# ETF Bonds or Individual Bonds



## JackieK (May 3, 2014)

I've been investing for the past 20 years, but mostly equities. Now in retirement, I'm looking to "stabilize" my portfolio with bonds.

I've looked at some bond ETFs (ZAG, XBB and others) they offer some okay yields, but my question is to whether buy bond ETF or single muni bonds?

If I buy a 2-3 year muni bond for an avg yield of 3% (if I'm lucky to find it!), the reasoning is that at maturity I am (quite) certain to get back my capital +interests.

On the other hand, if I follow the ETF route, what will happen with its value in 2-3 years from now? I could go up a bit, and down also. So, I may (or may not) lose some of my capital.

What's the argument of going with an ETF insteal of a "regular" bond? Beside the fact that the ETF could be sold anytime and that you must keep the bond until maturity.

I don't get it!


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## l1quidfinance (Mar 17, 2017)

I would say it's primarily down to the risk. 

The diversification of an ETF such as XSB with 505 holdings vs a handful of individual bonds.


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## like_to_retire (Oct 9, 2016)

Why not create a 5 year GIC ladder?

You are guaranteed your capital at maturity. 

They're insured by CDIC.

A ladder picks up the latest rates of day as each rung of the ladder matures.

GIC's pay more than bonds or Bond ETF's.

Liquidity can be realized by having 2 rungs per year.

ltr


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## fatcat (Nov 11, 2009)

when you buy a bond, as you say, you plan to hold until maturity to get both your interest payments along the way plus the return of your capital, as long as you hold until maturity and there is no default you are going to be ok

with a bond etf that holds a collection of bonds, look at the "duration" of the bond fund, this is roughly the amount of time you should plan to hold the etf to account for changes of interest rates (going up which would cause the fund value (capital) to go down

as new bonds are purchased and old ones mature, the duration is roughly how long it takes for your capital investment to come back zero (meaning zero loss of capital) and you have received interest payments all along and the market value of the fund will be back to where it was when you bought it

you should never buy a bond fund without allocating the cost of it for the duration, i.e. you should not "need" it until the duration is reached, just like with a bond, you don't plan to need the money until maturity

https://www.moneysense.ca/columns/holding-your-bond-fund-for-the-duration/

https://investor.vanguard.com/insights/bond-fund-basics-duration


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## JackieK (May 3, 2014)

Indeed, 5-year GIC is one way to go, yet you must keep it for 5 years to get the most efficient yield. The good point for it is that you get back your capital. As for bond ETFs, I never really looked at the duration of its composents. Thanks to you, I'll begin to change my views on that!

So does it mean that if I invest in a bond ETF, like XSB (27.28 today), which as an average maturity of about 3 years, that after 3 years, I could sell it for just about 27.28, the same price I paid today?

In 3 years, markets might (will) move quite a bit, so isnt' that bond ETF get affected by interest rates and the market variances, like any other investment?


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## like_to_retire (Oct 9, 2016)

JackieK said:


> Indeed, 5-year GIC is one way to go, yet you must keep it for 5 years to get the most efficient yield. The good point for it is that you get back your capital.


Well, theoretically you'll keep the GIC ladder running for many, many decades if you're retired. It takes 4 years to get a 5 year ladder running on all cylinders of course, but each year (or twice a year if you have 2 GIC's in each rung) you'll pick up the latest 5 year rate.



JackieK said:


> So does it mean that if I invest in a bond ETF, like XSB (27.28 today), which as an average maturity of about 3 years, that after 3 years, I could sell it for just about 27.28, the same price I paid today?
> 
> In 3 years, markets might (will) move quite a bit, so isnt' that bond ETF get affected by interest rates and the market variances, like any other investment?


I don't know why you would want to be selling it after 3 years, but the general rule is that your return after the duration amount of time should not be negative. This is because any price decline from rising interest rates will be offset by higher coupons within that time frame.

ltr


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## JackieK (May 3, 2014)

like_to_retire said:


> I don't know why you would want to be selling it after 3 years...


Just in case something unfortunate happens and I need to get some money fast, otherwise GICs are locked-in until maturity. That's probably the only reason I would go with a bond ETF, unless they offer a couple points more return than GICs.


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## fireseeker (Jul 24, 2017)

Liquidity is important. So is return.
No reason you can't do both -- put half your FI into GICs and half into a bond ETF.


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## like_to_retire (Oct 9, 2016)

JackieK said:


> Just in case something unfortunate happens and I need to get some money fast, otherwise GICs are locked-in until maturity. That's probably the only reason I would go with a bond ETF, unless they offer a couple points more return than GICs.


Yeah, not much debate that GIC's offer the best return. The trade-off is liquidity, but this can be ameliorated by having two GIC's per rung on your ladder. This means a full 10% of your entire investment matures every 6 months. That's a lot of liquidity for the best yield. Many CMF members ascribe to this method.

ltr


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## fatcat (Nov 11, 2009)

JackieK said:


> Just in case something unfortunate happens and I need to get some money fast, otherwise GICs are locked-in until maturity. That's probably the only reason I would go with a bond ETF, unless they offer a couple points more return than GICs.


you can also set up a 5 year bond ladder that functions exactly like a gic ladder and is entirely liquid unlike gic's, this allows you to maximize your bond return

your broker probably has the ability to create an instant ladder of bonds for you according to your specs

with gic's you trade a higher return for no (or less) liquidity

yeah, you never, ever want to get caught in a liquidity trap which can spell doom very quickly


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## james4beach (Nov 15, 2012)

I use a combination of the above: a ladder that mixes both GICs and individual bonds, in a single fixed income portfolio (non-registered). Inside my registered account, I hold a bond ETF.

I let my ladder stretch beyond 5 years, aiming to fill in 10 years. The GICs go into the early years, and I keep buying new 5 year GICs aiming to have 2+ GICs maturing each year (as like_to_retire described above).

Then I add individual bonds into the mix, usually buying ones with more than 5 year maturity. Generally I just keep buying whatever looks good at the time to try and have _something_ (bond or GIC) maturing at least every 6 months. The GICs provide the higher yields and the bonds provide liquidity. I really like having the combination of both.

I've been doing this for a few years and can share some caveats to be careful about:

1. Make sure you are routinely filling in and replenishing the ladder
2. Routinely doing that portfolio management requires consistency. This is easier said than done. You might find yourself having excess cash amounts (cash drag)
3. You must avoid the temptation to "time the bond market" by anticipating interest rates and, for example, failing to buy 5 year GICs
4. You must be careful to ensure you have sufficient liquidity

The bond ETF has the advantage of doing all this automatically for a very low 0.10% fee. Yes, the share price fluctuates, but the advantage of having professional management doing all of this might be a huge advantage. The bond ETF also has superior liquidity to anything you can do yourself. Personally I enjoy hunting for GIC and bond deals, so it's kind of fun, but I think a good quality bond ETF like XBB might actually beat my own DIY performance.

If you are a methodical kind of person, doing this yourself with a GIC ladder (or GIC + bond ladder) is very feasible and a fine way to go.


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## agent99 (Sep 11, 2013)

For FI, I have:

- a ladder that contains GICs and Corporate bonds. Presently goes out to 2025. Usually the bonds have higher yields than the GICs and they are liquid (although I only once ever sold a bond)

- No bond ETFs for me! (This based on having been doing this for a long time! )

- some convertible debentures, but not many now because it has become difficult to get performance info. They do have fixed maturity and are liquid.

All of above are in Registered accounts (RRIFs plus more recently some GICs in TFSAs)

And then, 

- quite a bit in split fund preferreds. These provide much higher yields than bonds or GICs. They are liquid and can also be redeemed at close to face value at various intervals depending on the fund. At least yearly. The funds mostly terminate at 5yr intervals, but are usually expended for another 5 yrs. (Don't own or recommend the capital shares of a split fund.) 

- two or three perpetual preferreds that yield over 5% as well as just one rate reset preferred (but thinking of adding)

above in both registered and unregistered accounts. Pfds of course provide tax benefit in unregistered,

So, as above, there are many types of true or pseudo fixed income to chose from to balance equity holdings.


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## lonewolf :) (Sep 13, 2016)

JackieK said:


> Just in case something unfortunate happens and I need to get some money fast, otherwise GICs are locked-in until maturity. That's probably the only reason I would go with a bond ETF, unless they offer a couple points more return than GICs.


 Can buy cashable GICs so do not have to hold to maturity.

as for building GIC ladder can build a 5 year ladder by going beyond 5 years instead of below 5 years maturities. Have seen 5, 6 & 7 year GICs from some of Manitoba on line credit unions


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## james4beach (Nov 15, 2012)

Question for all you fixed income investors: do you hold any USD denominated bonds? My fixed income assets are 92% CAD and 8% USD. I suspect it wouldn't impact my asset allocation given the low weight.

Do you think this is OK or should I try getting it all into CAD?



lonewolf :) said:


> Can buy cashable GICs so do not have to hold to maturity.


That's true, I forgot about those. I have a couple through Outlook Financial. Although they're cashable, there's a big penalty on the accrued interest (you forfeit and go back to a much lower interest rate). Still, it's nice to know there is the option to cash them out.


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## AltaRed (Jun 8, 2009)

james4beach said:


> Question for all you fixed income investors: do you hold any USD denominated bonds? My fixed income assets are 92% CAD and 8% USD. I suspect it wouldn't impact my asset allocation given the low weight.
> 
> Do you think this is OK or should I try getting it all into CAD?


Unless your USD bonds are hedged to CAD, slight movements against you in currencly can wipe out gains and then some. I'd never own foreign denominated fixed income, an HISA in my brokerage account aside.


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## fatcat (Nov 11, 2009)

i mostly buy canadian bonds and gic's but i do have some usd bond etf's, primarily because i want to pop the yield a little and can't hold canadian etf's


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## agent99 (Sep 11, 2013)

AltaRed said:


> Unless your USD bonds are hedged to CAD, slight movements against you in currencly can wipe out gains and then some. I'd never own foreign denominated fixed income, an HISA in my brokerage account aside.


I suspect that would depend on where you live or at least where you might want to spend the income. 

I don't own any US denominated bonds, but like many, do own US denominated equities. Just because I want the income in US$.

Re those cashable GICs, are there any that pay similar interest to the non-cashable GICs? Most I see on BMO have pretty lousy yields.


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## lonewolf :) (Sep 13, 2016)

agent99 said:


> I suspect that would depend on where you live or at least where you might want to spend the income.
> 
> I don't own any US denominated bonds, but like many, do own US denominated equities. Just because I want the income in US$.
> 
> Re those cashable GICs, are there any that pay similar interest to the non-cashable GICs? Most I see on BMO have pretty lousy yields.


Outlook financial cashable 1 yr 2.85%, 5 yr cashable 3.41% interest earned if cashed in early 1% per a year though can cash in a portion of GIC


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