# XSH - Canadian Short Term Corporate + Maple Bond



## james4beach (Nov 15, 2012)

I bought some XSH (iShares Core Canadian Short Term Corporate + Maple Bond Index ETF)

It has wide bid/ask spreads, which isn't so great. I placed a limit buy order using the NAV and it eventually filled.

This has a mgmt fee of 0.12% and thus MER around 0.14%, which is awfully cheap for a bond fund. Compared to my beloved XSB, the XSH is also short term maturity but has lower grade exposure, is all corporate debt and a higher yield.


----------



## james4beach (Nov 15, 2012)

Does anyone else own this?

I recently made a graph of the different corp bond ETFs. On the x-axis I put the % exposure to sub-A grade paper. On the y-axis is the yield. After adjusting for maturity length, there is a nice ... almost linear ... line on this graph. I think it's a nice illustration of risk vs reward. For instance, at the extreme end are junk bonds with 100% exposure to sub-A paper and the highest yield.

I like XSH's position on that grid; it's near the left of the graph. It has a bit more risk and bit more reward than the conservative corp bonds, but nowhere close to the junk bonds. It's just a spot that I like on the corporate risk/reward spectrum.


----------



## james4beach (Nov 15, 2012)

The yield-to-maturity of XSH is now *2.0%*. That seems pretty attractive for a short-term bond fund (avg 3 year maturity, effective duration 2.77), I'm buying more.

For instance XSB and VSB have the same maturity/duration, but their yields are much lower at 1.3% and 1.2% respectively


----------



## leoc2 (Dec 28, 2010)

I'm in ... Thanks James...greetings from a resident of Niagara.


----------



## james4beach (Nov 15, 2012)

Just beware, XSH has lower credit quality than XSB. So it is a bit riskier, and that's why it has a higher yield.

I grew up in Niagara! Nice place to live, isn't it?


----------



## leoc2 (Dec 28, 2010)

Yes....


----------



## agent99 (Sep 11, 2013)

james4beach said:


> Just beware, XSH has lower credit quality than XSB. So it is a bit riskier, and that's why it has a higher yield.


2% sheesh! Can't understand buying XSH (or any of those bond funds, for that matter). Instead of XSH, why not buy a basket of corporate bonds or convertible debentures? Or even split preferreds with a fixed maturity? Not hard to get more than double the yield of XSH, probably at about same risk? And little to no chance of capital loss. YMMV.

But of course, everyone has a different view . My aim is to have portfolio yield that exceeds our withdrawal rate (well into retirement). Worked out so far!


----------



## james4beach (Nov 15, 2012)

agent99 said:


> Instead of XSH, why not buy a basket of corporate bonds or convertible debentures? Or even split preferreds with a fixed maturity?


Basket of corporate bonds? XSH is a basket of corporate bonds. If you're talking about stuff like XCB, those have average maturities of 10 years ... way more price volatility and risk than XSH.

Split preferreds? I don't understand them fully so I won't buy them.



> Not hard to get more than double the yield of XSH, probably at about same risk?


You think you can get 4% yield with risk that's equivalent to 3 yr mostly A paper? Can you give an example of a corporate bond you think accomplishes that?


----------



## james4beach (Nov 15, 2012)

agent99 said:


> My aim is to have portfolio yield that exceeds our withdrawal rate (well into retirement). Worked out so far!


So basically, the central bank has forced you to chase yield and accept more risk than you'd otherwise take. Make sure you send Mr. Carney a postcard


----------



## james4beach (Nov 15, 2012)

james4beach said:


> *(back on 2015-11-20)* The yield-to-maturity of XSH is now *2.0%*. That seems pretty attractive for a short-term bond fund (avg 3 year maturity, effective duration 2.77), I'm buying more.


XSH has performed amazingly well. Since this post of mine in November, it's a 1.64% total return or *3.1% return annualized*. Just crazy; these are short term bonds but this is twice the return of XSB in the same period!

I still plan to buy more XSH in the future but I'm going to sit and wait in HISA right now


----------



## hollyhunter (Mar 10, 2016)

XSH.TO has been showing support at 19.66 and resistance at 19.80. From the relationship between price and moving averages; we can see that: it is NEUTRAL in short-term; and BULLISH in mid-long term.


----------



## humble_pie (Jun 7, 2009)

hollyhunter said:


> XSH.TO has been showing support at 19.66 and resistance at 19.80. From the relationship between price and moving averages; we can see that: it is NEUTRAL in short-term; and BULLISH in mid-long term.



they do say that standard technical analytics on an ETF - especially a short-term bond fund - are somewhat meaningless though


----------



## james4beach (Nov 15, 2012)

Yeah I'm also doubtful of technical analysis on a bond ETF.

I just watch the YTM both of a bond fund, and of the bond market in general. As it fluctuates over time, I try to buy debt when yields are on the high side -- assuming it's debt I want to buy anyway. This is totally analogous to more aggressively buying stocks at times the market is depressed (again assuming you are going to buy stocks anyway over time).

This is what led me to the good entry point on XSH ... I could see that the YTM was significantly higher than XSB's at the time. Indeed that turned out to be a great buying point!

I apply the same logic when looking at GICs vs corp bonds vs government bonds. They don't all move in lock step, so at any given time one of them tends to be a better deal than the others


----------



## james4beach (Nov 15, 2012)

This thing continues to be a real winner. Although I still heavily use GICs, I'm increasingly thinking short term corp bonds may be a great place to park my cash component long term. Just beware that the ETF causes very large distributions and is very tax inefficient in a taxable account.

Here are the last few annual returns of XSH:


```
2012:  3.79%
2013:  2.23%
2014:  3.39%
2015:  2.62%
2016:  2.17%
```
And the last 1 year's return is 2.74%.

XSH is steadily beating XSB over the years, which I find very interesting. Perhaps when the economy slows down and credit risk rises, the reverse will be true? Any thoughts from others?


----------



## james4beach (Nov 15, 2012)

Yield on XSH has increased with this recent rate hike. The YTM is now 2.31%, subtract 0.10% MER and the *expected yield = 2.2%*. That 2.2% is still quite a bit higher than you get in VSB/XSB. There are some troubled banks with GICs that yield that much, but XSH is liquid (unlike a locked in GIC).

Trailing performance is available here, and shows performance up to yesterday.

Yes, the price fell with the recent rate hike, but notice that year-to-date return is still positive +0.12%, and the one year return is also positive +0.96%

It's hard to not like this! Warning, XSH (all corporates) is still riskier than short term bond ETFs with higher quality bonds. That's why it returns more!


----------



## james4beach (Nov 15, 2012)

XSH had a pretty rough drop in the recent credit market event, due to its heavy exposure to corporate bonds. To check up on its performance, I looked at XSH returns versus PSA, which holds cash at credit unions. Here is how they stack up, with annualized return figures from Morningstar as of May 5:

1 year: XSH = 3.51% , PSA = 1.96%
3 years: XSH = 2.28%, PSA = 1.70%
5 years: XSH = 2.38%, PSA = 1.43%

So there's definitely a performance advantage of short term corporates versus cash, as there should be. But that comes with more risk and volatility.

Today, XSH's yield to maturity is 2.01%, subtract 0.10% MER, leaving you with 1.91% expected performance going forward roughly 3 years.

PSA/cash rate is 0.65%. So it looks to me like at current prices, XSH offers a pretty significant performance over cash, assuming we don't have another crisis in corporate bonds.


----------



## james4beach (Nov 15, 2012)

The XSH yield to maturity is now *2.3%*

That's pretty amazing! It's higher than any high interest savings account. Even if the Bank of Canada raises rates a couple times, HISA rates still wouldn't be anywhere close to 2.3%


----------



## Covariance (Oct 20, 2020)

james4beach said:


> The XSH yield to maturity is now *2.3%*
> 
> That's pretty amazing! It's higher than any high interest savings account. Even if the Bank of Canada raises rates a couple times, HISA rates still wouldn't be anywhere close to 2.3%


True, but the price of XSH will drop if rates or credit spreads go up. And that offsets some of the return.


----------



## james4beach (Nov 15, 2012)

Covariance said:


> True, but the price of XSH will drop if rates or credit spreads go up. And that offsets some of the return.


You're right about the credit spread risk. But with interest rate changes, you'll be fine if your holding period is on par with the average maturity of the portfolio. If you're buying XSH you should expect to hold it for at least 2-3 years.

And in roughly 3 years, you are going to get close to 2.3% yield. That's net of the price change and coupon payments.

But yeah over a shorter period like 1 year, you absolutely could get a net loss. This is why it's important to match your bond ETF to your time horizon.


----------



## Covariance (Oct 20, 2020)

james4beach said:


> You're right about the credit spread risk. But with interest rate changes, you'll be fine if your holding period is on par with the average maturity of the portfolio. If you're buying XSH you should expect to hold it for at least 2-3 years.
> 
> And in roughly 3 years, you are going to get close to 2.3% yield. That's net of the price change and coupon payments.
> 
> But yeah over a shorter period like 1 year, you absolutely could get a net loss. This is why it's important to match your bond ETF to your time horizon.


False comfort in this environment. Yes, if there is a one time change in yields (subject to other assumptions) the investor makes the yield to maturity if held for the full duration. But if there is another move in the rate the clock starts over. And again and again. A continuously upward shifting yield curve keeps pushing out the timeframe one must hold. It’s essentially the opposite of why bond funds did so well as rates went down.


----------



## james4beach (Nov 15, 2012)

Covariance said:


> But if there is another move in the rate the clock starts over. And again and again. A continuously upward shifting yield curve keeps pushing out the timeframe one must hold. It’s essentially the opposite of why bond funds did so well as rates went down.


I don't see that all in my modeling. In fact if you pull up some of the really old bond funds from 1965 or so, you can look at their forward performance. Even with steadily rising interest rates they showed solidly positive returns from 1965-1980.

Bond funds were a fine investment from 1960 (can't remember the starting point) to 1980 even as interest rates went from close to zero up to like 15%. Lots of pain in the short term yes, but overall, a positive return, that exceeded cash.

But I do share your concern and I've reduced my average maturity in my own fixed income. I do have XBB at 10 years maturity, but have GICs in there as well, bringing my weighted average maturity down towards 7. I believe I will have good, positive returns with my time frame of > 10 years.

For someone in XSB or XSH, I think it's extremely likely they will have positive returns in a ~ 5 year timeframe. It's not guaranteed of course.


----------



## Covariance (Oct 20, 2020)

james4beach said:


> I don't see that all in my modeling. In fact if you pull up some of the really old bond funds from 1965 or so, you can look at their forward performance. Even with steadily rising interest rates they showed solidly positive returns from 1965-1980.
> 
> Bond funds were a fine investment from 1960 (can't remember the starting point) to 1980 even as interest rates went from close to zero up to like 15%. Lots of pain in the short term yes, but overall, a positive return, that exceeded cash.
> 
> ...


I would caution against using historical performance for a number of reasons. But probably the most straight forward is nterest rates are substantial different today. The impact of a price change on a bond’s total return is not comparable when the coupon interest is so low.


----------



## james4beach (Nov 15, 2012)

Covariance said:


> I would caution against using historical performance for a number of reasons. But probably the most straight forward is nterest rates are substantial different today. The impact of a price change on a bond’s total return is not comparable when the coupon interest is so low.


It's true that bond coupons are low today, but why would there be no historical precedent?

Situations like today's do exist in historical data. The 10 year treasury yield during WWII was just 1.7% and was still near 2% in the early 1960s. Today's 10 year bond yield is also around 2% which really isn't too different. Our situation today isn't unprecedented, and we can look at the past performance.

When the Treasury issues bonds, the coupons are set to the prevailing interest rates at the time. I don't know what the coupon yields would have been back then but I don't see any reason to think they wouldn't be comparable to our modern situations. Both the Fed/cash rate and the treasury yields are the same as today.

Take a look at Damodaran's historical data source. There you will find the annual change in the US T Bond, referring to the 10 year treasury bond, total return.

Example 1: How about starting in 1940, when treasury yields were the same 2% as today. Just look at 1940 through to 1980, that's a period where rates *started at the same level as today*, and went insanely higher. This is pretty much the worst case scenario. The annualized return over this 40 year period was 2.6%. Certainly not a high return, but it's no disaster either.

Example 2: another relevant period, 1950-1960. In this 10 year period, interest rates went from 2.3% (similar to today) up to 4.7%. The annualized return works out to 1.8%

These returns aren't high, but they are positive.


----------



## Covariance (Oct 20, 2020)

james4beach said:


> It's true that bond coupons are low today, but why would there be no historical precedent?
> 
> Situations like today's do exist in historical data. The 10 year treasury yield during WWII was just 1.7% and was still near 2% in the early 1960s. Today's 10 year bond yield is also around 2% which really isn't too different. Our situation today isn't unprecedented, and we can look at the past performance.
> 
> ...


You are correct of course, there have been periods of history where rates were low and even lower. However, that is not a guarantee in which one should put their blind faith.

When coupon interest is low, mathematically the total return is more dependent on any change in the price of the bond (which in turn is dependent on a change in the reference rate). Hence during such periods of low coupon interest and rising rates (driving down bond prices) one is at greater risk to their total return and should exercise caution.


----------

