# RBC Target Maturity Corporate Bond ETF's



## Belguy (May 24, 2010)

Does anyone have any thoughts on the RBC Target Maturity Corporate Bond ETF's as recommended in the February/March edition of MoneySense magazine? This allows you to build your own rung of bonds. According to MoneySense, "each of these nine funds holds about 30 corporates that come due in a particular year, between 2013 and 2021, so they are similar to buying individual bonds. We like that these ETF's have maturity dates since that gives investors more predictability of income."

Using these funds, what would your ladder look like?

http://funds.rbcgam.com/etfs/overview/fixed-income.html


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## andrewf (Mar 1, 2010)

It might look like a GIC .


The fees are pretty high. If the intent is to hold these funds to maturity, why not use GICs instead?


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## Albert (Jan 19, 2012)

Check the yield to maturity, not very impressive.


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## lonewolf (Jun 12, 2012)

Belguy

With the low interest rates I really like the idea of the bond funds maturing. If interest rates rise & the bond fund never has a mature date they will continue to fall in value as interest rates rise. I like your idea of laddering the bonds. I wonder if there is a basket of goverment & or provincial bonds that trade like an etf & have differnt maturing dates? In regards of the funds holding the best bonds & the Mer I have no idea if it is well structured for ones portfolio.

Belguy your starting to wear off on me I have been watching the bugs bunny show lately & I enjoy it


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## andrewf (Mar 1, 2010)

These funds seem to hold some government bonds. I spotted some Ontario and Hydro Quebec in there.


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## lonewolf (Jun 12, 2012)

What are the rules for the fund buying & selling bonds once the fund is set up ? Andrew made a good observation that the mer was high. Perhaps once the fund is set up it would be best to have no more buying & selling of differnt bonds by the management of the fund. This should reduce the cost of running the fund to almost nothing. I do not know if they are allowed to sell a bond & buy another bond with the same date of maturity ? If they keep everything the same the investors knows exactly the bonds they are holding @ all times & the management fee should be lower.


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## lonewolf (Jun 12, 2012)

Maybe the MER does not matter much on these bond etfs. The higher the mer perhaps the lower the bid & the ask because the bonds wont be as valuable if a high management fee is being charged ?


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## Belguy (May 24, 2010)

Is it safe to assume that RBC can purchase bonds at better prices than individual investors could? If this is the case, maybe it would somewhat mitigate the MER which they are charging.:confused2:

Aside from these RBC offerings, MoneySense likes VSB with it's low MER of 0.15% and CBO if you prefer purely corporates.


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## Squash500 (May 16, 2009)

It's kind of interesting that this is RBC's only entries into the ETF landscape. I can't see these RBC ETF's being that popular?


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## andrewf (Mar 1, 2010)

They are filling a gap in the market. I could get much more excited about these if the MER was 0.1%

Hopefully as the fixed income market moves to ETFs the MERs get squeezed down to nothing. Otherwise it makes a lot of otherwise decent funds no better than GIC (except liquidity).


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## lonewolf (Jun 12, 2012)

Belguy

I dont think the price RBC purchases the bonds for & or the Mer they charge matters. Once they come to market & trading as ETFs the market determines thier value. If there were 2 etfs bond funds holding the same bonds with the same maturity date one fund was charging a MER of 1% the other fund charging a MER of 5% it would reflect in the price of the etf most likely resulting in the same percentage of money being made per a dollar by each fund. Now & then there might be a small difference but over the long run it would most likely balance out. 

If interest rates rise the target date etfs I think could drop in price because investors could buy bonds that paid out more. Unlike the bond funds that never mature though if held to maturity you know before hand the amount of money you will recieve regardless of interest rates. Of course a bond in the fund might go bust. 

I dont think these etfs would pay a high yield because if held to maturity they protect from the risk of rising interest rates which would be reflected in the price they trade @. With these low interest rates I would not touch a bond fund that never matures. A fund that holds 3 month treasury bills would be less effected by rising interest rates then a fund that is holding bonds that mature 20 years from now.


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## andrewf (Mar 1, 2010)

^ No, this is wrong. ETFs will tend to trade very close to the NAVs, so long as the underlying securities are reasonably liquid. So price of the fund will not reflect its relative attractiveness. A bond fund with a MER of 5% would find itself with $0 in AUM.


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## Belguy (May 24, 2010)

Maybe there is not much to choose between them but, if you had to go with the RBC funds, how far out would you go when constructing your ladder?

Or, would you go with CBO with it's pure play on corporates:

http://ca.ishares.com/product_info/fund/overview/CBO.htm

Or, what about ZCS:

http://www.etfs.bmo.com/bmo-etfs/glance?fundId=74665

Or, would you prefer to just go with the low fee mix provided by VSB:

https://www.vanguardcanada.ca/documents/literature/F9323EN.pdf

Or, if none of the above, then what for the bond component of your asset allocation?:confused2:

My main bond holding is currently the PH&N Bond Fund D:

http://funds.rbcgam.com/pdf/fund-pages/monthly/phn110_e.pdf

Do any of the ETF's listed above present a compelling reason to make a switch?


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## andrewf (Mar 1, 2010)

Here's my solution:

ZCS has a yield to maturity of 2.08%, and a MER of 0.3%, for an expected return of 1.78%. Find a GIC that offers that yield. You can get CDIC-insured GICs of over 2% for 2 or 3 year GICs. In fact, you can afford to keep a blend on GICs and savings account balance in a HISA and still get the same after-fee YTM.


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## fatcat (Nov 11, 2009)

andrewf said:


> Here's my solution:
> 
> ZCS has a yield to maturity of 2.08%, and a MER of 0.3%, for an expected return of 1.78%. Find a GIC that offers that yield. You can get CDIC-insured GICs of over 2% for 2 or 3 year GICs. In fact, you can afford to keep a blend on GICs and savings account balance in a HISA and still get the same after-fee YTM.


bmo yields are always quoted _after_ the mer ... i like the new provincial bond etf PXF which has ytm of 2.8

i so no reason not to diversify fixed income funds across several funds to hedge risk and bump up returns ... federal, provincial, corporate and emerging bonds of different lengths in different funds


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## andrewf (Mar 1, 2010)

Are you sure about that?

Here's what the fine print says:

" Weighted Average Yield to Maturity: The market value weighted average yield to maturity includes the coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity."

No mention of fees already being deducted.

PXF is interesting, but the duration is quite long, involving substantial interest rate risk. 2.8%-0.25% MER = 2.55% expected return. Do you really want to lock yourself into a fund with a duration of >9 years for that return? ICICI Bank offers 5 year GICs with 2.85% yield, and it's CDIC insured. If interest rates rise, you can reinvest at an even higher yield in 5 years time....


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## fatcat (Nov 11, 2009)

andrewf said:


> Are you sure about that?
> 
> Here's what the fine print says:
> 
> ...


reasonably sure, i just called them again and they told me, as they have before, that yields, whether they be YTM of fixed income or just plain "yield" of an equity etf (like ZEO for example) is always quoted _net of mer_

as far as PXF goers, yes the duration is fairly long, i would only use them for a fraction of my total fixed income placement, though your point is well taken and i am struggling with this issue along with everyone else

lately i have been wondering whether it makes sense to use many different bond funds to spread yield and duration around

on the other hand, if you can get 2% in a HISA, why risk locking money in a gic for 5 years for an extra 85 basis points which yield like $850 on a 100K extra ?

we are all well stuck between the rock and the hard place ... i am also tempted to overweight stocks in a low volatility fund or buy more ZUT and just hold on tight in the case of a correction


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## andrewf (Mar 1, 2010)

The distribution yield is net of MER... maybe the CSR is just confused.

And BMO's fund is in line with others from other providers with similar durations. So unless BMO can magick up an extra 30 bps to pay their MER, I don't see how it's possible.


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## james4beach (Nov 15, 2012)

Belguy said:


> Is it safe to assume that RBC can purchase bonds at better prices than individual investors could?


I have not found this to be the case, though I originally thought the same as you. I found that buying bonds through TDW or iTrade is very low cost provided you buy & hold to maturity, even for amounts as small as 5K.

The cheapest ETF MER is around 30 basis points (annual expense)
Bonds through discount brokers yield ~ 8 to 15 basis points less than wholesale (annualized yield loss)

Mind you, some corporate bonds with poor liquidity may be easier for the institution to do. But for government and liquid corporate bonds, assuming my above comparison is valid, I think you can actually get them cheaper yourself... at 1/3 the cost of the fund!

Of course the ETF is doing much more, such as trading, researching, and managing everything. So maybe it's not fair to compare the discount broker ~ 10 bp fee to the fund's 30 bp fee, as their trading cost is just a small part of that 30 bp. But personally I hold my bonds directly as in the end, the bond ETF would cost me more.


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## james4beach (Nov 15, 2012)

fatcat said:


> reasonably sure, i just called them again and they told me, as they have before, that yields, whether they be YTM of fixed income or just plain "yield" of an equity etf (like ZEO for example) is always quoted _net of mer_


FYI, both Blackrock (iShares) and BMO phone agents gave me wrong information about the yield and MER. The agents at these places don't seem to know... my own calculations showed that Blackrock and BMO told me the wrong thing. What matters in finance is what's in writing and what you verify yourself.

As andrewf mentions, the agents probably mostly deal with the distribution yield and that one is net of MER. The agents probably don't understand the nuances between YTM and distribution yield.


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## fatcat (Nov 11, 2009)

andrewf said:


> The distribution yield is net of MER... maybe the CSR is just confused.
> 
> And BMO's fund is in line with others from other providers with similar durations. So unless BMO can magick up an extra 30 bps to pay their MER, I don't see how it's possible.


well, the csr may well be confused but he told me yet again that the YTM is net of mer ... 2.08 seems about right for a short term corporate bond ... i can't find matching funds that track the same index to check it out but XSB has a ytm of 1.63 which is 45 basis points under the bmo fund which a corporate bond fund so this makes sense


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## fatcat (Nov 11, 2009)

james4beach said:


> FYI, both Blackrock (iShares) and BMO phone agents gave me wrong information about the yield and MER. The agents at these places don't seem to know... my own calculations showed that Blackrock and BMO told me the wrong thing. What matters in finance is what's in writing and what you verify yourself.
> 
> As andrewf mentions, the agents probably mostly deal with the distribution yield and that one is net of MER. The agents probably don't understand the nuances between YTM and distribution yield.


you may be right, when i called just now and began by asking about ZEO the csr told me that the 3.99 distro is before mer and i asked him to doublecheck and then he came back and said "i was wrong, it is after mer" ... when i then switched to the fixed income product ZCS, he assured me that the ytm is after the mer also ... who knows ? ... that it is after the distribution yield makes more sense


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## james4beach (Nov 15, 2012)

fatcat said:


> reasonably sure, i just called them again and they told me, as they have before, that yields, whether they be YTM of fixed income or just plain "yield" of an equity etf (like ZEO for example) is always quoted _net of mer_


They're making the same claim for an equity ETF? I think they're giving you wrong info. Back in October I made a spreadsheet with ZUT's holdings with their precise weightings and dividend yields. I calculated the portfolio's raw dividend yield and it exactly matched the 'portfolio yield' on their web site. That tells me that that their equity ETFs web pages show yields before MER.


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## andrewf (Mar 1, 2010)

CBO has a YTM of 2.06. CBO would be a comparable fund.


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## fatcat (Nov 11, 2009)

james4beach said:


> They're making the same claim for an equity ETF? I think they're giving you wrong info. Back in October I made a spreadsheet with ZUT's holdings with their precise weightings and dividend yields. I calculated the portfolio's raw dividend yield and it exactly matched the 'portfolio yield' on their web site. That tells me that that their equity ETFs web pages show yields before MER.


i am less certain about the fixed income products but i have now spoken to at least 3 csr's at bmo who have all said that the "yield" is net of mer ... i believe this is true of ishares products as well


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## andrewf (Mar 1, 2010)

And we're sure they're not referring to distribution yield?


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## fatcat (Nov 11, 2009)

andrewf said:


> And we're sure they're not referring to distribution yield?


 yes, BMO refers to it as "portfolio yield" in their equity etf "at a glance" ... Like ZUT shows a "portfolio yield" currently of 5.68 which is after the mer of .55 ... they have confirmed this a number of times to me ...


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## james4beach (Nov 15, 2012)

fatcat said:


> Like ZUT shows a "portfolio yield" currently of 5.68 which is after the mer of .55 ... they have confirmed this a number of times to me ...


I still think they're wrong: either they have no clue, or are lying to you. I can prove it with this spreadsheet I whipped up in 15 minutes:
https://docs.google.com/spreadsheet/ccc?key=0Ak1GkIfBO77ydGhvd1N6bG1COHN2dmR1SUlpWjRtZHc

This is the ZUT portfolio at January 30. The weightings are from BMO's web page, and the stock dividend yields are from google finance. This shows that the directly calculated portfolio yield, without any expenses considered, is 5.66%

The BMO web page's "Portfolio Yield (Jan 25, 2013)" is 5.68%. Conveniently, the ETF share price has hardly moved between January 25 and 30. Now you can see that the BMO quote of 5.68% directly matches my calculated portfolio yield of 5.66%, which is before considering the MER.

If the MER is considered, the yield drops to 5.11% which is much different than the BMO quote. Their web page definitely shows a raw, pre-MER value.

If you're not comfortable with the January 25/30 estimate, then let's wait for the web page to update and see what yield they're quoting as of January 30. I bet you it will match my spreadsheet exactly.


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## andrewf (Mar 1, 2010)

Maybe you should send BMO an email and ask them to give their CSRs a refresher...


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## lonewolf (Jun 12, 2012)

I dont know what the rules are for the MER ?
It would be good to know if the MER can change & by how much ? If an investor is holding an etf & they decide to double the MER what was once a good investment could become a bad investment.

When making the call regarding the MER & yield if possible try to talk to the highest supervisor possible explain the conflicting answers & ask if they could send in writing exactly how it works.


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## andrewf (Mar 1, 2010)

It's a risk you take. It's very unlikely they would double MERs, though.


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## fatcat (Nov 11, 2009)

yet another call to bmo, my 5th over 2 years or something ...

the yield is *gross* of the mer

quoting the csr "we have had some confusion about this ourselves"

well duh ... after 2 years of telling me the opposite now they finally get it right

good work james and andrew for pressing your case


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## james4beach (Nov 15, 2012)

fatcat said:


> yet another call to bmo, my 5th over 2 years or something ...
> 
> the yield is *gross* of the mer


Thanks (and I appreciate you calling them too). I recently emailed them with details of their mistake so hopefully they're getting the message right now. With interest rates being so low, this gross/net MER issue is a BIG deal. I didn't want to pick on BMO, as Blackrock agents have also made this mistake.

Here is an email reply I just received from BMO: *"I can certainly confirm for you that our published yield figures are gross of (i.e. do not include) MER. This is usually implied in the notes of the quoted yield figure – for example, with ‘Portfolio Yield’, the notes define it as ‘the most recent income received by the ETF in the form of dividends interest and other income annualized based on the payment frequently divided by the current market value (i.e. not the NAV – which is net of fees) of ETFs investments."*

Here are some take-away thoughts:

* So there we have it. The quoted portfolio yields (or yield-to-maturity) are gross of the MER, so you always have to subtract the MER from the quoted yield. This is very significant for bond ETFs. For instance with a short term corporate like ZCS, you will actually get 2.08% - 0.3% = 1.78% yield... now at this point, there's no reason to choose the bond ETF versus a GIC. The GIC yields are higher, CDIC insured, even for shorter maturity than the bond ETF!

* It's good to verify numbers yourself. This is in fact why ETFs are so great... can you imagine trying to verify this for a mutual fund (no daily disclosure) or worse, for a pension fund? I have always preferred investments that are transparent and where I can check the numbers. This is why stock ETFs are more transparent than bond ETFs - bond quotes are hard to find.


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## andrewf (Mar 1, 2010)

Really, the website is pretty confusing (it is for all providers). They state at least 3 different yields, and most investors would not be sure which one is relevant. Their descriptions of what the yields mean are written in legalese and don't actually clarify how or why each one is relevant. The fund providers would be doing investors a service by linking to a page long explanation of the differences between each of these figures and how to interpret them. But I suspect they prefer the confusion, as many investors incorrectly believe they are getting the distribution yield as their return, which looks impressive compared to alternatives like GICs.


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## james4beach (Nov 15, 2012)

I suspect that bond ETFs wouldn't be so popular if people understood what their actual expected yield is.

andrewf you're right, the confusion certainly helps as retail investors tend to be optimistic when seeing quotes like yields. Take something like XSB. A retail investor comes along and sees yields on the web page: 2.73%, 2.87%, 1.64%

He thinks to himself -- hey that looks pretty good, even if I take the average of the group, maybe I'll get paid 2.4% !

But what is the portfolio actually generating internally and paying out net of MER ... it's only 1.36% yield! At that rate, the investor is better off in a cash savings account, and there's no point to buying XSB.


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## andrewf (Mar 1, 2010)

It's interesting that funds like CBO offer after MER yields in the range of 1.8%, which is the same as the current interest on offer at Ally in their HISA. Of course, that rate can be changed at any time, but is CDIC insured and 0% volatility.


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## james4beach (Nov 15, 2012)

You can even get big five bank GICs in the 2 year range for 2.0%. Again, CDIC insured, total certainty. And like you said even the HISA (cash) rates look like a better deal. Honestly, this is why I can't understand purchasing corporate bonds at such low rates... I don't see the point.


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## Belguy (May 24, 2010)

And so, that is the bottom line question--is there ANY point in purchasing bond ETF's at the present time or might one just as well go the GIC route?

Can anyone present any valid argument for going the bond ETF route aside from not having to lock up your money for two years or whatever?:confused2:


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## james4beach (Nov 15, 2012)

Belguy said:


> Can anyone present any valid argument for going the bond ETF route aside from not having to lock up your money for two years or whatever?:confused2:


A bond ETF can still rise in value if interest rates continue to decline (let's say the BoC cuts to 0%). You could get a capital gain on it. And like you said, the bond ETF is liquid so you can cash it in any time (unlike a GIC). You could even potentially trade the bond ETF over a few months for a profit.

I wouldn't, though. I would just put money into a GIC ladder.


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## andrewf (Mar 1, 2010)

Yes, the yield curve, which is already at historic lows, could fall further. But even if the whole 0-5 year yield curve fell to zero, the upside is pretty limited (perhaps 5% max). Downside risk is greater, IMO.

Operation Twist hammered the yield curve down. I don't think I'd want to bet on it falling further.


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## andrewf (Mar 1, 2010)

You can estimate the capital gain (loss) by multiplying the duration by the decrease (increase) in YTM.


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## Belguy (May 24, 2010)

Well, I'll be turning the big 7-0 this year :distress::hopelessness::upset::cower: and I should be protecting my portfolio but the fixed income investments are so unattractive. Last year, I reduced my equity allocation to 50 per cent and was planning to further reduce it this year but now I don't know what to do. I read one recommendation today that a retired senior should reduce his fixed income allocation to 30 per cent because of the unattractive yields. I realize that I am not alone but it is a tough call when portfolio preservation means barely even keeping up with inflation for the portions in cash and fixed income.

Any other thoughts?


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## My Own Advisor (Sep 24, 2012)

I think CBO is great for corporate bonds, moderate MER.

I'm with you Squash500.


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## andrewf (Mar 1, 2010)

Have you thought about annuitizing some of your portfolio? MG happened to write a nice book about just that.


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## andrewf (Mar 1, 2010)

Advisor: Even if the yield is lower than GICs?


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## My Own Advisor (Sep 24, 2012)

Distribution yield ~4%. YTM ~ 2%. 

I'm not a big bond guy myself, I don't own CBO, but if the OP wants corporate bonds, I still think this is a decent choice.

Hey andrewf, what's the top GIC rate now?

As for MG book, just finishing reading that. That's a great book she did with Moshe.


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## andrewf (Mar 1, 2010)

ICICI (CDIC insured) offers 5 year GICs at 2.85%. You can get 2 year GICs that yield more than CBO.

Also, Ally offers a HISA that yields ((1.8%) the same yield as CBO less their MER.


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## Belguy (May 24, 2010)

I read the book but, with my luck, I'd likely croak the month after I purchased the annuity!

But, then again, would I even care at that point?

I just don't want the big insurance companies ending up with my hard-earned savings!

But, then again, if they don't get them, my no account relatives will!!

Maybe I'll just take it with me when I go!! 

Decisions, decisions.:stupid::stupid::stupid::stupid:


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## My Own Advisor (Sep 24, 2012)

Andrewf, you don't own any bond ETFs I take it? Or just not in this low rate market?

I've got XBB. YTM ~ 2.4%. The only bond I own.


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## Squash500 (May 16, 2009)

james4beach said:


> Thanks (and I appreciate you calling them too). I recently emailed them with details of their mistake so hopefully they're getting the message right now. With interest rates being so low, this gross/net MER issue is a BIG deal. I didn't want to pick on BMO, as Blackrock agents have also made this mistake.
> 
> Here is an email reply I just received from BMO: *"I can certainly confirm for you that our published yield figures are gross of (i.e. do not include) MER. This is usually implied in the notes of the quoted yield figure – for example, with ‘Portfolio Yield’, the notes define it as ‘the most recent income received by the ETF in the form of dividends interest and other income annualized based on the payment frequently divided by the current market value (i.e. not the NAV – which is net of fees) of ETFs investments."*
> 
> ...


Excellent post....I'm sure a lot of Bond ETF investors forget that the MER hasn't been subtracted yet.


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## andrewf (Mar 1, 2010)

XBB YTM is 2.39. MER is 0.33%, so after MER YTM is 2.06%.

You're not getting paid to take the interest rate risk, in my opinion. Yields can't fall much at all from where they are now, so there is little room for upside.


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## andrewf (Mar 1, 2010)

Belguy said:


> I read the book but, with my luck, I'd likely croak the month after I purchased the annuity!
> 
> But, then again, would I even care at that point?
> 
> ...


If that idea bothers you, you can get a guaranteed # of payments (sacrificing yield).

Since it'd just be part of your portfolio, I wouldn't worry too much about the chance you might not recoup the cost in full. It's about hedging your longevity risk, and reducing the risk that you outlive your nest egg.


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## lonewolf (Jun 12, 2012)

My own Advisor

The virtual credit unions in Manitoba also offer redeamable GICs 5 yr @ 2.85 interest can compound or paid annualy. Early with draw @ Outlook is 1% interest earned on money taken out rest of money earns the GIC rate. I think it was Accelerate that had the 6yr 2.9% & 7yr 3.0%

If you went with a longer term & interest rates sky rocketed You could redeam early then buy the higher rate GIC. 

Sometimes one of the virtuals credit unions will let you get paid monthly. THe virtuals dont pay a dividend like the bricks & mortar. I asked @ several differnt credit unions if I would make more using the bricks & mortar with the dividends or the onlines & everyone told me it works out to almost the same. They offer the virtual so they can get the out of province money to work with.

The Manitoba credit unions have a differnt insurance then CDIC.


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## lonewolf (Jun 12, 2012)

I should have explained myself better in above post. Dividends are not garanted. I asked historicaly over the years who would of done better using the virtual or bricks & mortar & the reply was it averages out to be almost the same.


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## Quotealex (Aug 1, 2010)

Does any know if we can buy free of commission the RBC Target Maturity Corporate Bond ETF thru their RBC Direct discount broker?


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