# XBB or XSB or other going-forward?



## Financial Cents (Jul 22, 2010)

Hey folks,

I own a bunch of XBB in my RRSP. Do you think it is going to get hammered by rising interest rates over the next couple of years? While it's hard to predict, "experts" say interest rates should be going up 50 basis points this year.

Weighted average duration of bonds in XBB = ~ 6 yrs. Compare that to XSB = ~ 2.5 yrs. With CAB (Claymore), duration = ~ 4.5 yrs.

Thoughts?

Anyone making their bonds shorter in this environment?


----------



## larry81 (Nov 22, 2010)

for this reason, I own XSB exclusively


----------



## Four Pillars (Apr 5, 2009)

I use XSB, mainly because William Bernstein says that the extra return from long term bonds does not match the extra risk.


----------



## andrewf (Mar 1, 2010)

Not sure why you are expressing duration as percentages, those numbers are in 'years' (as the dimension).

If you don't need liquidity, GICs are actually not a bad deal here. XSB offers essentially no yield pickup over a 5 year GIC ladder, and more capital risk. In a taxable account, GICs are also likely more tax-efficient.


----------



## Financial Cents (Jul 22, 2010)

andrewf said:


> Not sure why you are expressing duration as percentages, those numbers are in 'years' (as the dimension).


You're right Andrewf, I corrected my post. 

@Mike - yeah, maybe I should put at least 50% of my bonds in XSB??

I don't believe in a GIC ladder, yet, because I'm still in my 30's. When I get into my 50's, I will probably make a good portion of my bonds in my RRSP, into a bond ladder. I don't see the point of that now since I'm in my accumulation years, not my preservation years. I guess that's also why I have not moved anything to XSB, I've got a good 20 years to retirement. 

My Own Advisor


----------



## andrewf (Mar 1, 2010)

My point is that XSB has a lower yield than a five year GIC ladder right now. So, I don't think XSB is the best course of action right now. If you have a bond allocation, right now GICs are safer, have a higher yield, and are more tax efficient. That won't always be the case. The only reason I see to go with XSB is liquidity. If you plan to hold your bond allocation for five years though, GICs are the way to go.


----------



## gibor365 (Apr 1, 2011)

andrewf said:


> My point is that XSB has a lower yield than a five year GIC ladder right now.


Not only. There is saving accounts that give you 2% without any risks, and until end of the year interest rates should go up and GIC rates as well.
I hold very smll amount of CLO (at least better dividends than XSB)


----------



## Financial Cents (Jul 22, 2010)

If not XSB, (XSB weighted yield to maturity ~ 2.3%), what is the best GIC laddered product out there right now?

Seems to be good to hold a bit of a GIC ladder in retirement years...


----------



## gibor365 (Apr 1, 2011)

Financial Cents said:


> If not XSB, (XSB weighted yield to maturity ~ 2.3%), what is the best GIC laddered product out there right now?
> 
> Seems to be good to hold a bit of a GIC ladder in retirement years...


This is tricky part. The best GIC you can find here: http://money.canoe.ca/rates/gics.html

However, my discount brokarege TDW and CIBC Inv Edge don't llow me to buy it.

In CIBC at least you can check what 3rd party GIC they offer:
here is the list for (1,2,3,4 and 5 years rectectivly)
AGF TRUST 1.900% 2.310% 2.700% 3.000% 3.250% 
B2B TRUST 1.600% 2.250% 2.700% 3.000% 3.350% 
Canadian Western Bank 1.750% 2.300% 2.750% 3.000% 3.350% 
EQUITABLE TRUST 1.860% 2.200% 2.900% 3.000% 3.250% 
HSBC BANK 1.600% 2.150% 2.600% 2.950% 3.200% 
ICICI BANK CANADA 0.900% 1.600% 2.150% 2.800% 3.100% 
LAURENTIAN BK 1.600% 2.250% 2.700% 3.000% 3.350% 
MANULIFE BANK 1.650% 2.150% 2.700% 3.050% 3.350% 
MAPLE TRUST 1.550% 2.300% 2.700% 3.000% 3.300% 
MONTREAL TRUST 1.550% 2.300% 2.700% 3.000% 3.300% 
NATIONAL BANK 1.450% 2.050% 2.500% 2.900% 3.250% 
NATIONAL TRUST 1.550% 2.300% 2.700% 3.000% 3.300% 
PACIFIC WESTERN BANK 1.980% 1.950% 2.400% 2.750% 3.000% 
PEOPLES TRUST 1.600% 1.850% 2.250% 2.500% 2.750% 

In TDW you must call to inquire.

I wouldn't advise to buy GIC for long period now, as rates should go up at some point


----------



## Rysto (Nov 22, 2010)

One thing to watch out for with GICs is withdrawal/transfer penalties. If, in a couple of years, GIC rates start lagging bonds again, the extra return that you've earned on your GICs does you no good if you pay even more back to the credit union when you want to transfer your money back to your brokerage.

Edit: Obviously this does not apply if you purchase a GIC in your brokerage account, but as mentioned above most brokers don't seem to offer the highest rate GICs.


----------



## Financial Cents (Jul 22, 2010)

Thanks Rysto and gibor.

Again, I'm a big fan of my XBB product, just a little nervous about bond rates moving this summer and thus, trying to decide how short to go with bonds.

I've got a good 20 years until I'm financially secure (I hope?) to retire.


----------



## Rysto (Nov 22, 2010)

The Bogleheads' wiki has a great article on bond funds and individual bonds that I think is worth quoting here:



> t's useful to focus on the duration of your bond fund, such as the Vanguard TIPS Fund, which currently has a duration of 5.0 years. William Bernstein provides an insightful definition of duration as the "point of indifference" for the owner of a bond fund in dealing with interest rate changes. If interest rates rise after purchasing a bond fund, the NAV of the fund falls, which hurts the investor. However, the dividends that the bond fund throws off can now be reinvested at a higher rate. *The duration is the length of time that an investor needs to hold the fund for the increased yields to compensate for the decrease in NAV.* In that sense, duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen.


(bolding mine)

With all of the talk about the coming bond Armageddon, it's worth pointing this out. In the short term, bond funds (and individual bonds) will go down in value as interest rates rise. However, absent any defaults they are still going to throw off interest payments and the underlying bonds will be paid off. A bond fund drops in value when rates rise because the opportunity cost of investing in the fund has increased. The fund isn't any worse of an investment in absolute terms, it's just that better ones are now available. So long as no bonds default, you aren't going to lose money (in nominal terms) as long as you continue to hold the fund. You just might not make as much money as your could have. So if you're going to hold for the next 20 years, don't freak out. Everything will be fine.

For reference, the weighted average duration of XBB is 6.13 years(as shown here).


----------



## fatcat (Nov 11, 2009)

> The Bogleheads' wiki has a great article on bond funds and individual bonds that I think is worth quoting here:


i agree, very good article, thank you

so the answer is to hold one or more funds with a duration that matches your need or needs for the money ..

like XSB with half and XBB with the other half as an example ...

if you hold for the full duration of the fund you are getting the "equivalent" of buying individual bonds ... 

as far as GIC's go, the very best 1-year rate is 2.50 from maxa credit union in manitoba .. you get a provincial rather than a federal guarantee though .. (if that means anything)

not really worth locking in at 2.5% when you can get a cdic insured hisa at 2% though


----------



## andrewf (Mar 1, 2010)

Thing is, there are 5 year GICs that dominate XBB. XBB has a duration over six years and a lower yield than currently available 5 year GICs at 3.5%. And it's less tax efficient to boot, since it has higher coupons than the yield, holding premium bonds, and thus will result in higher income offset by capital losses.

XBB is vulnerable to default, and GICs are backed by the full faith and credit of the government of Canada.

I hadn't looked too closely lately, but it's becoming clear that bond funds are not a great way to go right now.


----------



## financialuproar (Jan 26, 2010)

If you're looking for a short term bond fund with a little extra yield, I'd recommend Claymore's Short Duration High Yield ETF (CSD TSX). It yields around 7% right now, but only holds bonds that mature in the next year.

There's only 14 issues, so it isn't the most diversified fund in the world. Most of the issues are American, and I'm not sure if the fund hedges the currency or not.

I'd recommend someone spent some time with the prospectus before buying this one. Actively managed ETFs aren't my favorite thing in the world.


----------



## andrewf (Mar 1, 2010)

It targets a duration of one year, but some of the issues mature as far as three years out. This fund also uses a forward structure so that the returns are all return of capital and capital gains. I'd say this is one of the more interesting ETFs I've seen in the Canadian fixed income space in a while. Jury is still out on how well it does on capital preservation, with its high concentration.

High yield bonds is one area where I can see a reasonable case for active management. The fees are also pretty low for an actively-managed ETF, at 0.55 ish.


----------



## CanadianCapitalist (Mar 31, 2009)

I own bonds strictly for diversification. Also, as Mike points out, you don't get much of a return boost for the increased risk in medium and long bonds. Therefore, I own XSB for my bond portion. I fully realize a GIC ladder could provide a bit more in yield compared to XSB but for me liquidity is very important. A compromise could be to own 50% in XSB and 50% in a GIC ladder. You can get about 2.6% with a GIC ladder of 1 to 5 years. XSB yields about 2.1%. Depending on your portfolio size and how much you allocate to bonds, the 0.5% difference may or may not be meaningful.


----------



## dogleg (Feb 5, 2010)

C C: A lot depends on how you look at it . Yahoo Fin. would have you believe that yield for XSB is about 4% where they just take the disributions and compare them to the AV. Right now it would be about 3.38 % minus the MER of 0.25% or about 3.13 % . However if you use YTM where you calculate what you would earn per year if you held all the underlying bonds to maturity it would be about 2.37% minus the MER of 0.25 = about 2.12. In some ways I suppose it makes more sense to use the Yahoo (etc. ) method .


----------



## andrewf (Mar 1, 2010)

^Nope. That is the coupon yield. It will be reduced by capital loss as the bonds mature. Yield to maturity is the way to look at these bond funds.


----------



## fatcat (Nov 11, 2009)

> A compromise could be to own 50% in XSB and 50% in a GIC ladder. You can get about 2.6% with a GIC ladder of 1 to 5 years. XSB yields about 2.1%. Depending on your portfolio size and how much you allocate to bonds, the 0.5% difference may or may not be meaningful.


 cc, if you blend those you get 2.35%, if you have say 100K, it hardly makes sense to risk capital loss in XSB and lock your money in GIC's for effectively $350 a year (since you can get 2% CDIC insured in a HISA at Ally for example .. plus I am seeing hints of other banks raising their HISA's as well) does it ?


----------



## andrewf (Mar 1, 2010)

I would go with a GIC ladder and a HISA for liquidity, if anything.


----------



## Financial Cents (Jul 22, 2010)

andrewf said:


> I would go with a GIC ladder and a HISA for liquidity, if anything.


Even if your time horizon is 20 years?


----------



## larry81 (Nov 22, 2010)

fatcat said:


> i agree, very good article, thank you
> 
> so the answer is to hold one or more funds with a duration that matches your need or needs for the money ..
> 
> ...


from my point of view, it does not make sense to mix XSB and XBB, since XBB bonds holding contain 40% of relatively short term (1-5 years) bonds.

Would be better to mix XSB and XRB, maybe some junks bond too.

Or someone could just say, i am going trust the wise folks who manage PHN110


----------



## Financial Cents (Jul 22, 2010)

larry81 said:


> from my point of view, it does not make sense to mix XSB and XBB, since XBB bonds holding contain 40% of relatively short term (1-5 years) bonds.
> 
> Would be better to mix XSB and XRB, maybe some junks bond too.
> 
> Or someone could just say, i am going trust the wise folks who manage PHN110


@larry81 - that's what I keep coming back to, if I already own XBB, with 40% short bonds, then am I really gaining much by holding XSB also given my 20-year time horizon. I'm not convinced. I think I'm going to keep my XBB and in another 15-20 years, just start creating a bond ladder as I get closer to retirement. 

As I get close to retirement, age 50, I plan on having a 50/50 equity/bond split in my registered holdings; a bunch of XBB or similar and at least 10% in 
CLF or CBO.

The lads at PH&N do have a good bond product, although MER is twice as much as XBB and 80% of their holdings are long issues which I'm not a fan of.


----------



## larry81 (Nov 22, 2010)

Financial Cents said:


> @larry81 - that's what I keep coming back to, if I already own XBB, with 40% short bonds, then am I really gaining much by holding XSB also given my 20-year time horizon. I'm not convinced. I think I'm going to keep my XBB and in another 15-20 years, just start creating a bond ladder as I get closer to retirement.
> 
> As I get close to retirement, age 50, I plan on having a 50/50 equity/bond split in my registered holdings; a bunch of XBB or similar and at least 10% in
> CLF or CBO.
> ...


Your thinking is correct.

Sure with interest rates that are (supposed) to rise this year, the NAV will take a hit but with your time horizon its a non-issue.

When it come to bonds holding, you simply cant go wrong by simply holding XBB. 

Try to keep your fixed income in your registered accounts if you can


----------



## andrewf (Mar 1, 2010)

Financial Cents said:


> Even if your time horizon is 20 years?


Right now that is the best yield with the lowest risk. If I didn't need liquidity I'd go with 100% GIC ladder for bond component. It's sensible to keep some cash for rebalancing in the event of an equity correction.

XBB is basically strictly dominated by a 5 year GIC ladder. You get more money after five years. There is no chance of capital gains in XBB, and plenty of risk of capital loss.


----------



## lmcfaden (Apr 4, 2011)

With the discussion on bond ETFs here, I did not see reference to XHB, iShares recently insituted Hybrid bond product, I think it was available as of October 2010 or so. In our non-registered portfolio, I hold XBB (66%) and some XHB (33%) of the 40% total bond holdings.

Yield = 5.3%
Mer = .45%
HST - .05%

I bought our holdings shortly after the New Year, and so far am pleased with the results. Presently sitting at +.47% since January. Any other comments or opinions on XHB? (perhaps I should have started a new thread?)


----------



## dogleg (Feb 5, 2010)

Andrew : I'm not an apologist for the way Yahoo Fin. calculates yield and I agree with you that for anyone holding a fund for the average duration of the bonds in it that the capital loss as the bonds mature must be factored in. However, Yahoo takes a shorter snapshot and if one looks at the fund like an individual stock I suppose you can measure the yield -as they do - by taking a four quarter gain and relate it to the average NA value of the fund. Anyway people find many ways to measure the long or short term performance of a fund. Maybe the psychological effect is worth something !


----------



## Financial Cents (Jul 22, 2010)

Thanks Larry81, re: with your time horizon its a non-issue. (20 years).

XBB is my all-in-one bond. I probably should have mentioned I'm not a fan of bonds for the most part, I think they are barely winners when compared to inflation, certainly a laggard vs. equities.

The only place I keep XBB, is in my RRSP. 

My TFSA is all dividend-paying stocks, I have a growing list of Canadian dividend-paying stocks unregistered and I have a defined benefit pension plan at work.


----------



## barnabam (Apr 22, 2011)

andrewf said:


> ^Nope. That is the coupon yield. It will be reduced by capital loss as the bonds mature. Yield to maturity is the way to look at these bond funds.


Agreed. I see no sense in purchasing this type of ETF for capital appreciation. If you can get some, ok ... but it should not be your main goal with this type of security. 

Besides, given that these funds are comprised of laddered bond maturities, those that mature sooner will be replaced by newer issues (at, hopefully, higher coupon rates) in time. Yield to maturity is the way to go.


----------



## andrewf (Mar 1, 2010)

lmcfaden said:


> With the discussion on bond ETFs here, I did not see reference to XHB, iShares recently insituted Hybrid bond product, I think it was available as of October 2010 or so. In our non-registered portfolio, I hold XBB (66%) and some XHB (33%) of the 40% total bond holdings.
> 
> Yield = 5.3%
> Mer = .45%
> ...


The difference is that this is a high yield fund, and so more credit risk. It has a yield to maturity of about 5.3% and a duration of 6.35 years. That's pretty long duration if interest rates rise.

I think CSD is more interesting for the high yield space. It had a duration of about a year and a higher yield to maturity. The return of that fund it also return of capital/capital gains to boot. It's pretty new and since the fund is small it's invested in a smaller number of issues, but I think it's something interesting to keep an eye on.


----------



## Financial Cents (Jul 22, 2010)

After doing only some quick searches on XHB, I wouldn't own it.

XBB has a) much lower MER, b) solid returns, c) more short duration bonds, d) mostly AAA bonds, e) 3x the holdings, f) lower weighted average duration and g) a proven track record against a widely accepted/standard index.

I'll definitely stay with XBB over XHB.


----------



## Belguy (May 24, 2010)

I continue to hold the PH&N Bond Fund D as my core bond holding on the theory that I would prefer to have professional managers with a proven track record managing my bond allocation during the predicted rising interest rate environment. This is not to say that some losses would still be unexpected but there are times when professional management helps me to sleep better.


----------



## andrewf (Mar 1, 2010)

An active bond fund with a strict mandate (100% invested, only say Canada bonds, etc.) is likely to get just as hurt by active management as passive. Paying big MERs on a bond fund is crazy.


----------



## Financial Cents (Jul 22, 2010)

Totally agree with you andrewf, re: big fees for bond funds. I think anything over 0.50% is way too much.


----------



## dubmac (Jan 9, 2011)

Hi..thought I'd jump in here - I have a question or two
I'm in the process of completing a 5 yr GIC ladder - I'm a buy & hold type of investor (aka Belguy and others). I have about 27% in DRIP equities (TRP, T. SLF, CDZ, FIE), 30% in bond funds & fixed income (one bond fund - NexGen - has a high MER, the other 2 fixed income funds have low MER's - Beutel Goodman and McLean Budden some cash (3%), and 40% in a 4 yr GIC ladder. I plan to cash in a portion of the fixed income and buy a 5th GIC to complete a 5 yr GIC ladder - all interest is to be used to buy more equities in the future. I'm 50 and won't need anything for another 10-12 yrs. 

My questions.

1. If and when interest rates go up, will 5 yr GIC rates go up? I guess this is like timing the market to some extent, but what are you thoughts?

2. Many of you are pooh-poohing high MER bond funds - if not bond funds, then I conclude that many of you recommend buying bonds outright (I know little about bond investing) or buying bond ETF's. Seeing that interest rates are going up, and I already have short term bond like products in GIC's, are long term bond funds the way to go? XLB?


----------



## andrewf (Mar 1, 2010)

dubmac, that is a very conservative allocation.

1. Yes, 5 year rates on GICs will increase a bit as rates rise. Into the mid 4 and 5% range.

2. Yes. Bond ladders, GIC ladders, savings accounts and bond ETFs are the way most here go. Bond MFs (except perhaps high yield) are usually a crazy idea. A MER of 1% on a bond fund is _not_ low. Bond ETFs are nice for their liquidity and the ease of management, but for a reasonable size bond portfolio it is a bit cheaper to buy bonds directly.

Long term bonds have one way to go: down. It's a great way to lose a lot of capital over the next 5 years. Stick with short duration bonds or GICs for now, until rates rise.


----------



## dubmac (Jan 9, 2011)

andrewf said:


> dubmac, that is a very conservative allocation.


money was an inheritance - we don't want to see it go down. Preservation of capital is what we are after - if we can get 5% on this account then bonus


----------



## cardhu (May 26, 2009)

Financial Cents said:


> I don't believe in a GIC ladder, yet, because I'm still in my 30's.
> ...
> [GIC ladder] Even if your time horizon is 20 years?


What does your age or time horizon have to do with it? If one's asset allocation includes a fixed income component, then in today’s interest rate environment a ladder is a reasonable candidate for at least a portion of that component, regardless of one's age. I don’t see why anyone would intentionally opt for lower returns coupled with higher risk. Sure a young person has more time to recover from the lower returns, but if they didn't go down that road in the first place, there'd be no lower returns to recover from. 



Financial Cents said:


> what is the best GIC laddered product out there right now?


The best laddered “product” isn’t a product at all, but a selection of separate and discrete GICs of staggered maturities that you assemble yourself. Or bonds if you wish to sacrifice some return in exchange for liquidity. There are some ETFs (ie. CLF) that use a regimented laddered structure, but their disadvantages outweigh their advantages, and they’re not recommended. That may change in the future, or it might not. 



dogleg said:


> Yahoo Fin. would have you believe ... etc. etc. ... Right now it would be about 3.38 % minus the MER of 0.25% or about 3.13 %


No ... it would be about 3.38% minus nothing ... they are measuring what was actually distributed to unitholders, not the gross amount that was received by the fund ... 3.38% is net of MER. 



dogleg said:


> In some ways I suppose it makes more sense to use the Yahoo (etc. ) method .


No ... the current yield is only one part of the overall return with a bond fund, so is rather meaningless on its own ... people get drawn into bad decisions by the current yield all the time (ie search this forum for any mention of CLF) ... it would perhaps make more sense if Yahoo didn’t report the yield on bond funds at all ... the distribution history is readily available from the fund sponsors directly, along with various more meaningful and relevant metrics. 



andrewf said:


> ^Nope. That is the coupon yield.


Actually, its the current yield ... the coupon yield is even higher. 



Dubmac said:


> I plan to cash in a portion of the fixed income and buy a 5th GIC to complete a 5 yr GIC ladder
> ...
> If and when interest rates go up, will 5 yr GIC rates go up? I guess this is like timing the market to some extent, but what are you thoughts?


Dubmac ... if you wait until GIC rates have gone up, then your bond fund will most likely have gone down ... its difficult to say whether the increased return on the GIC would make up for the smaller amount of capital you’re earning interest on ... if you plan to shift some money from bond fund to GIC, then you should either just go ahead and do it now, or sell the bond fund now and sit on the money in a HISA for a while ... the problem with the latter approach, of course, is knowing how long do you wait? ... and what would be the signal for you to deploy the funds? ... and would you recognize the signal when it came?


----------



## james4beach (Nov 15, 2012)

I took a look at the iShares page and saw that the yield to maturity on XBB was 1.49% on Friday. XBB dropped more today, so it's safe to say that the yield has hit 1.5%

Kind of a milestone there. 1.5% is a somewhat impressive yield these days! There are few savings account in the country which pay this much interest. Every savings account that I use myself pays less, so XBB actually has the best yield among my various fixed income investments.

If one holds XBB for a decade, the estimated return is 1.5% annualized. If inflation remains at the current 1.0% level, that's a good return.

If inflation goes down, and/or if interest rates go negative, XBB will be a *fantastic* investment.
On the other hand if inflation goes up, and rates go higher, XBB will perform poorly.
If inflation gets out of control and rates increase a lot, XBB will be a *terrible* investment.

My perspective here is that I can't predict which of these will happen. Therefore I continue to invest (passively) in XBB without trying to predict interest rates or inflation rates.


----------



## james4beach (Nov 15, 2012)

Short term bonds (XSB) are falling pretty hard now, too. meaning that yields at the short end of the curve are up.

GIC rates should go up now, right?

Wow interest rates going up across the yield curve. Should be interesting.


----------



## OptsyEagle (Nov 29, 2009)

james4beach said:


> Short term bonds (XSB) are falling pretty hard now, too. meaning that yields at the short end of the curve are up.
> 
> GIC rates should go up now, right?
> 
> Wow interest rates going up across the yield curve. Should be interesting.


The only thing making me feel warm and fuzzy when I noticed longer term rates going up was the shorter term rates staying fairly stable.

I believe it is the inversion of the yield curve (shorter rates getting higher then longer rates) that tends to foretell trouble ahead. We are a long way away from inversion but I think if we get close to that the pundits will certainly start talking about it.


----------



## james4beach (Nov 15, 2012)

So what do you think? Is it time to sell all bonds, before they fall even more?

This was a quick 5% loss in something that only yields 1% to 1.5%.

(I don't plan to sell, but curious what others are thinking)


----------



## Juggernaut92 (Aug 9, 2020)

james4beach said:


> If one holds XBB for a decade, the estimated return is 1.5% annualized. If inflation remains at the current 1.0% level, that's a good return.


Can you elaborate on this? XBB's dividend yield is 2.79% as listed on google. wouldn't XBB's annualized return be 2.79% minus the MER of the bond fund?

Also, what does yield to maturity mean?


----------



## Juggernaut92 (Aug 9, 2020)

james4beach said:


> So what do you think? Is it time to sell all bonds, before they fall even more?
> 
> This was a quick 5% loss in something that only yields 1% to 1.5%.


I actually have ZAG in my account and bought $500 worth at a high point at $16.5 per share. I may buy some now as it is lower.


----------



## Covariance (Oct 20, 2020)

Last fall I shortened up duration (to almost 0) and stayed long credit. I think it is to soon to buy. Would I sell now? That's a difficult question. Seems logical to expect a spike in near term inflation as people emerge and spend, so that's bad for rates but as of today is priced in. Longer term rates depend on central bank and government credibility.


----------



## james4beach (Nov 15, 2012)

Juggernaut92 said:


> Can you elaborate on this? XBB's dividend yield is 2.79% as listed on google. wouldn't XBB's annualized return be 2.79% minus the MER of the bond fund?
> 
> Also, what does yield to maturity mean?


The dividend yields listed on sites like that are the yield based on the fund's distribution. Those generally are the coupons from the bonds. The coupon of a bond is not the same as the yield.

The yield takes into account the starting price, ending (maturity) price, and all the coupons along the way. The "yield to maturity" is the measure of your overall rate of return, net of everything, to the maturity date of the bonds.

XBB and ZAG now have a yield to maturity of something like 1.5%. It's a more useful number than the distribution yield. You will get some coupon payments, but also some *share price declines* along the way. When all is said and done, the return over the next ~ 10 years should be roughly 1.5% annualized. These are just estimates.

Whether that's a good or bad return entirely depends on the rate of inflation.


----------



## andrewf (Mar 1, 2010)

Juggernaut92 said:


> Can you elaborate on this? XBB's dividend yield is 2.79% as listed on google. wouldn't XBB's annualized return be 2.79% minus the MER of the bond fund?
> 
> Also, what does yield to maturity mean?


The dividend yield is more related to the coupon rate (and kind of irrelevant. I'd call it the 'income trap'). The YTM is the weighted average yield to maturity of each individual bond the fund holds, calculate a weighted average to get YTM for the overall fund. YTM of a bond the effective rate of interest the bond pays if held to maturity, reinvesting coupons. If you pay a big premium for a bond with a 6% coupon rate, it may only have a 1.5% YTM because at maturity you will take a capital loss on the premium you paid over face value.


----------



## Juggernaut92 (Aug 9, 2020)

@james4beach : Just to be clear, the coupon/coupon rate of a bond is what percentage the bond pays out each year right?
I think I am understanding. So you are saying that the dividend yield that I see on google is the average coupon rate of all the bonds that XBB holds? But because of fluctuating bond fund prices and different bonds maturing at different rates then that number does not end up reflecting what you actually get?

I see. That is interesting. Im glad I am learning about this as the 2.8% dividend yield on ZAG looks quite good because it is a little above average inflation. However, if you are saying the actual return you get from it is 1.5% every year then that is not that great. 



andrewf said:


> If you pay a big premium for a bond with a 6% coupon rate, it may only have a 1.5% YTM because at maturity you will take a capital loss on the premium you paid over face value.


You lost me here. In this example you are talking about a bond from a bank or are you talking about a bond fund? If you paid 10k for a bond and the coupon rate is 6% and you hold it for 10 years how would you lose money? Or are you talking about inflation making your money not as valuable as it once was 10 years ago?


----------



## james4beach (Nov 15, 2012)

Juggernaut92 said:


> @james4beach : Just to be clear, the coupon/coupon rate of a bond is what percentage the bond pays out each year right?
> I think I am understanding. So you are saying that the dividend yield that I see on google is the average coupon rate of all the bonds that XBB holds?


Yes I think so. This means that the bonds in the portfolio pay out this amount of coupon (interest) payments. That's going to be close to the quoted distribution yield (incorrectly shown as a "dividend yield" in some places).

This still is the actual amount of cash paid out. If you had 100K invested, XBB really will pay out a 2.6% or $2,600 a year, but the problem is the unit price is going to decline. You get extra on cash payments, but then lose some of the unit value.



Juggernaut92 said:


> But because of fluctuating bond fund prices and different bonds maturing at different rates then that number does not end up reflecting what you actually get?


It has to do with the guaranteed price loss (capital loss) on the bonds. All bonds mature at a price of $100 but some are have a higher value today. If the fund holds a bond that's currently worth $105 we know for certain that it will mature at $100 and have a $5 capital loss.

Let's say this bond worth $105 pays out a $4 coupon (4% coupon) each year. Focusing just on this individual bond, here is the history you'll experience:

Pay $105 today for the bond
Get $4 coupon
Get $4 coupon, each year, etc...
Redeem $100 at maturity

So for this bond, that $4 (which looks like a 4% coupon) doesn't tell the whole story. You get a bunch of $4 payments, but then you lose another $5 by the time the bond matures.

That's why the "yield to maturity" is a useful figure. Each bond has some combination of coupons and capital gain or loss. The yield to maturity rolls all that together.

The bond ETF situation is pretty much the same as what's above. You get the coupon payments now, but eventually see a loss. The best estimate of your *net gain*, over roughly 7-10 years, is the weighted average yield to maturity figure = 1.56%

That's an annualized figure of course, compounding.


----------



## andrewf (Mar 1, 2010)

Juggernaut92 said:


> You lost me here. In this example you are talking about a bond from a bank or are you talking about a bond fund? If you paid 10k for a bond and the coupon rate is 6% and you hold it for 10 years how would you lose money? Or are you talking about inflation making your money not as valuable as it once was 10 years ago?


You don't buy bonds from a bank 'retail' like GICs. They trade on the secondary market like stocks. A bond may have a face value of $100 at maturity, a 6% coupon rate (pays ~$6 per year) and that same bond may cost you $140 on the secondary market. Not calculating what the yield would actually be, your YTM would be less than 6% over say 10 years because you get $60 in coupon payments and get $100 at maturity. But since you paid $140 for that bond, you really only gain $20 over the holding period, which is probably around 1.5% yield. These bonds are called 'premium bonds' because you have to pay a premium over the face value to buy them.

Lots of bonds today, including those held by bond funds/ETFs, are these 'premium bonds'. So if you look at the coupon rate and think 'great, I'm getting $6 per year for my $140 investment, that's 4% or so', you're not considering the fact that the bond will decline in value as it approaches maturity (eventually to $100).

If you want to learn more about how bonds work, I'm sure there are youtube video explanations that would give you a better run down than you'll find on this forum.


----------



## Thal81 (Sep 5, 2017)

I think selling bonds just because they're falling in price now is foolish. If anything, it's a good opportunity to buy more at a better price. Same way of thinking as stocks really. And in the last couple weeks, my bonds have not fallen as hard as the world stock market indices... so they're doing their job.


----------



## Covariance (Oct 20, 2020)

Thal81 said:


> I think selling bonds just because they're falling in price now is foolish.


Agree with general principle. If one is trying to active manage or time the market one needs to anticipate. Otherwise stick to passive and follow your plan. It pains me to see when people are in denial and dismiss what might happen. And then after it happens panic sell at the wrong time.


----------



## OptsyEagle (Nov 29, 2009)

Market timing of any market is difficult and timing interest rate moves is just as difficult. Bonds are a very interesting animal because they respond to a few factors all moving in different directions at times.

Right now we see the daily response to a rise in interest rates. Most of us understand the inverse relationship that has on a bond's capital value. It does not change the coupon, at least not on the same day and there is another relationship one needs to consider if they are worried about losing money. What does the yield curve look like and what will happen to it?

That is moving as well with the changes in interest rates but to understand its effect one needs to consider it in a stagnant interest rate environment. If you own a bond that currently yields 1% and rates move to 0.8%, we know that the value of that bond should want to go up. If rates are stagnant and the 10 yr rate is 1% and the 9 yr rate is 0.8%, and you hold a 10 yr bond FOR ONE YEAR, what should you expect to happen to its capital value over that year as it's interest rate declines. Go up, just for hanging on to it. If it is corporate bonds you own, their credit concerns also start moving the money making dial as well. There will be currency moves in foreign bonds to deal with. It's all very difficult to forecast.


----------



## MrMatt (Dec 21, 2011)

OptsyEagle said:


> It's all very difficult to forecast.


I hold that it is effectively impossible to forecast better than the experts.


----------



## Tostig (Nov 18, 2020)

This thread started in 2011. Ten years later we ask the same questions about the same concerns.

As usual, buy low. Buy when others are panicking.


----------



## MrMatt (Dec 21, 2011)

Tostig said:


> This thread started in 2011. Ten years later we ask the same questions about the same concerns.
> 
> As usual, buy low. Buy when others are panicking.


Didn't notice, because even though "this time it's different", it really isn't.
Like all things, The Simpsons says it best.


----------



## james4beach (Nov 15, 2012)

Tostig said:


> This thread started in 2011. Ten years later we ask the same questions about the same concerns.


Here are the total cumulative returns since 2011

CMR: +8.5% (cash / money market fund)
XSB: +24.5%
XBB: +45.0%

Just so that nobody loses sight about the big picture. It's very easy to forget about the big picture in a world where we look at our portfolios daily.


----------



## james4beach (Nov 15, 2012)

Covariance said:


> It pains me to see when people are in denial and dismiss what might happen. And then after it happens panic sell at the wrong time.


People always sell at the wrong time, when this is based on emotion or "feeling".

I maintain my XBB position. Yes it has its risks, as everything does. I will get clobbered in XBB if interest rates go up dramatically. I already know it's risky, but I know what I'm signing up for. Maximum drawdown could be 15% to 20% worst case scenario. More likely maximum drawdown of around 10%, in my opinon.

Long term return will be higher than cash and short term bonds... that part is guaranteed (it's what the yield curve means) provided your time horizon > 10 yrs.

Many people are not aware that bond funds got clobbered, briefly, during inflation & super high interest rates of 1970s and 1980s, but with a time horizon > 10 years, had excellent returns._ And in fact had better risk-adjusted returns than stocks throughout that period._


----------



## Juggernaut92 (Aug 9, 2020)

@james4beach :I see. The second part of your post clarifies a lot. Wouldn't asset management companies like vanguard, ishares and BMO buy bonds right at the beginning when their price is $100 for a bond that matures in 5 years at $100 or it does not work like that? Basically you are saying that a bond fund holds bonds of different coupon rates but it also holds bonds that were bought at different values then what they mature at? Then that makes sense why the distribution yield isn't a clear picture of the return you get. 

@andrewf :Cant people get bonds for the face value price if they acquire them close to the time the bonds are issued?
Yes I will probably look into this more. Stocks are a bit more straightforward but bonds always threw me off a bit.


----------



## andrewf (Mar 1, 2010)

Juggernaut92 said:


> @andrewf :Cant people get bonds for the face value price if they acquire them close to the time the bonds are issued?
> Yes I will probably look into this more. Stocks are a bit more straightforward but bonds always threw me off a bit.


If you are worried about this, you can even buy discount bonds. BMO offers an ETF for this strategy. It is mainly for tax advantage, though, so only relevant in a taxable account. I don't think most retail investors need to overthink bonds.


----------



## Juggernaut92 (Aug 9, 2020)

Do you mean ZAG? hmm I feel like bonds are more complex than stocks... but I feel like over time I will have more knowledge to understand them more.


----------



## AltaRed (Jun 8, 2009)

Andrew is referring to ZDB.


----------



## james4beach (Nov 15, 2012)

Juggernaut92 said:


> Do you mean ZAG? hmm I feel like bonds are more complex than stocks... but I feel like over time I will have more knowledge to understand them more.





AltaRed said:


> Andrew is referring to ZDB.


Just to provide some context...

XBB, VAB, ZAG, ZDB are all "equivalent" in terms of the kind of risk they carry and performance. They are very similar funds and are interchangeable.

In a taxable account though, ZDB is more tax efficient because it chooses bonds which have lower coupon payments but higher capital gains. The performance ends up being the same, but reducing interest payments and nudging towards cap gains is better in non-reg.

So in a tax sheltered account, you'd probably pick one of XBB, VAB, ZAG
And in a non-registered account, it's better to use ZDB or (if you are comfortable with it) Horizons HBB


----------



## Beaver101 (Nov 14, 2011)

Tostig said:


> This thread started in 2011. Ten years later we ask the same questions about the same concerns.
> 
> As usual, buy low. Buy when others are panicking.


 ... I wonder if Financial Cents (banned?) or is that My Own Advisor still holding on his XBB ... from approx. 10 years ago. Or how about larry81 (still registered/active) with XSB? Would be interesting to know.


----------



## Juggernaut92 (Aug 9, 2020)

james4beach said:


> XBB, VAB, ZAG, ZDB are all "equivalent" in terms of the kind of risk they carry and performance. They are very similar funds and are interchangeable.
> 
> In a taxable account though, ZDB is more tax efficient because it chooses bonds which have lower coupon payments but higher capital gains. The performance ends up being the same, but reducing interest payments and nudging towards cap gains is better in non-reg.
> 
> ...


I see. Thanks for the clarification. Was not aware that ZDB would be best in non-reg account.


----------

