# Best Short Term Bond ETF



## LongLiveTheMonarchy (Mar 20, 2014)

Which ETF do you prefer for short term bond exposure? I noticed that CBO (iShares' 1-5 Year Laddered Corporate Bond Index Fund) and XSB (iShares DEX Short Term Bond Index Fund) are quite popular on this forum, despite the fact that they have higher MERs than either Vanguard's VSB (Canadian Short-Term Bond Index ETF) or VSC (Canadian Short-Term Corporate Bond Index ETF). 

Also, is there any real benefit to CBO's laddered approach to short term bonds, or should I just go with the ETF with the best combination of yield to maturity and MER?

Thanks!


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## Soon Forget (Mar 25, 2014)

*Canadian Short Term Bond Fund comparison*

Hi, I've been looking at short-term bond funds recently too. Here's some comparison info I took from their websites this morning:


Fund Mgt Fee MER YTM Avg Duration Holdings

CLF 0.15 0.17 1.44% 2.61yrs 100% Gov't, laddered

XSB 0.25 0.28 1.62% 2.75yrs ~60% Gov't, 40% Corp
VSB 0.15 0.17 1.50% 2.7yrs ~50% Gov't, 50% Corp

CBO 0.25  0.28 1.96% 2.65yrs 100% Corp, laddered
XSH 0.12 unlisted 1.99% 2.75yrs 100% Corp
VSC 0.15 0.17 2.00% 2.7yrs 100% Corp



With yesterday's cutting of BlackRock's fees, it looks like XSH might now be the best (cheapest) all-corporate short term bond fund.


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## james4beach (Nov 15, 2012)

Reviving this thread. I don't think cheapest is necessarily "best", there are many dimensions to these. Here are my favourites (for performance look at NAV return)


*XSB*: 0.28% MER, 63k average volume. 3 year avg return 2.47%. Credit quality 90% in A's, 10% BBB, nothing below.

*VSB*: 0.15% MER, 36k average volume. 3 year avg return 2.51%. Credit quality 92% in A's, 7% BBB. About the same as XSB except much less liquidity/volume.

*XSH*: 0.14% MER, 28k average volume. 3 year avg return 3.31%. Credit quality 72% in A's, 24% BBB, 4% below. This is quite a different risk profile.


XSB is still my favourite. It performs imperceptibly worse than VSB but the higher daily volume, and better liquidity is much more important. I also like that it's a well established, much larger fund with about 4x the assets as VSB. With lower fees in VSB, I'd expect higher performance... but it doesn't achieve that. So what's the point of VSB?

XSH intrigues me. It's riskier; while the others are heavy in government bonds (and practically guaranteed to retain their value in a 3 year span), XSH has no government bonds and instead is heavy in bank sector debt. But it's the only short term bond ETF that has a better yield than GICs. The daily volume is also worse, of course. I would expect XSH to post higher returns unless we get a Canadian banking sector crisis. In such a crisis, debts of these banks & financial companies (like GE Capital) could plummet. While XSB & VSB will never lose significant value due to defaults, XSH might. Then again... with such a short term, it would also be buying new debts at great yields.

Thoughts?


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## thepitchedlink (Feb 17, 2014)

VSB is the one that I'm holding right now....but I'll look at XSB here


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## james4beach (Nov 15, 2012)

Any thoughts on XSH ? How risky does it seem? The yield is awfully good for short term bonds


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## Moneytoo (Mar 26, 2014)

The only thing I like about *XSH* is that it has "Additional layer of diversification through maple bonds (foreign bonds denominated in Canadian dollars)" But YTM 1.60% - MER (I'd guess about 0.15% since management fee is 0.12%) would give a yield of 1.45% - same as People's Trust HISA (and 1% less than their 2 and 3 year 2.45% GICs...)


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## james4beach (Nov 15, 2012)

That's a good point, but isn't that still higher than the YTM of other short term bond ETFs?


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## Moneytoo (Mar 26, 2014)

BMO Ultra Short-Term Bond ETF (ZST) - same yield, shorter duration:

Weighted Average Yield to Maturity (%)	1.66%
Weighted Average Duration (yrs)	0.60
Maximum Annual Management Fee	0.150%

But if I absolutely had to have short-term bonds ETF (I don't - happily sold CLF last year and CBO this year ), I'd probably go with BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF (ZSU) - but for now waiting for the US rate hike and want to see how mid-term ZIC will react...


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## dime (Jun 20, 2013)

All it takes is to have a market correction to remind you why holding bonds are important! But with the threat of rising rates ahead and not wanting to hold a duration that could drop significantly when rates rise, the shorter end of the curve seems to make the most sense to me. The challenge is to find the 'sweet spot' where you earn enough to make it worth while without being exposed to interest rate risk going forward. 




@ Moneytoo... I looked at a chart for ZST and did a double take... it's steadily declining. Down about 2.25% year to date. Something doesn't seem right with that. 



XSH looks good but after the MER is deducted from the YTM you're left with 1.43%. Not very compelling. 

PSB has a 3.2 duration 1.88 YTM after fees is 1.6% Morningstar gives this a 5 star rating

XCB has a YTM of 2.37, so after fees is 1.91% which is a bit better. It has a duration of 6 and is BBB credit or higher. 

ZCM leaves you with 2.22% with YTM of 2.56 and MER of 0.34 duration is also 6.

I assume this means an investor could expect the ETF to drop 6% when rates eventually rise 1%? How long would this take to recover? Hopefully not a duration of 6 years!?



XIG is interesting for BBB US corp credit (although not short term). Its YTM is 3.75, duration 8, but yield is 2.77. Rates haven't risen in the US yet but this somehow has a duration higher than the current yield. Can anyone clarify this further?


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## GreatLaker (Mar 23, 2014)

dime said:


> ZCM leaves you with 2.22% with YTM of 2.56 and MER of 0.34 duration is also 6.
> I assume this means an investor could expect the ETF to drop 6% when rates eventually rise 1%? How long would this take to recover? Hopefully not a duration of 6 years!?


This is a good (but detailed) paper from Vanguard on the effect of interest rate fluctuations on bond prices, particularly how long it takes to recover from higher rates:
Risk of loss: Should the prospect of rising rates push investors from high-quality bonds?

Here is a shorter one from CCP:
How Changing Interest Rates Affect Fixed Income


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## Moneytoo (Mar 26, 2014)

dime said:


> All it takes is to have a market correction to remind you why holding bonds are important!


Why? I see bonds as a waste of cash that can be easily deployed during the correction. Especially short term ETFs that yield next to nothing - useless even for those who need income...

But gold (in CAD) held up surprisingly well. We have 4% in CAD gold bullion ETF - if it goes up some more, we'll start selling it to buy more equity ETFs.


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## dime (Jun 20, 2013)

@greatlaker Thanks for the informative material and taking the time to share.

@Moneytoo We're looking at the same thing... agreed it's ideal to deploy funds at the bottom of a correction. But the challenge is knowing when this moment in time is. Investors who tried to 'buy the dip' yesterday may likely see losses as the market continues it's rapid decline into the next few months. 


What I was considering yesterday was how I'm glad I've been holding some short term bonds because it lowers the overall portfolio risk and volatility. The market drop impact on my portfolio was far less than it would have been because I was holding short term bonds. As opposed to buying equities for the past few months, holding cash has been good to avoid capital losses the past months.. 

But there's no yield on holding cash. My aim to to ensure the $ will appreciate with inflation over a 2-3 year period. Ideally I could at least be keeping pace with inflation on that cash with some kind of yield over the past few months. Also to consider is that this is for my TFSA so I retain the full yield (as opposed to buying bond ETFs in a taxable account).

The difficulty now is knowing when we've reached bottom, and a sane moment to start deploying cash to buy equities. The indexes could continue to sell off into a deeper correction through the fall. The Dow is now more than half way into a 10% correction as is the NADAQ. The S&P has further to go. It wouldn't surprise me in the slightest if the market indexes drop further than 10% from the year highs as the situation is not looking good. China reported the lowest PMI data since 2009, indicating global growth is declining. 


It has been nice to see gold performing it's job again lately as a 'safe haven'. For quite some time there the situation on gold was doubtful. 

As always portfolio diversification across asset classes is key for risk management. I believe bonds will continue to play a role, even if it's on the shorter end of the curve and rates remain "lower for longer".


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## dime (Jun 20, 2013)

With the all the risk in equities I put a chunk of spare cash into CBO yesterday. I lowballed my bid on CBO and it actually filled. With such a low yield on these funds I want to buy in as low as possible. 

A thought on buying bond ETFs is to pay attention to the xdiv date. Yesterday was the day after the xdiv on XSH and CBO. XSH is the lowest volume so I went with CBO for the highest liquidity. 

Both XSH and CBO were lower yesterday than the other short term bond ETFs which will have their exdiv today and tomorrow. If you take the yield and divide it over 12 months it gives you an idea of what kind of drop to expect in the unit price. CBO fell as much as 0.72% the day after it's exdiv, to reach the a lower trendline. By drawing a lower trend line on the CBO chart gave me a decent idea of where to put my bid (19.40) and it dropped to 19.38 and then recovered 19.40 by the close. 

Note that the YTM and yield data from the Ishares / BMO / Vanguard sites are delayed so you don't have an accurate picture of what the yield actually is at current market price. 

The Aug distribution for CBO is 0.55 which is quite a bit lower than previous monthly distributions. Annualized (0.66) at a price of 19.40 this gives an estimated yield of 3.4% tax free in my TSFA
I expect the fund price and distribution to continue to slide going forward, which will I expect will eventually result in a YTM closer to 1.58.

I fully expect rates to remain low for some time ahead considering the bloodbath in stock markets the past few days.


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## james4beach (Nov 15, 2012)

I expect negative interest rates coming, at least for short maturities. This has already happened in Switzerland and Germany.


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## dime (Jun 20, 2013)

james4beach said:


> I expect negative interest rates coming, at least for short maturities. This has already happened in Switzerland and Germany.


Wouldn't that be from the QE where the European central bank is buying up the treasuries... Do you think we're going to see that happen in Canada?


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## james4beach (Nov 15, 2012)

TomB19 said:


> XSB is quoted as yielding 2.39%. Using a future value calculator, it should produce 13% over 5 years.
> 
> You've just indicated it yielded 6.5% in the last 5 years. That's half.


_Today_ its portfolio yields 2.39%. That's not what the yield to maturity (YTM) was at the start of the time frame -- it was lower. Bond funds return approximately the YTM at the time of purchase (less MER), in the time frame of the fund's average maturity. For XSB, you have to look approximately at a 3 year period (the fund's average maturity).



TomB19 said:


> Was XSB yielding that much less over the last 5 years than it does now? No. It was actually yielding more 5 years ago than it is now, so the discrepancy is even larger than I've indicated.


I don't know about 5 years ago, but the closest data point I could find to 3 years ago -- to match the fund's average maturity -- is this old thread from 4 years ago: http://www.canadianmoneyforum.com/showthread.php/17736-Best-Short-Term-Bond-ETF

We're given a data point there. On 2014-03-25 the XSB yield to maturity was 1.62% and the MER was 0.28%, quite high back then. The approximate forward return forecast would have been 1.62% - 0.28% = 1.34% annualized, over 3 or so years.

Plugging that start date into stockcharts or the iShares fund performance page, we see that XSB has returned a cumulative total of +4.9%. This was 4.16 years ago. Convert this number to an annualized rate of return, which is = 1.049^(1/4.16) - 1= 1.16%

Forecasted return at purchase time = 1.34%
Actual return since 2014 was = 1.16%

OK, so I agree with you that XSB has disappointed and returned less than the expected yield. Back in 2014, it was forecasted to return 1.34% annually going forward. But in reality it only returned 1.16%.

That's 87% of the forecasted return though, not half as you said. Those are just forecasts and 87% is quite close to the forecasted return, well within normal. There are other periods in which XSB returned more than the forecast.

I don't see a problem Tom. XSB returned a bit less than its calculated approximate future return. It's not dramatically less.


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## james4beach (Nov 15, 2012)

And as of today...

XSB return estimate is the YTM 2.43% - MER 0.10% = 2.3% annual return over about 3 years.
XBB return estimate is the YTM 2.81% - MER 0.10% = 2.7% annual return over about 10 years.

These yields might change Wednesday when the BoC has its next interest rate decision.


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