# Is it stupid to buy bonds etf now?



## metta2006 (May 1, 2011)

I have been sitting on cash for the last two years and have started buying equity etfs just a month ago, about 20% of my net worth. The rest is still in cash. I don't have any bonds. Everybody was so bearish about bonds just a month ago because of the interest rate risk but now I realize that bonds have an important role in reducing volatility by doing the opposite to what stocks are doing. 

I'm waiting on the sideline at the moment on cash but is it better to buy some bonds even if they are almost record high to protect from more volatility coming? Or would you wait all in cash? Thanks.


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## larry81 (Nov 22, 2010)

This year bonds-history is a good example of why market timing is bad.

Everyone (myself included) was expecting a major interest rate hike and bonds hecatomb...

I would say, keep your bonds duration short (ex: XSB) and when you feel confortable.


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## andrewf (Mar 1, 2010)

If bond ETFs make you nervous, buy some GICs. Otherwise, stick to shorter-term bond funds.


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## larry81 (Nov 22, 2010)

At least put your cash in 'high' interest mutual fund while you wait on the side, they currently give between 1.2 and 1.3%


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## fatcat (Nov 11, 2009)

> I'm waiting on the sideline at the moment on cash but is it better to buy some bonds even if they are almost record high to protect from more volatility coming? Or would you wait all in cash? Thanks.


 i would find it very hard to refute the idea that sitting in cash in todays environment is a bad thing ... you may miss the first 10-20% of a bull market but you are protected 100% against a massive downswing and there are plenty of very smart people out there saying we may well be headed for a big downswing .. cash is an asset category .. you can get 2% at ally bank in a hisa cdic insured for the first 100K .. that's where i would go ....assuming you decide to stay in cash ... make your own decision ... i have been in mostly cash for a long time ... protection of capital is the prime directive


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## Pickering (Jun 24, 2011)

I am a conservative investor who relies on dividends for all but my CPP Income in retirement. I invested heavily in the market in April 09 ( just very lucky ) but my portfolio was almost 66 % bond ETF's - CLF, CBO, CPD, XCB & XSB
Like you, was concerned about interest rates but ...
I have been trying to sell a big chunk for over a year but every time I get close - market hiccups and these keep saving my bacon.
Not that the rest of my portfolio is risky - pipelines, utilities , couple of banks and some oil. 
Bonds sure make sleeping easier in these volitile times
Long term goal is to establish my own bond ladder but with premiums being what they are and wanting to stay short term - keep using those monthly distrabutions on tee times.
So no - do not think you are crazy


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## Belguy (May 24, 2010)

While most equity ETF's have dropped dramatically in the past 30 days, most bond ETF's have a 30-day return of between PLUS 2 and PLUS 4 per cent.

Bonds can provide you with a welcome rudder when the seas get rough.

It is during times like these that a balanced portfolio, with a 50 per cent bond component, will allow you to sleep well.

Remember this when and IF stocks start to surge again which isn't very likely given the current market conditions.

Have a little balance in your life!!


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## larry81 (Nov 22, 2010)

curious what % of bonds are you holding in your portfolio Belguy !


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## Eder (Feb 16, 2011)

I added a bunch of long term investment grade corporate bonds back in Nov-January. At the time they were considered near toxic but atm are working out quite well. (I think my Canadian Tire bond got downgraded recently to BBB so maybe that one is a dog)

So if people actually knew what was going to happen there would be little upside in making their views public.


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## Belguy (May 24, 2010)

My target bond allocation is 40 per cent but I will adjust that to 50 per cent when I recoup some of my equity paper losses.

After the disasterous drop in equities in 2008, I had hoped that we could avoid further volatility for a few years before all hell broke loose again.

Sadly, I was wrong.

At least I'm consistent.


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## Cal (Jun 17, 2009)

At this point in this market, it would be best to buy some bonds just for the capital gains....they seem to be the only things going up some days.

How backwards is that.


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## metta2006 (May 1, 2011)

Cal said:


> At this point in this market, it would be best to buy some bonds just for the capital gains....they seem to be the only things going up some days.
> 
> How backwards is that.


Hmmm...I guess you would expect capital gains from bonds if you think stocks are going to sink lower. Is it not too late to buy bonds, or am I buying again on the top of the market...


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## Lephturn (Aug 31, 2009)

metta2006 said:


> Hmmm...I guess you would expect capital gains from bonds if you think stocks are going to sink lower. Is it not too late to buy bonds, or am I buying again on the top of the market...


Look at the long term yields. Bond prices are the inverse of this:
http://finance.yahoo.com/echarts?s=%5ETYX#chart2:symbol=^tyx;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

That means that bond prices have had a 30 year run. There is a logical top to bond prices - as there is a floor to the yield. With yields near 30 year lows - prices are near 30 year highs.

To me that means that the best case scenario is that bond yields stay very low and prices high for the next 10 years or so - but they certainly will not appreciate in price like they have over the last 30. This is not a stock - people are not going to pay negative yields - so they just can't go up much further. Worst case, we have a big market rally and bonds go down significantly in the next 10 years.

If anyone disagrees with my risk/reward case on bonds I would like to hear your version and thoughts on it.

I don't plan to purchase securities where the reward is close to 0 and the risk of loss is significant.


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## sensfan15 (Jul 13, 2011)

If you hold a bond fund or etf until median maturity of the underlying bonds you will not lose money.


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## NorthernRaven (Aug 4, 2010)

I guess it depends on what alternatives a person would consider for money that otherwise would be in bonds. If it is equities, that's one thing. But if it is GICs, how does one estimate the likelihood that something like XBB, if one is willing to buy and hold, will really underperform high-end GiCS?

With a Manitoba CU like Hubert, you could get around 3%-3.5% with 3 or 5 year GICs or ladders. If one plunked the same amount into XBB at the current price, what sort of conditions would it take over the next five years for that not to beat the GICs? It makes my head spin...


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## HaroldCrump (Jun 10, 2009)

sensfan15 said:


> If you hold a bond fund or etf until median maturity of the underlying bonds you will not lose money.


How so?
Median maturity at this point in time doesn't mean anything because the fund will continue rolling over its holdings.
Unless it's a super short term fund, increasing interest rates will hurt current bond prices (depending on average duration of the fund).
When you are ready to sell, it is quite possible you can lose part of your capital (not including interest payments).
The only way to avoid that risk is to buy individual bonds and hold them to maturity.


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## CanadianCapitalist (Mar 31, 2009)

When looking to add an asset class to the portfolio, you should look at not only returns but also correlation with other asset classes. First, let's look at returns. Unless we have massive deflation, bond returns going forward are not going to be comparable to the past 30 years. In fact, bond returns in the future are likely to be modest.

So, why own bonds at all? Because returns are not the only thing that matters. Bonds are poorly correlated (despite what you may hear in some circles) with stocks and provide a ballast to your portfolio in turbulent times. In fact, in times of crisis, correlations among stocks goes to 1 (there is no place to hide) but correlations between stocks and bonds goes to -1. By adding bonds, you'll lower overall portfolio volatility and you are able to manage your portfolio risk.


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## metta2006 (May 1, 2011)

I'm considering to buy a house in 5 years. The only option would be then GIC? Am I going too risky with short term bonds, xbb or Claymore laddered Bonds if I buy them now? Thanks.


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## Argonaut (Dec 7, 2010)

Bond ETFs are very suspicious to me. How can XSB be yielding over 3% while the average 1-3 year bond yield right now is about 1%? I realize a lot of the returns are from bonds bought at previous prices, but how long can this out-of-whack relationship exist? If I had a bond allocation right now.. which I don't.. I would only buy high-grade corporate debt directly. I will not have a bond allocation at all until the yield on the 10 year government bond is 7.2%, if and when that ever happens.


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## andrewf (Mar 1, 2010)

The duration is 3 years, so about half of the dollars are invested longer than 3 years.

You can go through their holdings. Not sure what you're suspicious of. ETFs are totally transparent.


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## HaroldCrump (Jun 10, 2009)

Argonaut said:


> How can XSB be yielding over 3% while the average 1-3 year bond yield right now is about 1%?


Where did you find XSB yielding 3%?
The yield on XSB is 1.67%
Refer:
http://ca.ishares.com/product_info/fund/overview/XSB.htm

Bond funds are not suspicious, at least not the major ETFs like XSB, etc.
The problem with bond funds vis-a-vis buying individual bonds is a different one, esp. the lack of certainity around the FV of your portfolio, which is one of the main reasons for buying bonds in the first place.

EDIT: ah, I see where you got the 3% from...it is the average _coupon_, not the average _yield_


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## Argonaut (Dec 7, 2010)

Payments are about 8 cents a month, times 12, divided by the price gives me over 3% yield on the ETF. Unless Google and Yahoo are failing me. 1.67% would make a lot more sense.


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## jwsmith519 (Dec 13, 2009)

HaroldCrump said:


> Where did you find XSB yielding 3%?
> The yield on XSB is 1.67%
> Refer:
> http://ca.ishares.com/product_info/fund/overview/XSB.htm
> ...


In the last 12 months, XSB has paid out 94.458 cents. With a NAV of $29.19, that puts the yield at 3.236%.


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## Lephturn (Aug 31, 2009)

I recommend you use the TSX site - it's free.

http://tmx.quotemedia.com/quote.php?qm_symbol=XSB

Currently at $ 29.20

Dividend:	0.078 CAD Monthly
Yield:	3.215

The main issue is that it's price is 20 cents off of the all-time high.


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## Argonaut (Dec 7, 2010)

Still makes no sense to me. No explanation could possibly explain a bond ETF yielding three times the amount of buying the bonds direct. I get that when bond prices fall, the NAV of the fund will decrease. But the monthly payout makes no sense.


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## andrewf (Mar 1, 2010)

^ Oh, yup. The bonds have higher coupons than their yield. The bond ETFs generally pay out their coupons as this is taxable income, leading to a gradual decline in NAV over time. Same thing happens when you buy bonds individually at a premium (a coupon rate higher than YTM). Not very tax efficient, for that matter.


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## gibor365 (Apr 1, 2011)

month, month and half ago wanted to buy XRB, now sorry that didn't buy


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## CanadianCapitalist (Mar 31, 2009)

As Andrew points out, it is misleading to just look at the distribution yield of XSB. You need to look at the weighted average yield to maturity which is just 1.67%. Subtract the fund MER and you can expect a return from XSB of 1.4%.


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## Argonaut (Dec 7, 2010)

So basically, the fund is banking on increasing bond prices to keep its share value afloat. And bonds cannot literally go much higher. That doesn't look like a James Bond bubble beach party I want to be invited to. So to answer the question posed in the thread, yes, it is stupid to buy bond ETFs right now. Cash in a savings account does just fine.


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## NorthernRaven (Aug 4, 2010)

CanadianCapitalist said:


> As Andrew points out, it is misleading to just look at the distribution yield of XSB. You need to look at the weighted average yield to maturity which is just 1.67%. Subtract the fund MER and you can expect a return from XSB of 1.4%.


Would it be fair to say that the YTM would be an estimate of the annual average yield for the weighted average duration of the fund (XSB shows 2.69 years right now, with a YTM of 1.60%)? So if everything else is static, the distribution might be a bit higher than YTM for the first year, but lower in the last year?

Also, everything I can find on YTM calculations seems to suggest that there is an assumption that coupons are reinvested at the same interest rate as the bond. If bond yields have been trending downward, wouldn't this make the YTM slightly optimistic?


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## Mike59 (May 22, 2010)

Argonaut said:


> So basically, the fund is banking on increasing bond prices to keep its share value afloat. And bonds cannot literally go much higher. That doesn't look like a James Bond bubble beach party I want to be invited to. So to answer the question posed in the thread, yes, it is stupid to buy bond ETFs right now. Cash in a savings account does just fine.


Agreed...I exited bonds last year and haven't looked back.


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## LBCfan (Jan 13, 2011)

Right now I have NO bonds, none. My "bond" allocation is is cash (CD's or HISA). Has been for a couple of years. I probably would have done better (by a few basis points) in bonds but there is the alternative scenario. 

Until yields rise, I'm out.


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## andrewf (Mar 1, 2010)

I have been recommending savings accounts and GIC ladders over bond funds for a while now. Put what you might need liquid in a HISA and the rest in a ladder. It should be the same or better return than a bond fund and probably more tax efficient.


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## CanadianCapitalist (Mar 31, 2009)

NorthernRaven said:


> So if everything else is static, the distribution might be a bit higher than YTM for the first year, but lower in the last year?


Here is a very good explanation of how YTM is calculated:

http://en.wikipedia.org/wiki/Yield_to_maturity

For XSB, weighted average coupon is much higher than weighted average YTM, so the distributions will be higher than YTM.



NorthernRaven said:


> If bond yields have been trending downward, wouldn't this make the YTM slightly optimistic?


I'm not sure. My guess is that's what will happen but I haven't run the math to know if its true.


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## Belguy (May 24, 2010)

Another year where bond ETF's have generally outperformed equity ETF's.

In times of trouble, a bond allocation can help you to sail through troubled waters. I have always been thankful for mine!!


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## andrewf (Mar 1, 2010)

It's also worth noting that YTM is not quite an accurate predictor or returns for funds that sell bonds with less than 1 year to maturity. If you buy a 5 year bond with a 3% yield and sell it 4 years later (with 1 year to maturity), the yield might only be 1%. In other words, the bond might be trading at a premium. The total return on the bond for the holding period would be higher than the 3% annual yield it was purchased at.


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## Belguy (May 24, 2010)

I am a simple man and so I just look at the YTD results for each of my ETF's when I am comparing relative short term performance.

If I see that one ETF is up 3 per cent YTD and another one has lost 5 per cent, I am happy that one has bolstered the loss on the other. 

Is that not better than holding all equity ETF's with each experiencing a YTD loss?

I guess that I tend to see things in simplistic terms but that keeps me happy.


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## Cal (Jun 17, 2009)

Belguy said:


> Is that not better than holding all equity ETF's with each experiencing a YTD loss?


To me it would depend on when you needed the money and what your longer term outlook was. If a stock or etf had a YTD loss, but I felt it was a good long term buy, and at a good price, the current positioning of it would only be my indication to buy more.

On the other hand....were I needing the $ sooner, perhaps it would concern me more.

In regards to a bond, it would depend if you were looking for yield or to flip for a capital gain.


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## Ihatetaxes (May 5, 2010)

With my new passive portfolio I am mixing up my 40% lower risk holdings as follows:

10% XSB
10% GICs in a 5 year ladder
10% Cash
10% Preferred share ETF (XPF)

Bonds are getting a lot of hate mail lately, GIC's are offering terrible rates, cash loses value (inflation) and preferreds can drop in value like other equities. I'm not losing sleep about risk and I feel these will buffer the swings in the 60% stock etfs I hold.


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## Belguy (May 24, 2010)

http://www.theglobeandmail.com/glob...ond-market-mutual-fund-or-etf/article2150933/


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## fatcat (Nov 11, 2009)

> cash loses value (inflation)


don't forget that cash accrues a couple of benefits, it gains value in terms of opportunity and it also does well in inflation since it is available to invest at higher rates


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## Belguy (May 24, 2010)

I thought that this article on bonds from the Globe and Mail might be of interest to some:

http://www.advisor.ca/news/industry-news/faceoff-bond-funds-60035

Any comments?


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## leoc2 (Dec 28, 2010)

Belguy said:


> Any comments?


From the link:



> Older Canadians, well into their retirement years — when preservation of previous savings is more important than growing the nest egg — tend to have a higher proportion in fixed-income assets, including bond funds. Younger investors with longer time horizons can definitely afford to have more of their assets in stocks


You and me belguy


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