# HBB and VAB adapting Couch Potato portfolio



## MyWallet (Sep 24, 2014)

Hello,

I've built a portfolio with Couch Potato Model (option #4) from there: http://canadiancouchpotato.com/model-portfolios/
I was waiting to purshase the bond part of my portfolio and I think it is a good moment now.
However the bonds ETF would be held in the non registered account. Originally I was planning on 40% of VAB.TO as per model. However after having read the article about swap bonds, I'm now thinking about the HBB:
http://canadiancouchpotato.com/2014/11/19/ask-the-spud-bond-etfs-in-taxable-accounts/

The question is the following:
Is this a good idea to replace VAB by HBB completely? If partly should be it 50-50 split between VAB and HBB? Some other ideas?

Thank you,


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## andrewf (Mar 1, 2010)

An option is also to keep part of the bond allocation in a GIC ladder for better tax efficiency and yields.


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## GoldStone (Mar 6, 2011)

HBB
http://www.horizonsetfs.com/pub/en/etfs/?etf=HBB&tab=overview

VAB
https://www.vanguardcanada.ca/individual/etfs-detail-characteristics.htm?portId=9552

Open two pages side by side. Compare key characteristics carefully to make sure you understand the differences between two bond portfolios.

At a quick glance, they look very similar to me.

Average duration: 7.21 vs 7.5
Yield to maturity: 2.28% vs 2.2%
Average coupon: 3.67% vs 3.6%

AAA rating: 46.57% vs 48.1%
AA rating: 36.76% vs 32.9%

Federal Govt: 42.10% vs 30.1%
Provincial: 29.97% vs 37.3% 

It's not a good idea to own VAB in a taxable account. If you are set to keep fixed income in a taxable account, 100% HBB is better than a split between HBB and VAB.


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## larry81 (Nov 22, 2010)

Absolutely, you should use HBB for all fixed income held in a non-registered account.

For fixed income held in a registered account, VAB could be used.

disclosure: I am in a similar situation and this exactly what i do


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## larry81 (Nov 22, 2010)

andrewf said:


> An option is also to keep part of the bond allocation in a GIC ladder for better tax efficiency and yields.


From my understanding, owning GIC's is not more tax efficient than HBB.


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## larry81 (Nov 22, 2010)

MyWallet said:


> Hello,
> 
> I've built a portfolio with Couch Potato Model (option #4) from there: http://canadiancouchpotato.com/model-portfolios/


Wondering why u picked this over the "Complete Couch Potato" ? Any reasoning (minus RRB) ?


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## MyWallet (Sep 24, 2014)

Thank you for the answers.
For the GIC ladder I think it would be slightly different from Couch Potato portfolio and I would like to stick closer to it.
So if understand correctly picking 100% of HBB wouldn't be a bad idea. I will probably go for it so.
(To larry81) I didn't pick the complete one because of the brockerage fees. Since I plan to invest each 3 month I thought that having less ETF to buy will save some on fees.
Also I'm starting in ETF so I decided to have less ETFs. Maybe in future with confidence I'll go for more complex portfolio. Do you own the complete one with HBB as bond parts?


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## GoldStone (Mar 6, 2011)

Good idea to keep it simple. Simplicity is the ultimate sophistication.


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## larry81 (Nov 22, 2010)

I own the complete couch potato without the Real Return bonds and i use HBB for all my fixed income. Like you, i minimise my costs and i use a grand total of 5 ETF's: VCE, VTI, VXUS, HBB, ZRE.

Two tings that i would suggest you look into:

1. Depending of the size of your portfolio, consider adding some REIT (probably should be considered if your portfolio is >100k)
2. XEF is less diversified than VXUS, there no Canadian domicilied ETF equivalenet but you should look to supplement your international equities with emerging markets by using XEM

While a 4 ETF portfolio is fantastic, a portfolio using the right 5-6 ETF's could add add a lot of diversification but would be more complex/expensive to manage. If you want extreme simplicity you could use a 3 ETF's portfolio: VCE, VXC, HBB


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## MyWallet (Sep 24, 2014)

Thanks again for the advices. My portfolio is currently less than 100k. But I'll definitely look to add some of the REIT to it.


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## kitbuilder (Aug 15, 2013)

MyWallet said:


> However the bonds ETF would be held in the non registered account. Originally I was planning on 40% of VAB.TO as per model. However after having read the article about swap bonds, I'm now thinking about the HBB:
> http://canadiancouchpotato.com/2014/11/19/ask-the-spud-bond-etfs-in-taxable-accounts/
> 
> The question is the following:
> Is this a good idea to replace VAB by HBB completely? If partly should be it 50-50 split between VAB and HBB? Some other ideas?


Why does your 40% Canadian bond allocation need to be in a non-registered account?

Also, just curious as to why you're not considering ZDB.TO after reading the Canadian Couch Potato article at http://canadiancouchpotato.com/2014/11/19/ask-the-spud-bond-etfs-in-taxable-accounts/?

Personally, I would avoid HBB.TO due to its swap structure/counterparty risk and its vulnerability to legislation that could eliminate its tax-advantaged characteristics. Legislation in 2013 effectively ended the iShares Advantaged ETFs that had been originally launched by Claymore. Seeing that HBB.TO started trading only this year, I don't think I'd feel comfortable owning such a product, especially in a non-registered account where liquidation could trigger an accumulated, unplanned tax bill.

You're probably familiar with these articles, but I'll post them here just in case you haven't seen them before:

http://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
http://canadiancouchpotato.com/2012/09/20/foreign-withholding-tax-which-fund-goes-where/
http://canadiancouchpotato.com/2014/08/13/managing-multiple-family-accounts/

In terms of some other ideas, I realize that preferred shares are not of the same quality as bonds and are certainly not a substitute for bonds, but have you considered owning a portion of your fixed income allocation as CPD.TO in your non-registered account to get income in the form of tax-efficient eligible dividends? The remainder of your fixed income allocation would be in your registered account.

In summary though, if RRSP is an option, I'd fit as much of the bond allocation in the RRSP as possible using VAB.TO, with the remainder as either ZDB.TO or CPD.TO in the non-registered account, according to risk tolerance. If possible, I'd try to move equities out of the RRSP to another account to provide room for the 40% bond allocation in the RRSP. If RRSP were not an option, I would likely split between ZDB.TO and CPD.TO in the non-registered account, again, according to risk tolerance. I'd leave TFSA for growth assets.


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## MyWallet (Sep 24, 2014)

Thanks kitbuilder. You’re right I’ve also considered the ZDB.TO. However after having read another article on the Couch Potato where one of the financial advisors was saying he owns HBB, I went with HBB.
I’m afraid I’ve read your comment too late. I’ve purchased the HBB this morning at the exchange opening.
The reason I don’t have a RRSP is because currently I have a status that allows me to have a partial provincial tax refund. I have still 2 years remaining of this advantage and as such the RRSP would lead to a loss.
I filled up my TFSA and figured out that It would be better to me to tax shelter the ETFs generating more gains such stock ETFs. This way I ended with owning bonds in my non registered account.
When I’ll open RRSP I’ll probably move to the bonds that you suggest.


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