and increasing interest rates, which is a possibility.


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## GoldStone (Mar 6, 2011)

doctrine said:


> if your justification for losing your money to inflation is stability in a portfolio, then you may as well just hold cash. That way, if stocks fell, you could rebalance into more equities, but you wouldn't have to suffer the combined losses of a decreasing stock market and increasing interest rates, which is a possibility.


I agree and that's why, at present, I don't own any fixed income. I keep my FI allocation in HISA funds. Yes, I'm losing money to inflation. To combat the sickening feeling, I sit back and imagine that I'm Warren Buffett.... waiting patiently for an opportunity to scoop up bargains. :tongue-new:

For Warren Buffett, the cash option is priceless



G&M said:


> [Buffett's biographer Alice Schroeder] argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr. Buffett for years before she became his biographer.
> 
> “He thinks of cash differently than conventional investors,” Ms. Schroeder says. “This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”
> 
> ...


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## fatcat (Nov 11, 2009)

doctrine said:


> Based on Belguy's/Norm Rothery's argument above, if your justification for losing your money to inflation is stability in a portfolio, then you may as well just hold cash. That way, if stocks fell, you could rebalance into more equities, but you wouldn't have to suffer the combined losses of a decreasing stock market and increasing interest rates, which is a possibility.


 this is what i am wrestling with now ... i can get 1.8% in an ally cdic insured hisa ... it's a very tough call ... the case for a correction seems to be growing ... my concern is the strength and sustainability of corporate earnings and the stagnant buying power of the middle class ... i referenced it another thread and think that this interview with gary shilling was very persuasive (of course, he recommends high-quality corporate bonds)


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## james4beach (Nov 15, 2012)

I personally feel it's generally the wrong time to buy more bond funds, but it's all on a case by case basis.

Whatever bond fund you're looking at, look at the yield to maturity minus the MER. Then compare that net yield to competing investments: savings accounts and GIC rates. Consider that bond exposure is riskier than either of those alternatives because the cash/GIC will be CDIC insured and there's no risk of capital loss. Consider that some corporate bonds are MUCH riskier than others and the issuers may default. Additionally, remember that cash is liquid and superior in many ways to bond exposure.

Every time I've done this comparison in the last few months, I have determined that I'm better off in a GIC or cash savings account. That's why I don't buy bond funds. I do, however, buy individual government bonds (not in a fund).


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## Belguy (May 24, 2010)

This time last year, many forum members were warning that interest rates were about to rise and bond yields were about to fall. Some of those folks suggested that a HISA was a better place to put your money.

Well, I hope that your HISA paid a higher interest than the almost 6 per cent that XCB (to quote the performance of one bond fund, for example) would have earned you!

http://ca.ishares.com/product_info/fund/performance/XCB.htm

With the Bank of Canada suggesting that they will not be increasing rates at least before the end of 2013, and quite possibly beyond, it is quite likely that, while your HISA return will not keep you ahead of inflation, a low fee corporate bond fund very well might.

Nothing is certain in this world but let's get together here this time next year and compare performances.

You pays your money and you takes your chances.


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## HaroldCrump (Jun 10, 2009)

Belguy said:


> This time last year, many forum members were warning that interest rates were about to rise and bond yields were about to fall.


I wrote the following post after the Spring BoC update:
http://canadianmoneyforum.com/showt...rate-forecasts?p=125499&viewfull=1#post125499
Quote:



> just more growling and rumbling by the paper tigers.
> They don't want to raise rates...there will always be some excuse.
> 
> The exact same thing happened in 2011.
> ...


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## dogleg (Feb 5, 2010)

I think you nailed it when you said gov'ts like the low interest rates no matter what the consequences for Joe Average. Jefferson was prophetic when he warned , "... banking institutions and government debt are more dangerous than standing armies .... and spending money to be paid by posterity is swindling the future on a large scale." And after reading Griffin's text on the Federal Reserve I am inclined to believe that Ron Paul has it right when he says it should be abolished.Maybe a lesson for Canada and the BOC and the way it is structured. The Federal Reserve System strangely is not federal and there are no reserves and most of its equity is privately held. After the first WW congress found it could use the Fed .Res. to obtain revenue without taxes and thus began systemic deficit spending. It took 198 years for the US gov't to borrow its first trillion. Then only about twelve years mainly in Reagan's presidency to borrow another three. Now the Obama admin. is talking about 16 trillion. Does any sane person think we in Canada are not going to be affected by these enormous amounts of personal debt next door? Our debt clock is running full out too. All very scary.


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## My Own Advisor (Sep 24, 2012)

I'm with james4beach....wrong time to be buying bonds. Holding bonds, yes, but those with short to medium maturities.


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## HaroldCrump (Jun 10, 2009)

dogleg said:


> I think you nailed it when you said gov'ts like the low interest rates no matter what the consequences for Joe Average. Jefferson was prophetic when he warned , "... banking institutions and government debt are more dangerous than standing armies .... and spending money to be paid by posterity is swindling the future on a large scale."


You are right, DG, and so is T. Jefferson 
We have to look at all central banks (incl. our own) from a different perspective - central banks are not here to _prevent_ inflation - they are here to _create_ inflation.
The objective of neo-classical monetary policy is to create and sustain inflation.

Part of that activity is subterfuging the definition and calculation of inflation itself.
i.e. if it produces a number that is inconvenient, let us simply change the formula - every few years.

Inflation _must_ be 2% - by golly if it aint so, we will make it so.


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## dogleg (Feb 5, 2010)

As usual Belguy you make some good observations. There is risk /reward in everything in the market. Take XID or CGR for example with one year returns of over 23% while on the other hand consider the 15% loss for XGD . Who has the courage or the abandon to play these numbers. Cheers.


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## sharbit (Apr 26, 2012)

What about a middle ground like rate-reset preffered shares?


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## lonewolf (Jun 12, 2012)

If interest rates go to zero how much higher would some of the bond funds go ? I dont think it would be much of a gain compared to potential risk. 

The couch potatoe system might work better for the next 30 year cycle of rising interest rates to not hold bond funds but instead to hold GICs & or individual bonds that are held to maturity & rebalance as they mature.

The old approach worked well for the last 30 years of declining interest rates by using bond funds.


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## dogleg (Feb 5, 2010)

sharbit said:


> What about a middle ground like rate-reset preffered shares?


Might be a good idea Sharbit. I don't know a lot about them but aren't they the 5%/5 yr preferreds that BNS and TD are offering? On renewal I think you can opt for a floating rate maybe?? Why do you like them? Thanks.


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## gibor365 (Apr 1, 2011)

dogleg said:


> Might be a good idea Sharbit. I don't know a lot about them but aren't they the 5%/5 yr preferreds that BNS and TD are offering? On renewal I think you can opt for a floating rate maybe?? Why do you like them? Thanks.


Isn't it preferred shares ETF like CPD or XPF?


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## Squash500 (May 16, 2009)

gibor said:


> Isn't it preferred shares ETF like CPD or XPF?


 I put some money recently into the CPD as a replacement for a corporate bond ETF. I'm not dripping the CPD shares either....just receiving the monthly distributions as income. From what I've read....the income that I receive from the CPD is all taxed as dividend income.....as opposed to interest income that I would have received from the XCB.


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## fatcat (Nov 11, 2009)

Squash500 said:


> I put some money recently into the CPD as a replacement for a corporate bond ETF. I'm not dripping the CPD shares either....just receiving the monthly distributions as income. From what I've read....the income that I receive from the CPD is all taxed as dividend income.....as opposed to interest income that I would have received from the XCB.


CPD cannot be considered a replacement for corporate bonds ... look at what happened to CPD from jan-08 to mar-09: XIU dropped 42% CPD dropped 22% and XBB rose .93%


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## gibor365 (Apr 1, 2011)

Yes CPD dropped, but CPD dividend is much higher and what the chance of 2008 repeat? I personally prefer XPF over CPD. XPF has better yield and it's 50% PFF (iShares S&P U.S. Preferred Stock Index) and other 50% best Can preffered shares... another option is XTR that include combination of bonds (include long term and junk), preferred shares, REIT, XDV and Utilities


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## Ihatetaxes (May 5, 2010)

10% of my portfolio in XPF. Happy with it.


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## Squash500 (May 16, 2009)

Ihatetaxes said:


> 10% of my portfolio in XPF. Happy with it.


 Do you have to pay partial US withholding tax on the XPF if held in either TFSA or non-registered trading account? ----since XPF according to ishares website holds 50.70% PFF---i shares us preferred--- as a major component of the XPF.


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## Squash500 (May 16, 2009)

gibor said:


> Yes CPD dropped, but CPD dividend is much higher and what the chance of 2008 repeat? I personally prefer XPF over CPD. XPF has better yield and it's 50% PFF (iShares S&P U.S. Preferred Stock Index) and other 50% best Can preffered shares... another option is XTR that include combination of bonds (include long term and junk), preferred shares, REIT, XDV and Utilities


 I'm also curious if any US withholding tax has to be paid on the XTR if held in TFSA or non-registered account----since XTR holds about 17% US high yield bonds and about 6% XPF?


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## andrewf (Mar 1, 2010)

Why would you want to hold US prefs? They are taxed at your full marginal rate. Equity risk and bond tax treatment.


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## Ihatetaxes (May 5, 2010)

I hold XPF only in our RSPs.


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## andrewf (Mar 1, 2010)

You're still losing 15% US withholding on the US prefs held in XPF. You're better off holding a Canadian pref share fund in nonregistered and a US listed pref share fund in your RRSP.


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## Squash500 (May 16, 2009)

andrewf said:


> You're still losing 15% US withholding on the US prefs held in XPF. You're better off holding a Canadian pref share fund in nonregistered and a US listed pref share fund in your RRSP.


 What about holding XTR in TFSA?----as far as US withholding tax goes?


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## 44545 (Feb 14, 2012)

Squash500 said:


> What about holding XTR in TFSA?----as far as US withholding tax goes?


TFSAs aren't recognized by the current tax treaty with the USA. I believe you'll lose US withholding tax within a TFSA. (can someone verify that please?)


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## andrewf (Mar 1, 2010)

Any foreign holding is subject to withholding on distributions (including foreign holdings wrapped in a Canadian fund) and that withholding can't be recovered in TFSA.

The high yield and US preferred components of XTR have built-in withholding tax (regardless of which account you hold them in). I'm not saying that this makes holding these funds a bad idea. The effect is not huge... 15%*distribution yield*% allocated to foreign holdings... In the case of XTR, we're talking on the order of 15%*5-6%*20%= 0.15% per year. Other things like MERs and currency hedging can be more important.


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## gibor365 (Apr 1, 2011)

I'm not clear about it... You can hold XTR or XPF in RRSP or TFSA and you won't be paying any taxes on dividends (even though XPF consists 50% of PFF). Maybe be this is built in the XPF distributions already?! But in this case it doesn't matter in which account TFSA or RRSP you hold it....
PFF 100%, if you hold it than hold in RRSP


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## gibor365 (Apr 1, 2011)

Ihatetaxes said:


> 10% of my portfolio in XPF. Happy with it.


I'm watching both XPF and XTR... I don't really like that XPF allocation in XTR is just 6%, would like to see 20%... in order to increase exposure in XPF was thinking to buy 80-85% of contribution XTR and 10-15% XPF, but I need in TFSA where contribution room is pretty limited.....
Ihatetaxes, what do you think about ZPR?


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## fatcat (Nov 11, 2009)

gibor said:


> I'm watching both XPF and XTR... I don't really like that XPF allocation in XTR is just 6%, would like to see 20%... in order to increase exposure in XPF was thinking to buy 80-85% of contribution XTR and 10-15% XPF, but I need in TFSA where contribution room is pretty limited.....
> Ihatetaxes, what do you think about ZPR?


why would buy a preferred fund that only gives you dividend tax credits on 50% of it's holdings ? ... kind of defeats one of the major benefits of this asset class


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## andrewf (Mar 1, 2010)

The only way to avoid the withholding tax on US preferreds is to hold a US listed pref fund/individual prefs in an RRSP. Every other way involves withholding tax being skimmed off. That includes XPF and XTR.


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## gibor365 (Apr 1, 2011)

fatcat said:


> why would buy a preferred fund that only gives you dividend tax credits on 50% of it's holdings ? ... kind of defeats one of the major benefits of this asset class


What do you mean by "dividend tax credits on 50% of it's holdings"? I talked to rep in CM who said that if ETF is listed on TSX (like XPF), you don't pay any witholding taxes regardless of underlying holdings... 
I'll get exactly same dividends in both RRSP and TFSA


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## gibor365 (Apr 1, 2011)

andrewf said:


> The only way to avoid the withholding tax on US preferreds is to hold a US listed pref fund/individual prefs in an RRSP. Every other way involves withholding tax being skimmed off. That includes XPF and XTR.


OK, so am I right that it doesn't matter where do you hold XPF/XTR in TFSA or RRSP, results are the same and you won't see any dividend witholding tax on your accounts


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## fatcat (Nov 11, 2009)

gibor said:


> What do you mean by "dividend tax credits on 50% of it's holdings"? I talked to rep in CM who said that if ETF is listed on TSX (like XPF), you don't pay any witholding taxes regardless of underlying holdings...
> I'll get exactly same dividends in both RRSP and TFSA


the stocks in ISHARES S&P US PREFERRED STOCK IND are not domiciled in canada so you would not be elegible for the dividend tax credit or perhaps i am incorrect here ??? ... they are part of an etf that is listed on the TSX but the underlying securities are not in companies who are listed on the tsx


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## gibor365 (Apr 1, 2011)

It doesn't matter for TFSA or RRSP...
1. if you buy PFF into TFSA - you pay div withholding tax and cannot get dividend tax credit
2. if you buy PFF into RRSP - you don't pay div withholding tax 
3. if you buy XPF.T into RRSP or TFSA , (even tgough it consists 50% from PFF), you don't pay div withholding tax as it listed on TSX (as andrew mentioned this tax alresdy build in XPF dividend $ (but it doesn't matter into which account you buy it,...meaning you get for example 0.08 dividend /shre in any account you hold it)

but also think that if you want exposure to US preferred and buy PFF even into RRSP, you gonna pay FX rate not only on buy and sell, but twice on every dividend you get (if you are DRIPing), nothing like this with XPF or XTR


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## andrewf (Mar 1, 2010)

Not if you're smart and use a brokerage that lets you hold USD in your RRSP.


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## webber22 (Mar 6, 2011)

If you buy XPF outside the TFSA or RSP then yes you lose half of the dividend tax credits since PFF is US dividends. The withholding tax is a completely different issue.

The dividend tax credit on Canadian dividends is a gift. Not taking full advantage of it would be foolish


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## gibor365 (Apr 1, 2011)

webber22 said:


> If you buy XPF outside the TFSA or RSP then yes you lose half of the dividend tax credits since PFF is US dividends. The withholding tax is a completely different issue.
> 
> The dividend tax credit on Canadian dividends is a gift. Not taking full advantage of it would be foolish


yes, If you talking about CASH account. I personally have enough TFSA/RRSP room on annual basis, so I don't have cash account in discount brokarage


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## gibor365 (Apr 1, 2011)

andrewf said:


> Not if you're smart and use a brokerage that lets you hold USD in your RRSP.


No big bank discount brokerage allows it right now (DRIP w/o FX conversion)... and to move all money to Qtrade doesn't make sense for me...you'll pay more money on such move than you earn potentially on FX rate in maany many years


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## andrewf (Mar 1, 2010)

Why DRIP an ETF? They don't offer discounts... Just to save the commission? Who cares about DRIPs. The tax savings are much larger than a $5 commission every now and then.


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## jslmsca (Aug 26, 2012)

gibor said:


> and to move all money to Qtrade doesn't make sense for me...you'll pay more money on such move than you earn potentially on FX rate in maany many years


I just checked CIBC's fees (my bank) and it costs $50 to wire funds between $10k-$50k. So if I want to buy $15k worth of US holdings, it'll cost me (roughly) $116.70 in currency conversion. I think you come out ahead immediately with a non-big bank discount brokerage.

I must be missing something...


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## Ihatetaxes (May 5, 2010)

andrewf said:


> Why DRIP an ETF? They don't offer discounts... Just to save the commission? Who cares about DRIPs. The tax savings are much larger than a $5 commission every now and then.


I view the dripping of ETFs in my portfolio as a little dollar cost averaging of long term core holdings.


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## bayview (Nov 6, 2011)

I have not read every posts. I apologise if I'm repeating what some may have posted.

Personally, I'm also not in favour of bond funds or bonds per se at this juncture. I respect those who do it to diversify their portfolios. I can understand why some investors buying bonds despite earning negative real rate of return. 

There is no way to know for sure what will happen this year. The road ahead many cans have been kicked since the Lehman collapse. Surely this has to end at some point. It seems that interest rates may continue to cruise around near zero for longer than expected but Im not going to speculate my core portfolio on this outcome.

I hold cash albeit losing to inflation to keep my powder dry instead of diversifying into bonds for its miniscule yield. I was wrong last year to avoid bonds but I rather be early than a day late.

Ironically, a crash in the bond markets could also trigger a major bear market for equities (The Big Reset) rather than flight of funds into equities.


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## dogleg (Feb 5, 2010)

bayview: I think you make a good point. I am going to get all I can of INGs 2.5% for 90 days and rethink then. I sure appreciate the range of input from this panel.


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## andrewf (Mar 1, 2010)

And to put it in perspective. A bond 'crash' might see funds like XSB/CBO show 1 year returns of -5% or -10%. Yield would have to rise massively to hurt funds like this that much.

On balance, though, a 2 or 3 year GIC is a better deal in my book, unquestionably so in a taxable account.


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## Squash500 (May 16, 2009)

andrewf said:


> And to put it in perspective. A bond 'crash' might see funds like XSB/CBO show 1 year returns of -5% or -10%. Yield would have to rise massively to hurt funds like this that much.
> 
> On balance, though, a 2 or 3 year GIC is a better deal in my book, unquestionably so in a taxable account.


Just to play devil's advocate...who wants to tie up your money for a 2-3 year GIC at such pitiful rates. I'm pouring a lot of my extra cash into the XDV and XFN....so far so good. I'm getting a monthly income and capital appreciation at the same time....a win...win in my books.


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## zylon (Oct 27, 2010)

> *Is This The Wrong Time To Be Investing In Bond Funds ?*


I'm guessing that o/p asked the question because of concerns there could be another free-for-all crash as in 2008. It's a good question, and I'm keeping a future crash scenario in mind as well.

I took a look back at 2008 to see how some bonds & sectors behaved. In that year the Canadian dollar ($CDW) was *down 19%*, so I took into consideration what the percent return was when compared with the move in the dollar.


```
Returns for calendar year 2008      percent         c/w $CDW
XBB                                   +6                +31
XSB                                   +8                +33
XGB                                   +9                +35
CBO - n/a
PH&N Bond Fund D                      +3.2
TD Cdn Bond Index-e                   +5.7

XRE - REITs                          -38                -23
XFN - financials                     -37                -22
XEG - energy                         -36                -21
XIU - TSX 60                         -32                -16
XGD - gold                          flat                +24
```










Chart link: http://stockcharts.com/h-sc/ui?s=XBB.TO&p=D&st=2008-01-01&en=2008-12-31&id=p28797308820

For those not familiar with StockCharts:

enter symbol in box at top left (add .TO for TSX listings)
click "update"
two lower graphs will automatically change to selected symbol
time range can be changed to view other periods (max 3 year span)


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## andrewf (Mar 1, 2010)

Squash500 said:


> Just to play devil's advocate...who wants to tie up your money for a 2-3 year GIC at such pitiful rates. I'm pouring a lot of my extra cash into the XDV and XFN....so far so good. I'm getting a monthly income and capital appreciation at the same time....a win...win in my books.


As long as you're comfortable with the idea of those funds dropping by 50%, and not having any cash/bonds to buy at low prices.


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## andrewf (Mar 1, 2010)

Are those supposed to be USD returns for CAD-denominated assets?

Since the CAD:USD fell, and funds like XIU and XRE fell in CAD terms, shouldn't they have fallen by even larger % in USD terms?


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## Jungle (Feb 17, 2010)

I have learned not to time the bond market and just stick to my plan and allocation. 
This allows me to be the most successful with investing.


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## zylon (Oct 27, 2010)

andrewf said:


> Are those supposed to be USD returns for CAD-denominated assets?


No, those are Canadian dollar returns as usually reported.

I added the comparison to $CDW as it makes a difference to what the investment actually accomplished.

*ADDED:*
Being a lousy teacher, I've never been able to explain the effect that fluctuating currencies have on an investment; some gold bugs measure everything in ounces or grams of gold; that may well be the best way to measure price movements of a security.

To add to the confusion, take the example of *unleaded gasoline in USD* ($GASO)

During the 3 years '09, '10, '11 gasoline increased 148% in USD
During the same period, Canadian dollar rose 20%
Gasoline priced in Cdn dollar rose (only) 106%

Chart: http://scharts.co/XMVy3e


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## gibor365 (Apr 1, 2011)

dogleg said:


> bayview: I think you make a good point. I am going to get all I can of INGs 2.5% for 90 days and rethink then. I sure appreciate the range of input from this panel.


The point is that after 90 days interest will be much lower.... and if you lock 90 days for TFSA you stuck , if you lock 2.5% into RRSP and would like after 90 days to move money into your account brokarage account, it can take you up to 1 month to wait until money get transfered (even though you don't pay transfer fees to ING)


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## dogleg (Feb 5, 2010)

gibor: Yes I agree .It is one big dice game isn't it ? Zylon: Thanks. I have used their charts and they give one an instant picture as you suggest.


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## dogleg (Feb 5, 2010)

zylon: I guess I am too lazy to check it out. How does the XBB to $CDW spread yield the 31% ? Thanks.


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## zylon (Oct 27, 2010)

*dogleg:* as I mentioned upthread, I'm not good at explaining things; that's why I prefer charts, as it's easier to see how things unfold.

In Sep-Oct XBB was falling; then near end Sep the dollar (CDW) started a 15% plunge which sent XBB:CDW higher. If your currency is worth less, it makes whatever you're buying more expensive.

Once the dollar levelled off into year-end and XBB rose sharply, it pulled XBB:CDW even higher. Had the dollar been up 19% instead of down 19%, with everything else being equal, XBB:CDW would have been negative.

FP has an article today titled *Will Canadian stocks rally if loonie slumps?* which may shed more light on the effect of currencies on market returns.
http://business.financialpost.com/2013/01/29/will-canadian-stocks-rally-if-loonie-slumps/



> He examined prior global growth cycles that coincided with periods of Canadian dollar weakness lasting an average of 27 months with an average 14% decline.
> 
> He found that the average return of the country’s main equity benchmark was 16% with positive returns recorded in every cycle.
> 
> The S&P 500′s average return, meanwhile, was even better at 26% in U.S. dollars and 47% in Canadian dollars.


The article implies that a weak dollar *causes* a strong market. The way I see it, the market could stay flat but if the dollar loses value, the market becomes more expensive.

I became acutely aware of this concept in the days when I used to cross the Cdn/US border 4 times per week; at that time our dollar was hovering in the $0.65 to $0.70 range - I think the low was $0.62 

A good meal in US - more than I could eat would be US$15 or C$22. If I went back a month later and ordered the same meal the price was still US$15; but if the Cdn dollar had dropped 5 cents in the meantime, now that $15 meal was C$24. Today that $15 meal would be C$15.10 or so.

All I know is: a weakening dollar equals higher prices to buy an item, but also higher markets.
- a strengthening dollar means lower prices to buy, and year-end market returns may look terrible.


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## none (Jan 15, 2013)

Jungle said:


> I have learned not to time the bond market and just stick to my plan and allocation.
> This allows me to be the most successful with investing.


I think this is wisdom talking here.


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## dogleg (Feb 5, 2010)

dogleg said:


> zylon: I guess I am too lazy to check it out. How does the XBB to $CDW spread yield the 31% ? Thanks.


Zylon: Yes thanks. I recall it all now. It is just the ratio of the two changes expressed in percent. So in this example Xbb went up by about 6% and the dollar down by about 19 % so the ratio is just over 3. So one is about 30% of the other. Instructive? I suppose so. At least the graph gives one a sense of the dynamics for the two elements.


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## MrMatt (Dec 21, 2011)

Jungle said:


> I have learned not to time the bond market and just stick to my plan and allocation.
> This allows me to be the most successful with investing.


I second this.

As far as bond funds, I do have some, mostly for asset allocation and small purchase management. But I understand and somewhat agree with the argument that you should not actually use bond funds and my reallocate to some direct bond holding.


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## gibor365 (Apr 1, 2011)

I was wondering how I can find out YTM for MF, for example for TDB909?


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## andrewf (Mar 1, 2010)

It's appalling that TD does not provide that info on the fact sheet.


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## webber22 (Mar 6, 2011)

TDB909 YTM right from the sister TD site: 2.3%

https://research.tdwaterhouse.ca/research/public/MutualFundsProfile/Holdings/ca/TDB909


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## andrewf (Mar 1, 2010)

Minus the MER....


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## The Financial Blogger (Apr 4, 2009)

I don't like bonds in general but right now, they scare me.

Interest rates can't really go further down. Therefore, if there is a status-quo, your portfolio will generate lower and lower yield (as long term with higher interest rate matures). Bonds will eventually all pay between 1 and 3% as the long term bonds matures. 

If interest goes up, you will not only get a small amount of interest, but your bond value will decrease. I don't see bonds as a good investment right now....

The solution would be to add some higher risk bonds (i.e. corporate bonds) and hope that interest rates don't go too high too fast!


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## dogleg (Feb 5, 2010)

TFBlogger: I think you make some good points. At the moment I am kind of 'bond scared' too. I think I will just put more money in XDV. What thinkest thou?


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## Belguy (May 24, 2010)

How I feel about bonds at the present time: :hopelessness::cower::eek2::nightmare:


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## Money4life (May 17, 2012)

Why is it that if you go to a banker and tell them you are a newbie investor who wants to start with a more conservative approach, they will always recommend bonds as the focal point of your portfolio? They are just as risky as stocks and don't have the longevity to perform as well.


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## Squash500 (May 16, 2009)

Money4life said:


> Why is it that if you go to a banker and tell them you are a newbie investor who wants to start with a more conservative approach, they will always recommend bonds as the focal point of your portfolio? They are just as risky as stocks and don't have the longevity to perform as well.


IMHO bonds are nowhere as risky as stocks. The worse loss for the XLB ...ishares dex long bond index in one year was -7.4% in 1994 when interest rates went up by 2%. On the other hand....you have a stock like RIM that can lose 12% in just one day.


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## Money4life (May 17, 2012)

Squash500 said:


> IMHO bonds are nowhere as risky as stocks. The worse loss for the XLB ...ishares dex long bond index in one year was -7.4% in 1994 when interest rates went up by 2%. On the other hand....you have a stock like RIM that can lose 12% in just one day.


True. I was more referring to a collection of bonds and stock funds rather than individual stock or bonds themselves.


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## Ihatetaxes (May 5, 2010)

I just calculated that the XSB I bought in 2011 (2/3 of it in July/11 and 1/3 in December/11) has gained 2.9% and only because of the dripped shares. Paid $28.96 and $29.20 then and now its at $28.78. Lame.


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## My Own Advisor (Sep 24, 2012)

Yeah, I wouldn't be buying bonds now....holding them, yes, but I always hold some bonds.


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## andrewf (Mar 1, 2010)

Is that strictly rational? Why would you hold something that you wouldn't presently buy?


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## Jets99 (Aug 26, 2011)

andrewf said:


> Is that strictly rational? Why would you hold something that you wouldn't presently buy?


I agree with this. I'm holding XBB and CBO. Only two bond funds I have. But now now likely going to sell half or all of both. 

If I want low risk fixed income I'll just hold the cash in HISA. Even less risk, will probably give me better return this year and more liquid. 

And even better returns if I redeploy the cash into something more interesting (but adding risk of course) like BAC, more REI.UN, BP, CIEN, LIQ, THI or SBUX. But thats a whole other discussion.


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## scomac (Aug 22, 2009)

andrewf said:


> Is that strictly rational? Why would you hold something that you wouldn't presently buy?


Of course it is rational. In an efficient market you won't buy something that doesn't offer sufficient compensation for the risk assumed. However, that doesn't mean that you should sell it if those conditions are lacking because the alternatives may not be any better or potentially worse when you factor in the frictional costs of liquidating. This may not be obvious if we are talking about highly liquid securities such as ETFs, but it would be abundantly clear if you are talking about illiquid securities such as individual bonds/GICs.


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## andrewf (Mar 1, 2010)

I should have couched that more specfically. Mea culpa. The point stands in context. Most bonds are fairly liquid, and you'd have to have your indifference point be in the narrow band between bid and ask.


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## gibor365 (Apr 1, 2011)

Jets99 said:


> If I want low risk fixed income I'll just hold the cash in HISA. Even less risk, will probably give me better return this year and more liquid.
> 
> .


If it's registered account, you cannot have HISA there... the best case you get 1.25% on something like TDB8150 or ATL5000.... I have MF RESP in TD bank and cannot buy even those 1.25% funds... only 2 choices: bond MF or money market


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## gibor365 (Apr 1, 2011)

My Own Advisor said:


> Yeah, I wouldn't be buying bonds now....holding them, yes, but I always hold some bonds.


and what about high-yield bonds like CHB? 
12-Month Trailing Yield 6.79%
Weighted Average Yield to Maturity 5.39% => not too bad and imho less risky than many stocks with similar yield


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## doctrine (Sep 30, 2011)

Look at the credit quality of CHB - 75% of the bonds are BB or lower. That's not very high at all. They are junk bonds, and they have risk. 

I know there are a lot of holdings, but have you looked at the names? How many of those companies do you recognize?


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## james4beach (Nov 15, 2012)

gibor said:


> and what about high-yield bonds like CHB?
> 12-Month Trailing Yield 6.79%
> Weighted Average Yield to Maturity 5.39% => not too bad and imho less risky than many stocks with similar yield


The yield you can expect is 5.39% - 0.55% MER = 4.84% net yield. Compared to a nearly risk-free GIC of similar maturity (5 years), you're getting just 2.6% more yield for all the extra risk of this junk lending. My opinion -- that's a bad deal, not nearly enough reward for the risk.


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## scomac (Aug 22, 2009)

andrewf said:


> Most bonds are fairly liquid, and you'd have to have your indifference point be in the narrow band between bid and ask.


Obviously, you've never ever traded in bonds at the retail level. Yup, they're fairly liquid, but the spreads can be a b*tch.

Now, having said that, I understand where you are coming from as a passive investor. Valuation is irrelevant to you based on the assumption that the market is efficient and hence securities are priced appropriately, so you if you are willing to be an owner, you are at all times willing to be a buyer. One question though, how do you reconcile this with rebalancing?


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## andrewf (Mar 1, 2010)

Good point. I guess in terms of diversification you might have exactly the right amount (one wouldn't sell any of what one currently holds, nor buy any more). It's just an odd way to express that.


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## Jets99 (Aug 26, 2011)

gibor said:


> If it's registered account, you cannot have HISA there... the best case you get 1.25% on something like TDB8150 or ATL5000.... I have MF RESP in TD bank and cannot buy even those 1.25% funds... only 2 choices: bond MF or money market


Yes. I meant TDB8150 instead of bond fund. But really looking at some stocks instead. BAC was first on watch list. Up 3.4% today. Too much watching, not enough execution. :hopelessness:


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## gibor365 (Apr 1, 2011)

james4beach said:


> The yield you can expect is 5.39% - 0.55% MER = 4.84% net yield. Compared to a nearly risk-free GIC of similar maturity (5 years), you're getting just 2.6% more yield for all the extra risk of this junk lending. My opinion -- that's a bad deal, not nearly enough reward for the risk.


But you lock you money for 5 years! and if interest rates in 2 -3 years will double?! Also, I buy share every month, so compounding in work...


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## gibor365 (Apr 1, 2011)

doctrine said:


> Look at the credit quality of CHB - 75% of the bonds are BB or lower. That's not very high at all. They are junk bonds, and they have risk.
> 
> I know there are a lot of holdings, but have you looked at the names? How many of those companies do you recognize?


On other hand only 7-10% of holdings are lower than B! and there are 271 holdings... if many of them will go belly up, I can imagine what gonna happen with index ETF....obviously that I don't recognize all holding, but companies like Bombardier, Sirius, Sear, BurgerKing, REYNOLDS, Toy'R'Us and many more are very familiar to me and imho everything will be OK with them


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## doctrine (Sep 30, 2011)

Historically, 2% of high yield bond funds can default in a given year. Thats just 5 or 6 companies on this list, and all of a sudden you'd be just as well off in a safer fund. The 2-3% yield advantage is essentially a gamble that less than 2% will default in the next year. This <3% margin of safety is at historical lows and is normally 4-5%.


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## andrewf (Mar 1, 2010)

Even when companies default, often the loss is only partial.

Even still, the credit premium is not very large.


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## Argonaut (Dec 7, 2010)

4.8% interest-only yield on junk bonds. Compare that to, for example, 5% growing dividend yield on BCE. Forget about asset allocation and all that for a moment.. why not choose the apples when the oranges are old and rotten?


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## james4beach (Nov 15, 2012)

Argonaut said:


> 4.8% interest-only yield on junk bonds. Compare that to, for example, 5% growing dividend yield on BCE. Forget about asset allocation and all that for a moment.. why not choose the apples when the oranges are old and rotten?


Well to play devil's advocate, bonds rank higher than equity for claims on assets, in case of bankruptcy. In some ways bonds are safer.

Still, I would NEVER buy junk bonds at these prices. I agree that even some equities are a better place to be... heck, the utilities as a group pay just as high a yield and are very stable companies. I own some ZUT (ETF), but in all fairness I wouldn't recommend that either at these prices.


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## james4beach (Nov 15, 2012)

doctrine said:


> Historically, 2% of high yield bond funds can default in a given year. Thats just 5 or 6 companies on this list, and all of a sudden you'd be just as well off in a safer fund. The 2-3% yield advantage is essentially a gamble that less than 2% will default in the next year. This <3% margin of safety is at historical lows and is normally 4-5%.


Yes this is a very important point, thanks. And in case of economic slowdown, you just watch how many of those companies default. I agree that this current 3% yield advantage (the spread) just isn't enough to make junk bonds worthwhile. It's got to be historically one of the lowest spreads ever for corporate bonds.

I mean did everyone suffer amnesia and forget about the credit crisis or something? American junk bond funds lost 33% of their value in 2008, even with all the high interest being paid. And you're taking on all that risk just to squeeze out an extra 3% of return?


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## james4beach (Nov 15, 2012)

Here is a neat historical chart that illustrates exactly what we're talking about with bonds vs stocks:
http://static.cdn-seekingalpha.com/uploads/2012/9/25/1112099-13486208407349875-Ploutos_origin.png

This shows (yield on US junk bonds) minus (S&P 500 earnings yield). It looks like a historical average is ~ 5%. Today: it's zero!

Basically, junk bonds should yield around 11% but instead they yield 6%.

Note that earnings yield is different than dividend yield. It's E/P (inverse of P/E)
(From article http://seekingalpha.com/article/899241-the-high-yield-corporate-bond-conundrum)


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## liquidfinance (Jan 28, 2011)

After reading all this it intrigues me as to what people think of XTR as an offering in terms of yield and safety?

I have a very small allocation of bonds. SLX (GBP Corporate Bond) and IHYG (Euro Junk, very small holding). which are held inside my SIPP (UK RRSP equivalent)

I don't currently have any bond allocation in my TFSA as I just don't see anything I like with the exception of XTR. The price seems more stable and it has a reasonable payout. I was thinking of buying some of this from other dividend payments I receive to the TFSA, taking advantage of the Questrade free etf purchases. This way i'm capturing the yield and putting the money to work instantly and increase the effects of compounding. Then when XTR builds up to a reasonable amount and I see something I like I can sell off and invest in the new stock. If there is nothing I fancy then I still capture the dividends from XTR. Of course this is not without risk as the price of XTR could fall.


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## james4beach (Nov 15, 2012)

liquidfinance said:


> After reading all this it intrigues me as to what people think of XTR as an offering in terms of yield and safety?


You're not going to get the yield you plan on, with your re-investment strategy. XTR is tricky. (Jump to bottom of my post if you just want to see the numbers)

XTR (a fund-of-funds) wraps up a bunch of yield instruments. Like other income mutual funds, it pays out a constant distribution which is more than what the fund earns from its actual investments. This somewhat gives a false sense of security: it makes it look like the fund earns a steady income, and a high one at that. It doesn't actually. They're paying out a steady high income, but the fund earns a volatile lower income. The shortfall comes from your own capital in the fund, which is the neat little trick with income funds.

Normally an ETF matches distributed income to what is actually earned, because they're supposed to be a transparent conduit of the underlying. Oversimplifying a bit, total distributions / net income is usually close to 100%. For example XIU 112%, XDV 93%, XBB 102%

In the case of XTR, that ratio is 152%... it pays out significantly more than its investments earn. In other words, the income from their investments only provides 66% of their monthly distribution. The rest is financed by liquidating assets, which means that the capital is being depleted over time. On that portion (the return of capital) you're not making money.

The point here is that the XTR dividend is not sustainable indefinitely and you're not EARNING what you think. The share price will erode over time. So notice how the fund's payout trickery attracted you to it... you wrote "The price seems more stable and it has a reasonable payout".

Given what XTR does, your strategy won't work like you think. You're talking about taking that distribution (part of it return of capital) and throwing it back into the fund... it's just recycling the same money. Only the real earnings are being put to work/compounding -- but the real earnings are 66% of the distribution, so think of it like 66% x 5.77% = *earned 3.8% yield*.

I can illustrate using constant market prices. Bare with me, this is neat! Say you start with $1000 capital, buying 100 shares XTR at $10, distributing $0.577 annually (that's the current 5.77% yield). In one year it will pay you $57.70 [ $38.08 earnings + $19.62 your own capital ]. Some has come from capital, so share price falls to $9.8038. You reinvest the whole distribution. Now you own 105.885 shares. In the second year it pays you $61.10 [ $40.33 earnings + $20.77 your own capital ]. The share price falls to $9.6076.

Now you sell and you're done. What have you ended up with after 2 years? The $61.10 distribution + accumulated XTR value 105.885 shares x $9.6076 = $1,078.40 total. What's the annualized return? sqrt(1078.40/1000) = 3.8% yield!

So while XTR nominally pays out 5.77%, it actually earns (and can only compound your investment) at 3.8% yield. You're just fooling yourself by reinvesting into the fund... it's your own capital getting sloshed back and forth.


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## james4beach (Nov 15, 2012)

Boy I really went nuts with that last post, but I had been curious about XTR for some time too.

This leads me to observe that a fund-of-funds like XTR can be quite misleading. This is why I don't like opacity of a fund-of-funds. iShares doesn't clearly state what the underlying investments earn (I calculated the 66% figure from the financial statements). Nowhere on their web page is there any mention of a yield of around 3.8%, though you can calculate it by doing a weighted average of the holdings, if you remember to include the MERs ;-)

Tricky, tricky stuff.


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## Squash500 (May 16, 2009)

james4beach said:


> Boy I really went nuts with that last post, but I had been curious about XTR for some time too.
> 
> This leads me to observe that a fund-of-funds like XTR can be quite misleading. This is why I don't like opacity of a fund-of-funds. iShares doesn't clearly state what the underlying investments earn (I calculated the 66% figure from the financial statements). Nowhere on their web page is there any mention of a yield of around 3.8%, though you can calculate it by doing a weighted average of the holdings, if you remember to include the MERs ;-)
> 
> Tricky, tricky stuff.


I totally agree with you....that the XTR is far from a perfect solution. With that being said it's IMHO much better to buy the XTR than locking up your money in GICS of 2,3,4 or a 5 year term that pay next to nothing and give you absolutely no liquidity whatsoever.

At least with the XTR....you get a decent monthly income and can sell it the same day if you want. Also a 1yr locked in GIC is only paying at present 1.55% at TDW....IMHO there's a very good chance that you'll make more than 1.55% by holding the XTR for a year.


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## RBull (Jan 20, 2013)

Doctrine, I think you mean 2% of bonds within a fund and not 2% of bond funds. A default % is baked into the historical returns, so it's not really an added risk. However , I agree the spread is worth considering more carefully right now.


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## andrewf (Mar 1, 2010)

I never liked how they transformed XTR from an income trust fund into a 'yield' fund. A lot of the fans of XTR seem to be pretty uncritical about it, too. If they didn't like the individual holdings of the fund of funds, why would you like the package?


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## liquidfinance (Jan 28, 2011)

So what is holding the price of XTR? 

Is it more a case of new money being invested into the fund which allows for this support rather than price appreciation of the underlying assets?


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## andrewf (Mar 1, 2010)

Same as with all other bond funds: falling yields.


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## Squash500 (May 16, 2009)

liquidfinance said:


> So what is holding the price of XTR?
> 
> Is it more a case of new money being invested into the fund which allows for this support rather than price appreciation of the underlying assets?


Actually XTR is very transparent. The nine holdings of the XTR are: XHB, XCB, XHY, XUT, XEI, XRE, XPF, XDV, and XLB. IMHO if the price of these ETF's goes up then the price of the XTR will go up. However the top 3 holdings....which are all bond ETFS make up approx 56% of the XTR.

I don't think new money invested into the ETF has anything to do with whether the price of the XTR will go up or not? It's just basically has to do with the price appreciation of the underlying assets.


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## gibor365 (Apr 1, 2011)

Argonaut said:


> 4.8% interest-only yield on junk bonds. Compare that to, for example, 5% growing dividend yield on BCE. Forget about asset allocation and all that for a moment.. why not choose the apples when the oranges are old and rotten?


BCE is one of my largest holdings already.... just wanted a bit mire diversification...


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## gibor365 (Apr 1, 2011)

james4beach said:


> So while XTR nominally pays out 5.77%, it actually earns (and can only compound your investment) at 3.8% yield. You're just fooling yourself by reinvesting into the fund... it's your own capital getting sloshed back and forth.


even 3.8% yield is much better than any HISA or GIC


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## andrewf (Mar 1, 2010)

Not that much better. 5 year GIC at 2.85%. The risk you're taking for the yield pickup seems questionable.


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## Squash500 (May 16, 2009)

andrewf said:


> Not that much better. 5 year GIC at 2.85%. The risk you're taking for the yield pickup seems questionable.


 Andrew where do you get a 2.85% 5 year GIC. At TDW the best 5 year GIC is only 2.45%.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Not that much better. 5 year GIC at 2.85%. The risk you're taking for the yield pickup seems questionable.


In Investor Edge the best 3rd party GIC for 5 years are 2.45%... and it's 55% less than "actual" 3.8% of XTR ... So, if you lock 10K in 5 y GIC, you'll get in 5 years 11,286 and with XTR in 5 y you may get (with 3.8% yield) 12,050.
Also with such GIC you cannot touch money for 5 years, and if in 2.5-3 years 5 year GIC will offer much higher interest (and it's very possible) -> you stuck.... but you can always sell XTR and buy GIC with better rate...
Disclosure: currently not holding XTR or 5 y GIC, but may buy XTR before next ex-div


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## andrewf (Mar 1, 2010)

If rates go up, XTR will lose value, because it is primarily a bond fund. In your scenario where rates rise substantially (and your GIC is locked in), you will get much less than the 3.8% YTM XTR indicates. Unless the equity components really pop, which is not likely.

ICICI bank offers 2.85% 5 year GICs, CDIC insured.

While you can compare rates on a % basis, it can be misleading. Is a fixed income instrument that pays 0.2% with substantial risk really twice as good as one that pays 0.1% guaranteed by the government? One has to account for risk of loss, too.

There's no free lunch in bonds. You can get an attractive rate from GICs, but the cost is reduced liquidity.


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## webber22 (Mar 6, 2011)

Keep in mind that XTR is not a bond fund. During the 2008 crash it went from $15 down to $7 and still hasn't recovered back over $13. That's interesting because all the components have recovered - maybe some new Ishares accounting methods or returning capital back to holders
Like andrew said this will get hammered when rates rise ..


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## james4beach (Nov 15, 2012)

This ETF needs a big fat asterisk beside it. If you TOTALLY understand what's going on with it, go ahead a buy it. I suggest looking at my spreadsheet closely and seeing if this is really what you want to buy. With yesterday's prices I calculate a true yield of 3.70%

Here's a spreadsheet I created that calculates the XTR true yield from underlying.

1. I don't like seeing an ETF doing the fund-of-funds thing. I suppose an ETF can do anything a mutual fund does, but I feel that it's contrary to the mandate of an ETF. Most regular income mutual funds play the game of misleading "high" payouts and that's bad enough. But an ETF doing that seems even more misleading to me.

2. I say XTR is not transparent because the holdings keep changing. The managers of the fund are allowed to change the allocations to anything they want, at any time. Today it's a bond fund, but what will it be tomorrow? Nobody knows. webber22 said the underlying components have recovered... it's hard to judge, because XTR held much different things in 2009 than it does today. I could never recommend this as a long-term holding. With an ETF you're supposed to know what you're buying. With XTR, you don't know what you're buying unless you're going to keep watching it daily.

3. Nowhere does iShares publish its actual portfolio yield. I estimated it at 3.8% based on mid-2012 financial statements. I recalculated it with current prices and got 3.70%, see spreadsheet at top of my post.


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## gibor365 (Apr 1, 2011)

Understandable that this is not perfect holding, but waht is it?! What options for fixed income we have? 
Bond - no goods , GIC for 5 years - no good (at least for myself), Preferred - not sure...

btw, is the XTR analog in another ETF producers? like BMO or Horizons?


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## andrewf (Mar 1, 2010)

webber22 said:


> Keep in mind that XTR is not a bond fund. During the 2008 crash it went from $15 down to $7 and still hasn't recovered back over $13. That's interesting because all the components have recovered - maybe some new Ishares accounting methods or returning capital back to holders
> Like andrew said this will get hammered when rates rise ..


Didn't it used to be a income trust ETF at that point? The mandate is totally different now.


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## liquidfinance (Jan 28, 2011)

andrewf said:


> Didn't it used to be a income trust ETF at that point? The mandate is totally different now.


Here is the article from when it changed.

http://opinion.financialpost.com/20...s-income-trust-etf-into-income-fund-of-funds/


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## james4beach (Nov 15, 2012)

XTR was originally a traditional ETF, an income trust index. When income trusts disappeared the managers changed the mandate totally, and now it's an Income Fund and can hold any odd thing the managers want.

From the shareholder perspective, it was a smooth transition from income trusts (still pays high distributions). But of course it's a totally different fund. And the high 5.77% payout is misleading; it only yields 3.70% as I illustrated here, and the rest is return of your own capital.

Fee-wise, its holdings have 0.54% MER and then you pay an additional 0.03% for the convenience of XTR, for total MER 0.57%


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## james4beach (Nov 15, 2012)

gibor said:


> btw, is the XTR analog in another ETF producers? like BMO or Horizons?


ZMI the "BMO Monthly Income ETF" looks similar. As with XTR, it's not obvious what it actually yields (calculate it yourself) but I suspect it's higher than XTR because ZMI's top holdings yield 4.8%, 5.1%, 4.7%

When calculating yields, remember to (1) subtract MER from quoted yield-to-maturity or portfolio yield to get net yield, and (2) BMO's "max annual management fee" isn't same as MER, so make sure you use MER. More info here


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## gibor365 (Apr 1, 2011)

FOund somewhat similar BMO ETF, ZMI BMO Monthly Income ... but differently from XTR they reduce dividends every year, last payment 0.06 was the lowest since inception

Holdings: 
BMO High Yield US ETF	13.72%
BMO Eq Wgt Utilities ETF	10.96%
BMO Eq Wgt REITs ETF	10.11%
BMO Emerg Mkt Bond ETF	9.79%
BMO S&P/TSX Laddered Indx	9.05%
BMO Mid Corp Bond ETF	8.97%
BMO Long Corp Bond ETF	8.92%
BMO Short Corp Bond ETF	8.01%
BMO Eq Wgt Oil & Gas ETF	7.09%
BMO Equal Wgt Banks ETF	6.99%
BMO Global Infra ETF	6.09%
Cash	0.31%


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## gibor365 (Apr 1, 2011)

james4beach said:


> ZMI the "BMO Monthly Income ETF" looks similar. As with XTR, it's not obvious what it actually yields (calculate it yourself) but I suspect it's higher than XTR because ZMI's top holdings yield 4.8%, 5.1%, 4.7%
> 
> When calculating yields, remember to (1) subtract MER from quoted yield-to-maturity or portfolio yield to get net yield, and (2) BMO's "max annual management fee" isn't same as MER, so make sure you use MER. More info here


I did similar calculation for ZMI and result even worse than XTR, ZMI yield 3.4%
BMO High Yield US ETF 13.72% 13.72	5.34	0.732648
BMO Eq Wgt Utilities ETF 10.96% 10.96	5.72	0.626912
BMO Eq Wgt REITs ETF 10.11% 10.11	5.34	0.539874
BMO Emerg Mkt Bond ETF 9.79% 9.79	3.99	0.390621
BMO S&P/TSX Laddered Indx 9.05% 9.05	4.7	0.42535
BMO Mid Corp Bond ETF 8.97% 8.97	3.15	0.282555
BMO Long Corp Bond ETF 8.92% 8.92	4.33	0.386236
BMO Short Corp Bond ETF 8.01% 8.01	2.12	0.169812
BMO Eq Wgt Oil & Gas ETF 7.09% 7.09	4.06	0.287854
BMO Equal Wgt Banks ETF 6.99% 6.99	4.12	0.287988
BMO Global Infra ETF 6.09% 6.09	3.14	0.191226
Yield (include 0.55 MER) = 3.4%


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## andrewf (Mar 1, 2010)

Thanks for doing the number crunching.


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## james4beach (Nov 15, 2012)

gibor said:


> I did similar calculation for ZMI and result even worse than XTR, ZMI yield 3.4%


Thanks. lol you're right... I got the wrong idea looking at the top yielding holdings. I wonder how the heck BMO gets the 'portfolio yield' they've posted, because that wording sounds like it should be the same as yours.

So we've got two of Canada's highest payout ETFs, which in reality yield
*XTR 3.7%
ZMI 3.4%
*
That's pretty sad, but it makes fundamental sense given that these funds are pretty well diversified. No free lunch. Someone who wants to do high risk yield-chasing could just pick the highest yielding components out of the above, I suppose.


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## gibor365 (Apr 1, 2011)

james4beach said:


> That's pretty sad, but it makes fundamental sense given that these funds are pretty well diversified. No free lunch. Someone who wants to do high risk yield-chasing could just pick the highest yielding components out of the above, I suppose.


sure  you can pick for example 5 first ETFs and get about 4.5% yield (after MER deduction and weighted allocation) and you have pretty diversified stuff: US junk bond, preferred, Utilities, REIT and Emerging market bonds


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## gibor365 (Apr 1, 2011)

Another option to whom may like - Protected Notes 
https://www.cibcnotes.com/ScreensCA...éant+le+6+mars+2018&OfferCloseDate=2013-03-01

for example for 3 years, maximim you can get 4% annually and minimum 0.5%, all depends on performance Anheuser-Busch, Apple, AT&T, Bayer, Exxon Mobil, HSBC, Pepsi, Merck, Siemen, and Unilever
if related stock in gain - you get 4% for calculation purposes, if in losses -> % loss (maximum to -10%) and than calculate average.... Compare with maximum GIC rate for 3 years (2.05% in Investor Edge)....


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## andrewf (Mar 1, 2010)

More to the point: YIELD DOESN'T MATTER.

Look at expected after tax total return. This is the only thing that matters. Yield is just a bunch of noise.


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## gibor365 (Apr 1, 2011)

andrewf said:


> More to the point: YIELD DOESN'T MATTER.
> 
> Look at expected after tax total return. This is the only thing that matters. Yield is just a bunch of noise.


Why yield doesn't matter?! I don't care about "after tax total return" as I have only registered accounts


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## andrewf (Mar 1, 2010)

In a registered account, after tax return is the same thing as before tax return.

Yield doesn't matter.

What's a better investment, Asset A that yields 10%, but has 20% capital losses per year (total return -10%), or Asset B that yields 2% and has 5% capital gains per year (total return 7%). If you make decisions based on yield, Asset A looks great. Total return is how much money you have over time--money you can actually go out and spend.


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## gibor365 (Apr 1, 2011)

You cannot control return, but more or less you can control yield on initial purchase....
In your example , if I have $1,000,000, I'd prefer Asset A, as with yield 10% , I'd take out 100K every year and this is more than enough for us as we don't have any debt.


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## liquidfinance (Jan 28, 2011)

The yield is very important. 

It provides cashflow! No need to speculate and rely on the price of the asset increasing.


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## andrewf (Mar 1, 2010)

So you're happy to hold a fund that yields 10% but loses 9% of its value every year?

Gibor, nope. Asset A yields 10% each year. You get $100K the first year, then $80k the next, then $64k the third year, etc as the fund decreases in value. Your total return is -10% a year. Yield is just a part of that. Everything you get in yield you lose in capital losses. Total return = yield + capital gains. If total returns are negative, then yield doesn't matter--you're still losing money.


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## gibor365 (Apr 1, 2011)

No, I was talking on original yield on investment ... if I bought stock with yield = 10% and it depreciate, my yield will go up ....I will care less, as I get fixed amount of dividends every time


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## andrewf (Mar 1, 2010)

Dividends can and do go down. See Manulife. It was a blue chip stock that any smart dividend investor would hold, with a nice yield. Asia would deliver untold riches. A billion Chinese to sell life insurance to. Woops...

Also, with funds that hold bonds, pref shares. The dividend rate / unit (in $) can and will go down. Don't believe me? Look at the distributions from XSB, etc. Which direction have distributions been going in?


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## james4beach (Nov 15, 2012)

andrewf said:


> Total return = yield + capital gains. If total returns are negative, then yield doesn't matter--you're still losing money.


I agree that in the end, total return is the most important thing. Let's say:
total return = income + capital gains

But at the time you're buying a fund, how can you project the total return? When you look at that equation, the only thing you can predict with any confidence is the income. There is no way you can predict the capital gains (assuming there isn't some systematic problem that is guaranteed to give you a sure capital loss)

So I think many of us look at that equation, mentally put in capital gains of zero, and then take the income (yield) pretty seriously. That's what I do anyway.

Note: with the Monthly Income Funds I was talking about, there is a systematic problem that is sure to make the share price decline in the long-term: return of capital. So there's a case where it's a mistake to focus just on the income, but only because the capital is being depleted by design. But other than RoC, if you have no reason to believe the capital will erode, I think it's still correct to focus on the yield as far as projecting the total return.


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## andrewf (Mar 1, 2010)

But for things like premium bonds, the coupon yield is positive and capital gains are negative (losses). So juts assigning a zero to capital gains is wrong. You can calculate the total return: it's the YTM (save reinvestment risk). Much the same with CBO, and how it yields 4.5%, has a YTM of about 2%, so has expected capital losses of 2% (more, once you account for fees).


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## james4beach (Nov 15, 2012)

I see what you're saying, but I always use the YTM with bond funds for exactly that reason. The YTM goes in the income part of the equation, IMO. I suspect we're getting caught up on nomenclature


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## andrewf (Mar 1, 2010)

I'm putting yield in terms of 'portfolio yield'/'coupon yield' etc. that is being used to justify buying all kinds of assets that spin off cash presently but can be expected to decline in value.


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## james4beach (Nov 15, 2012)

Well I agree with you that looking at yield alone should definitely NOT justify buying assets that are expected to decline in value. The goal should always be preservation/growth of capital, plus a yield that doesn't compromise that.

Besides those Income Funds and other structured products, what other kinds of things erode the capital by design? Maybe my mind is fuzzy due to the late hour. Bonds certainly don't erode capital, unless they're junk and are expected to have a rather high default rate. Is that what you mean?


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## andrewf (Mar 1, 2010)

Premium bonds, preferred shares trading above par, *ahem* high dividend paying companies a la Yellowpages.

It's not even about growth/preservation of capital, per se. What matters is after tax total return, with acceptable risk. Whether that return is dividends, capital gains, ROC, interest etc before tax doesn't much matter. After tax, it is just dollars that you can spend to buy donuts or go on trips to Mexico.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Dividends can and do go down. See Manulife. It was a blue chip stock that any smart dividend investor would hold, with a nice yield. Asia would deliver untold riches. A billion Chinese to sell life insurance to. Woops...
> 
> Also, with funds that hold bonds, pref shares. The dividend rate / unit (in $) can and will go down. Don't believe me? Look at the distributions from XSB, etc. Which direction have distributions been going in?


As far as I know MFC never was even close to be dividend champion, they increased dividends less than 10 years, can you give me examples of stock that increased devidends 30+ years and cut them? Maybe there are, but not many.... Also MFC is an insurance company and I personally a bit scary to invest into them, this is the reasom why I was watching for a long time great company AFL (30 years div. increase streak), but couldn't pull the trigger. 
Several stocks like PG, JNJ, .... increased dividends every year for more than 50 years! 
Can they cut dividends? Probably... but chances of this cut much less, than chances that you projected appreciation will fail


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## gibor365 (Apr 1, 2011)

Actually XTR didn't reduce dividends from Aug-2010...


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> I see what you're saying, but I always use the YTM with bond funds for exactly that reason. The YTM goes in the income part of the equation, IMO.


Even with YTM, you have re-investment risk.
A high yielding bond purchased in the past may be spinning off attractive income/yield these days, but unless you can re-invest that income at the same YTM, you are not going to "earn" the YTM that you planned for when you bought it.
The only way to avoid re-investment risk is to build your ladder exclusively with strip bonds.


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## andrewf (Mar 1, 2010)

How many companies in Canada meet those criteria? 5 or 6? No banks, no telcos, no O&G, no retailers... a few utilities maybe?

XTR is paying distributions out of capital. The holdings don't yield enough to cover the distributions.


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## gibor365 (Apr 1, 2011)

andrewf said:


> How many companies in Canada meet those criteria? 5 or 6? No banks, no telcos, no O&G, no retailers... a few utilities maybe?
> 
> XTR is paying distributions out of capital. The holdings don't yield enough to cover the distributions.


On TSX even less, FTS increase dividends for 40 consecutive years, TRI, IMO, ENB - about 20 years.... if criteria will be expanded , instead "increased" dividends to use "didn't cut dividends) , than almost all Canadian banks will fit.
But, who said you should just look at TSX, hold US$ div champions stocks: JNJ, PG, MCD, T, MO, KO, PEP ... there are plenty of them...

Yes, XTR reminds me some huge Ponzi scheme  and how long it will bring money - unknown...maybe 1 year, maybe another 10 years.... too many people are scared and prefer something like XTR over some riskier assets


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## gibor365 (Apr 1, 2011)

Even more than that, during bear market long-term income investors just benefit... take as an example JNJ, during ressesion 2008 it dropped twice less than S&P 500 and JNJ continue to increase dividends, so shareholders were getting more shares every quarter while DRIPing, so every quarter income from dividend was growing faster and faster and if you have RRIF and withdraw minimum - it's perfect


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## james4beach (Nov 15, 2012)

gibor said:


> Yes, XTR reminds me some huge Ponzi scheme  and how long it will bring money - unknown...maybe 1 year, maybe another 10 years....


Well just to be fair, it's not a ponzi scheme or anything. It's just eroding its capital. If markets stop rising, say a sideways market/bear -- the share price will steadily decline until eventually it gets to $0. And that doesn't mean investors are losing money (since ROC is harmless) it just means they're making very little.

It will definitely keep bringing in money for a year. This is just an issue of a drag on returns. It can get a LOT worse than XTR. See for example BMO Global Monthly Income Fund (which has a terrible drag on returns due to so much ROC being paid out)


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## andrewf (Mar 1, 2010)

ROC is less a drag on returns than an illusion of returns (except with things like REITs). You can buy mutual funds that will pay you 7, 8, 9% yields, but a lot of that yield is return of capital. The amount you leave invested gets whittled away, and the cashflow decreases along with it.


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## james4beach (Nov 15, 2012)

Yes well said - it's an *illusion *of high returns. Many people seem to love those things (or more likely, have no idea it's happening). My gut still tells me there's a semi-fraud happening here, since artificially high distributions are used to attract people into the funds under false pretenses. And then of course the fund collects fees from all that money under management.


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## gibor365 (Apr 1, 2011)

james4beach said:


> Yes well said - it's an *illusion *of high returns. Many people seem to love those things (or more likely, have no idea it's happening). My gut still tells me there's a semi-fraud happening here, since artificially high distributions are used to attract people into the funds under false pretenses. And then of course the fund collects fees from all that money under management.


I think you just gave definition of Ponzi scheme...

Isn't whole stockmarket illusion to some degree?! Same with XTR, when ppl put money in, you can get appreciation and juicy dividend, you just need to get out in time...


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## andrewf (Mar 1, 2010)

A Ponzi scheme is where impossibly high returns are provided to initial investors, funded through contributions from new investors. It collapses when there are not enough new investors to continue the illusion of returns. XTR is not a Ponzi. You are not being given illusory high returns by getting money from later investors. You're getting illusory high returns by being given back some of your own money. This is not sustainable, because eventually what remains of your investment can't sustain the stream of payments, and the yield falls. It doesn't mean its a scam or even that it will have a negative return. It just means you're being either deliberately or inadvertently tricked into investing in the fund by the implied promise of a yield that is higher than the fund can sustain. If you read the fine print, I'm sure iShares explicitly states that the yield is not guaranteed and may decrease. But in situations like this, the investor is complicit in the trick. In other words, they want to be fooled.


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## andrewf (Mar 1, 2010)

And no, the stock market is not an illusion. At the end of the day, there is real money generated from real profits flowing to shareholders. There are bubbles and manias that make the market seem like a scam, but that is more the fault of the participants than the market. People don't get burnt by buying Nortel or sinking all their life savings into Apple at $700 unless they get greedy and take leave of their senses.


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## andrewf (Mar 1, 2010)

james4beach said:


> Yes well said - it's an *illusion *of high returns. Many people seem to love those things (or more likely, have no idea it's happening). My gut still tells me there's a semi-fraud happening here, since artificially high distributions are used to attract people into the funds under false pretenses. And then of course the fund collects fees from all that money under management.


I agree that those 'high yield' MFs are probably unethical. XTR is a much more muted version of that. I'm not sure I would call it fraud, but they certainly are taking advantage of people. Much like the vast majority of the MF sales industry takes advantage of people.


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## fatcat (Nov 11, 2009)

james4beach said:


> My gut still tells me there's a semi-fraud happening here ...


really ? how shocking, i have never heard of such a thing in the investment industry ... i thought that the industry was eager to serve their customers and help them grow their investments ... you are saying that the industry exists merely to make money off it's customers ??


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## Squash500 (May 16, 2009)

I just look at it this way. Right now I would rather put $100000 into the XTR then into a 1 yr GIC paying 1.70%. Right now....given market conditions I think the XTR will earn more than 1.7% over the entire year. Obviously I could be totally wrong. Right now I'm earning $5760 in yearly income from the XTR whereas with a 1 yr GIC I'd only be earning $1700. I have this money in a non-registered account.

I also like the fact that the XTR pays out income monthly. I personally don't like buying stocks like BCE where you have to wait 3 months for the dividend payout. I also like the fact that the XTR is very diversified.


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## andrewf (Mar 1, 2010)

Why would you buy a 1 year GIC when you can get 1.8% at Ally?

Given XTR's allocation to high yield, prefs and REITs, a negative year is not at all unlikely.

I think it's funny that I think so differently than some other people out there. I have found the switch from quarterly to monthly payouts a bit gimmicky. A lot of extra paperwork tracking ACBs, for no real benefit.


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## Squash500 (May 16, 2009)

andrewf said:


> Why would you buy a 1 year GIC when you can get 1.8% at Ally?
> 
> Given XTR's allocation to high yield, prefs and REITs, a negative year is not at all unlikely.
> 
> I think it's funny that I think so differently than some other people out there. I have found the switch from quarterly to monthly payouts a bit gimmicky. A lot of extra paperwork tracking ACBs, for no real benefit.


Andrew maybe I should switch discount brokerages because I find that TDW pays lower GIC rates than some other discount brokerages etc. For example...TDW doesn't deal with Ally or ICI Bank etc. Andrew I've learned a lot from all of your excellent posts. However...in my situation the fact that XTR pays out monthly makes me want to hold on to the XTR as I use the XTR monthly income that I receive to help with my monthly living expenses.

Also I like the fact that the XTR doesn't fluctuate that much in price in comparison to individual dividend paying stocks.


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## fatcat (Nov 11, 2009)

Squash500 said:


> Andrew maybe I should switch discount brokerages because I find that TDW pays lower GIC rates than some other discount brokerages etc. For example...TDW doesn't deal with Ally or ICI Bank etc. Andrew I've learned a lot from all of your excellent posts. However...in my situation the fact that XTR pays out monthly makes me want to hold on to the XTR as I use the XTR monthly income that I receive to help with my monthly living expenses.
> 
> Also I like the fact that the XTR doesn't fluctuate that much in price in comparison to individual dividend paying stocks.


you do realize that from july 2008 to mar 2009 XTR lost 47% of its value ... it may well have less fluctuation and it pays more than a GIC but you _can't even fairly compare it to a GIC_ ... this is a _completely different_ product than a GIC


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## andrewf (Mar 1, 2010)

XTR was effectively a completely different fund back then. They changed the fund's mandate from income trusts (hence the Tr in XTR) to an 'income fund'. I find the idea of an income fund bizarre, because they only thing that matters is after tax risk-adjusted total return. Whether you create income from that through distributions or selling a portion of your units seems utterly immaterial to me. But many investors have a (let's be blunt) irrational dislike of selling their investments to fund their consumption, so hence the market for 'income' funds. It's bizarro world stuff, if you think about it... Even weirder are the people who are still in the accumulation phase (ie, not withdrawing from their portfolio) who are fixated on distribution yield. It's all smoke and mirrors, folks. 

It's like preferring a company that has a 5% dividend yield with 100% payout ratio to one with 4% dividend yield and 40% payout ratio. The second company has twice the earnings yield/half the P/E, but the 'yield hungry' investor salivates over the first one, even though it has a lower expected return, all else equal.


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## Squash500 (May 16, 2009)

I got the idea for investing in the XTR and other income ETFS from the latest book by Alison Griffiths.

http://www.alisongriffiths.ca/articles.php?id=120


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## andrewf (Mar 1, 2010)

Sounds like a financial Dr Phil.


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## james4beach (Nov 15, 2012)

Can we somehow move the XTR discussion to its own thread? It's not even a bond fund.

Investing in XTR is fine if you acknowledge it only yields 3.7% and holds some very high-risk assets that will fall both with a stock correction, or with rising interest rates. As others have said, you can't directly compare something like this to a GIC (which is CDIC insured and won't decline in value). The risks are totally different. Deciding risk vs reward tradeoffs is an art, and a personal decision... I just want people to make these decisions with the right information.

If you like XTR, then you should equally well like a basket of dividend paying stocks. The holdings of XTR correlate totally to the broad stock market... there's nothing special or magical about this fund. To say "I don't like the TSX 60 index, I'm going to buy XTR for yield" is very silly. Based on mathematical correlation, they're basically the same thing.


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## gibor365 (Apr 1, 2011)

james4beach said:


> Can we somehow move the XTR discussion to its own thread? It's not even a bond fund.


It's half bond fund


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## P_I (Dec 2, 2011)

Going back to the OP's question


dogleg said:


> I have some ETF bond funds like CBO, XBB and XSB . The question is whether to add to them ??? And if so are they a good fit for a TFSA.


I agree with mrcheap's line of thinking. Let's turn the question around, what purpose do your existing ETF bond funds fulfill in your portfolio? Are they an asset allocation choice and have you established target ranges for rebalancing? I'm presuming that since you are using ETF bond funds, you're not living off the income generated, so the purpose is not generating income. 

Answering my own questions, if they are an asset allocation choice for the fixed income portion of your portfolio, AND they are currently underweight to your target range, then I'd be adding fixed income as a matter of investment policy. This would generate a couple of follow-up questions, given your circumstances and risk tolerance, what are currently the better choices for fixed income given the current rate environment. If your goal is purely to have a fixed income allocation that matches the index return, with little consideration to current income, then I'd hold my nose and add to XBB or possibly consider building a 5 year GIC ladder and then continue to roll-it over. XSB and CBO change the choice of the underlying index you are choosing to follow, again an investment policy question IMHO. The second follow-up question is whether they are a "good fit for a TFSA", and generally I'd answer yes. Fixed income is taxed at highest rate, so where possible should be placed in the most tax-efficient account type (TFSA and/or RRSP, i.e. registered accounts). 

On this topic there is much discussion of the different means to implement the fixed income portion. There are pros and cons with each approach and the OP would be wise to give consideration to the factors that matter to themselves. In a low rate environment, the importance of low costs increases, thus careful consideration of MERs and their impact would seem to be prudent. Other factors that have been mentioned are the likelihood of when interest rates will change, and how quickly. This impacts how long one should consider locking their money into a choice. There have been mentions of current GIC vs. HISA rates, but no mention of the fact that when comparing them, HISA rates are subject to change and not guaranteed over the holding period of the investment. In the low rate environment of the past few years, HISA rates have continued to drop, whereas if someone had locked into a GIC over the same period, they probably would have done better. Clearly it rates rise, the opposite holds true. 

In a low rate environment, alternatives that should IMHO be considered as reaching for yield typically make an appearance, as it has on this topic. I'm not saying it is a necessarily a bad thing, but I'd go back to the asset allocation question, what role does fixed income play. If you are already taking risk in the equity portion of your portfolio and are not relying on the income to cover living expenses, why take additional risk within the fixed income portion of the portfolio? Of course this is tougher in a low rate environment, but at the risk of sounding like a broken record, it goes back to your investment policy decision(s). 

My long winded $0.02. Of course, YMMV.


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## james4beach (Nov 15, 2012)

I'm not saying these bond funds are terrible but when interest rates get this low you have to start being really critical of the risk vs reward equation and very critical of fees, because the MERs on bond funds eat up a lot of your yield. For example while I generally like XSB, think of this: the 28 basis point MER eats up 18% of the whole yield you get on this thing! The net yield is only 1.30% after MER.

I strongly recommend easing into a GIC ladder (if you don't already have one) because every time I run the numbers lately, GICs offer a better return with less risk (almost no risk). The "risk-adjusted return" from GICs is superior, at current interest rates. You don't even need 5 year GICs. From what I'm seeing, even 2 or 3 year GICs are a better deal than bonds.


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## fatcat (Nov 11, 2009)

if you have 100K and the best you can do on a GIC is 2.85 and you can get 1.80 at ally in HISA you are "paying" a $1000 a year for complete flexibility and access to your funds, this seems to me to be a better value proposition than locking for 5 years (if you have 50K you are paying 500 bucks)

on the other hand we may well go sideways for several more years and the ladder might look good


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## andrewf (Mar 1, 2010)

Ally (now RBC) could also choose to lower their HISA rate tomorrow. It's a risk you take. It was 2.2, then 2.0, now 1.8%.

A happy medium might be something like Home Trust's 18 month, 2.2% GIC.


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## james4beach (Nov 15, 2012)

fatcat said:


> if you have 100K and the best you can do on a GIC is 2.85 and you can get 1.80 at ally in HISA you are "paying" a $1000 a year for complete flexibility and access to your funds, this seems to me to be a better value proposition than locking for 5 years (if you have 50K you are paying 500 bucks)
> 
> on the other hand we may well go sideways for several more years and the ladder might look good


I guess this is where it becomes very difficult to boil down things to one-size-fits-all solutions. Some people really want that liquidity and cash on hand which I totally understand. Depends on lifestyle too.

Others are OK waiting for the 1 or 2 year intervals as their GICs mature (it's in a ladder remember), and don't see that as locking up money too long. I would think the simple solution is a mix of all these. You keep a chunk of cash in savings and a chunk in the GIC ladder. As your cashflow needs change you keep adjusting your allocations. This is basically what I do, but I also hold individual government bonds to maturity ... which I throw into my ladder, alongside the GICs. One big ladder going out 10 years.


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## Lephturn (Aug 31, 2009)

Not all bonds are evil, but...

http://www.thereformedbroker.com/2012/10/26/33-times-you-poor-dumb-bastards/

Just keep in mind the long term environment.


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## james4beach (Nov 15, 2012)

Lephturn said:


> Not all bonds are evil, but...


I agree with the article that there's definitely a bond mania happening right now. But all bonds aren't equal.. there's short maturity vs long maturity, corporate vs government, and credit quality. I think the high yield/junk bonds are developing a tremendous bubble. Same with long maturity corporate bonds... I can't believe anyone buys these things!

The yields on long dated corporates and junk bonds are laughably low. Yet people still pile into them. For someone who absolutely insists on buying bonds, I can only recommend shorter maturities and high credit quality or government. Personally I don't own ANY corporate bonds as I find the yields unacceptable. Also I agree that government bonds are overvalued too, but I buy & hold them to maturity, so I have a totally predictable total return (treat them like GICs).

I'll wait til they come back to the market, begging to borrow money at better rates. It will happen.


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## andrewf (Mar 1, 2010)

There will be much wailing and gnashing of teeth when rates start rising and all these people who have been reaching for yield get burned.


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> I can't believe anyone buys these things!


It is not people like you and I that are buying these things (at least, I hope not).
It is mostly institutions and funds that can't buy CDIC or FDIC insured GICs.
The capital that has fled the equity markets since 2008 has found refuge in bonds, and that trend is continuing.
If you are a hedge fund manager and you don't want to be in the equity or commodity markets, there isn't anywhere else to hide other than cash and bonds.
Most funds can't keep everything in cash for extended periods of time, so they choose bonds for want of better options.


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## gibor365 (Apr 1, 2011)

andrewf said:


> There will be much wailing and gnashing of teeth when rates start rising and all these people who have been reaching for yield get burned.


and how about junk bonds ETF ? 
Like CHB YTM is higher than 5% (after MER ).... imho opnion interest rates will start going up when economy will be in better shape.... if economy in good shape -> much less chances that holdings within this ETF will default... or I'm wrong?


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## james4beach (Nov 15, 2012)

gibor said:


> and how about junk bonds ETF ?
> Like CHB YTM is higher than 5% (after MER ).... imho opnion interest rates will start going up when economy will be in better shape.... if economy in good shape -> much less chances that holdings within this ETF will default... or I'm wrong?


I don't think the economy can handle higher interest rates. That's why they're trying to keep rates suppressed, after all. Consumers have enormous debts, and banks do too. If rates go higher, debt servicing costs go up and rob everyone of cashflow (including government). Low interest rates have made the economy especially vulnerable to this.

Until some things fundamentally change, I don't see how the economy could possibly sustain higher interest rates.


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## like_to_retire (Oct 9, 2016)

One of the better precursor indicators for me, as to when interest rates will rise has been my low spread reset preferred shares. They all took a sharp jump up today after Governor Stephen Poloz said two years of ultra-low rates have done their job. So now, financial markets are pricing in better than two-thirds odds that the central bank will raise its overnight lending rate by a quarter percentage-point at its next rate-setting meeting July 12.

But all my low spread reset preferred shares have been showing an expectation of rates rising since about the last year and a half, so maybe the time is actually nigh. Low spread resets expect a reset on their five year dates (rather than a call), so when interest rates are expected to rise, they become more desirable, and the share price rises, as shown by the attached chart.

View attachment 15546


I thought it interesting to read this old thread about how rising rates would affect bond funds from back in 2013. Man, have we been waiting a long time for interest rates to rise. Maybe now, maybe not.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> One of the better precursor indicators for me, as to when interest rates will rise has been my low spread reset preferred shares.


The Montreal Exchange actually has interest rate derivatives, which are probably the most accurate predictors of interest rates in future months. But I have no idea how to read them (decode the prices). Does anyone know how to do this?



james4beach said:


> while I generally like XSB, think of this: the 28 basis point MER eats up 18% of the whole yield you get on this thing!


An update on this. The management fee on XSB has dropped to just 0.09% so the MER is probably now only about 10 basis points, a huge improvement!



like_to_retire said:


> I thought it interesting to read this old thread about how rising rates would affect bond funds from back in 2013. Man, have we been waiting a long time for interest rates to rise. Maybe now, maybe not.


Looking back, notice how all of us (me included) were bad at predicting interest rates. Back in Feb 2013, I also thought that short term bonds like XSB were the better investment.

Total cumulative returns since then:

XSB: +7.33% ..... short term normal
XSH: +11.43% ... short term corporates
XBB: +15.27% ... medium term (10 year avg maturity) generic bonds

Today I still lean towards short term bonds (my bond portfolio has 7 year avg maturity) but we definitely all got this wrong before, and the generic 10 year avg maturity bonds performed the best.

Also keep in mind that short term BoC policy rate is a different thing from bond market rates & prices. For example, the central bank can raise the overnight rate, and yields on bonds may or may not change. Those yields can even go in the reverse direction.


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## james4beach (Nov 15, 2012)

I should also add GIC returns. The 5 year GICs were at 2.45% back then, so in the 4.38 years since then, that gives total cumulative return +11.18%

XSB: +7.33% ...... short term normal
GICs: +11.18% ... CDIC insured GIC
XSH: +11.43% .... short term corporates
XBB: +15.27% .... medium term (10 year avg maturity) generic bonds


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