# XBB is overvalued? Fees too high?



## james4beach (Nov 15, 2012)

I'm scratching my head regarding a comparison between two long-term bond instruments I'm looking at.

XBB yield to maturity is listed at 2.40% which is the correct way to measure yield on a bond fund, since it balance out high coupons with capital loss at disposition. Subtract the MER of 0.33% and you get a *net yield of 2.07%*

So that's XBB with approx 30% corporate bonds and average maturity 9.6 years.

Now at the broker, I get a quote for a Government of Canada bond (June 2022) and that works out 2.0% yield net of fees. That's a very similar maturity, 9.5 years out, but of course it doesn't have any of the riskier provincial or corporate exposure. The government bond is very liquid and even better, the broker treats it as 90% cash due to its quality as ultimate collateral.

I find it really surprising that the yields are virtually identical (within 0.10%) when XBB has more credit risk than a pure government bond. What does this indicate? Is XBB overvalued, or perhaps this illustrates the MER is too high?


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## andrewf (Mar 1, 2010)

XBB is more liquid. But other than that, XBB's credit premium gets gobbled by iShares. Personally, I think 0.33% MER is too high by half. It should be 0.15% or less.


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## james4beach (Nov 15, 2012)

OK that was my sense too... you can more easily trade out of XBB at tight spreads (the plus) but the MER is pretty huge, gobbling up all credit risk premium (the minus)

At current interest rates I agree that 0.33% MER is way too high. This is why I have basically been buying either individual bonds or GICs instead of the bond funds.


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## james4beach (Nov 15, 2012)

For comparison, when I buy Government bonds directly at the discount brokerage I'm only paying between 4 and 8 basis points of yield as a fee, versus 33 basis points on XBB. Assuming I'm doing an apples-to-apples comparison there, it's no contest ... that's like 80% lower fees than the ETF.


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## OptsyEagle (Nov 29, 2009)

I would go with whatever is easiest. When it is all said and done, you are going to make around 2 percent, plus or minus some measuring error. That's how I would think about it.


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## andrewf (Mar 1, 2010)

The bond market is shifting. Supposedly brokers and investment banks are reducing their inventories of bonds, and thus spreads will widen. Exchange traded funds will continue to make inroads with institutional investors looking to get away from managing hundreds or thousands of bonds. I think the declining maturity bond funds (that mature in a particular year) are part of this shift.

MERs should be crushed away to nothing, though, once there are several multi-hundred billion $ AUM bond funds. 0.05% MER on $100 billion is $50 million per year.


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