# VAB, VSB or VSC?



## Belguy (May 24, 2010)

For a long term hold in the fixed income component of your portfolio, if you had to choose just ONE of only the following bond ETF' s, at this moment in time, which one would you choose and why or does it really make much difference?

VAB- Vanguard Canadian Aggregate Bond ETF.
VSB- Vanguard Canadian Short Term Bond ETF
VSC- Vanguard Canadian Short Term Corporate Bond ETF


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## AltaRed (Jun 8, 2009)

For a long term hold, pick a medium* term duration of 5-7 years. Any interest rate sensitivity is overcome by the time one holds the ETF for the length of its duration. FWIW, none of those you propose have a current effective yield (YTM - MER) that beats a 5 year GIC ladder.

Added: Check Hank Cunningham's website to see what he has to say, but not so long ago (last year?), the 'sweet spot' in bonds was in the 6-7 year range (balance of return vs interest rate volatility).


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## Moneytoo (Mar 26, 2014)

Not VAB because this article made sense to me: http://www.moneygeek.ca/weblog/2013/06/01/open-challenge-canadian-couch-potato/

"The dumbest investment you know, in my view, is a long-term government bond" - Warren Buffett, March 4, 2013

BTW, there seems to be something wrong with YTM calculations. Say 2 years ago ytm on cbo (short term corporates, similar to vsc) was 2.34%. Yet today its 12 months trailing yield is 4.30%. The distributions we're getting definitely yield above 4% (if prorated for a year), and it's trading higher than when we bought it. So if we were to sell the shares now - we'd make a small profit.

I.e. it looks to me that (YTM - MER) does not truly reflect what you're gonna get when investing in Bonds ETF - but I don't have enough experience yet to argue with the pros


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## AltaRed (Jun 8, 2009)

Trailing yield (which means coupon yield) over the past 12 months is a meaningless number. And no, YTM is not calculated incorrectly.

It does not matter what your distributions are today. When the coupon yield of the bonds currently in the ETF is mixed with the capital losses that occur as a result of maturing premium bonds (priced >$100 today) between today AND the maturity date of the ETF (over the next 7 years), your effective yield is YTM (less MER) as the fact sheet says. If you held on to that bond ETF for 7 years, you will get YTM-MER in your pocket for that 7 year period. Granted the ETF is not static, so YTM will gradually change monthly/quarterly/annually as bonds are cycled in and out of the ETF.


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## Moneytoo (Mar 26, 2014)

AltaRed said:


> Trailing yield (which means coupon yield) over the past 12 months is a meaningless number. And no, YTM is not calculated incorrectly.
> 
> It does not matter what your distributions are today. When the coupon yield of the bonds currently in the ETF is mixed with the capital losses that occur as a result of maturing premium bonds (priced >$100 today) between today AND the maturity date of the ETF (over the next 7 years), your effective yield is YTM (less MER) as the fact sheet says. If you held on to that bond ETF for 7 years, you will get YTM-MER in your pocket for that 7 year period. Granted the ETF is not static, so YTM will gradually change monthly/quarterly/annually as bonds are cycled in and out of the ETF.


What if I bought the CBO shares last June and sold them tomorrow? *The share price went up 2.89% in a year, trailing yield is 4.30% - woukd i have made more than 6% over a year? And why would I care about YTM if I sell it before the averaged maturity?* (As it's the laddered ETF ) 

I'll have to wait and see I guess, and do the math after - but I think YTM is much less than real returns.


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## Belguy (May 24, 2010)

I was just comparing XSB with VSB and was a little taken aback when comparing the assets under management. XSB is a much larger fund. Is that simply because it has been around longer or does it have some other inherent advantages over VSB? I note that the management fee is lower for VSB and so one might think that would give it an advantage when fees matter more than ever. Any thoughts?


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## Belguy (May 24, 2010)

Thanks Moneytoo for the interesting link!


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## leeder (Jan 28, 2012)

@ Belguy: It depends on what your definition of a long-term hold is. If you plan on holding and not selling your bond investment as long as the duration of the bond ETF (or longer), then I would go with VAB. It is the most diverse and holds both government and corporate bonds. If you have a short time horizon and can tolerate minimal risk, I would go with VSB. It primarily holds government short-term bonds. The chances the government goes into default is low and, therefore, they can pay the face value on maturity date. If you have a short time horizon and can tolerate slightly more risk, then go with VSC. It has a higher YTM than VSB; however, that's the slight premium you get for the slightly more risk you assume.


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## Belguy (May 24, 2010)

I turned 71 this year and this investment will be in a RIF from which I must make annual withdrawals. The bond portion is only meant to add stability to my portfolio. I am currently invested in VSB and so, if there is no compelling reason to change, that's where I will probably stay. In another thread, the consensus was to go with a ladder of GIC' s instead but I just don't like locking money up no matter how irrational that may be.

I have, however reconsidered my asset allocation and have decided to change it from 10/60/30 to 10/50/40 cash/bonds/equities.


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## leeder (Jan 28, 2012)

I do agree with the consensus in that you might be better off with a GIC ladder. The return with a GIC ladder may be greater than the short-term bond returns. The YTM of VSC as at April 29 is 2.0% (per Vanguard's website) less the MER of 0.17%. The net return 1.83% in 2.7 years. Not too long ago, there was one GIC that was offering a 2-year 2.05%. Not to mention, GICs have no risk, whereas bonds and bond ETFs have interest rate risk.

From your posts, I have a concern on your time horizon. In your original post on this thread, you are looking for a "long-term" fixed income component. On the other hand, you are afraid of locking up your money. Locking up your money can represent a long-term view. However, you state you are afraid of locking up your money. Well, do you plan to access it right away? Yes, you're 71 and making RRIF withdrawals. You're most likely to withdraw from your stock component rather than fixed income, right? Most contemporary thought is to de-risk as you age. Maybe you have an irrational fear that the banks would take your money and run? Well, in that case, keep in mind that CDIC insures $100,000 for cash/GIC products.

Ultimately, the choice is yours. There's actually more risk with bonds than GICs. However, if you have a fear of locking up your money, maybe you should consider having a higher % allocated to cash (HISA).


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## Spudd (Oct 11, 2011)

I chose VAB just a few days ago, because the YTM was highest. Since I plan it as a long term hold, that's what matters most to me.


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## AltaRed (Jun 8, 2009)

Moneytoo said:


> What if I bought the CBO shares last June and sold them tomorrow? *The share price went up 2.89% in a year, trailing yield is 4.30% - woukd i have made more than 6% over a year? And why would I care about YTM if I sell it before the averaged maturity?* (As it's the laddered ETF )
> 
> I'll have to wait and see I guess, and do the math after - but I think YTM is much less than real returns.


A person does not buy ETFs for short term holds. You buy on the basis of holding it for the duration (the only true way to 'measure' your decision at the time). True, if you only held for a year, you'd have made out well, but not over 6%. I cannot comment fully on how trailing yield is constructed (don't care actually). However, either the trailing yield includes the capital appreciation and current distribution yield, or again it is based on coupon yield which is meaningless in an ETF of premium bonds at the time. The capital appreciation you cite is simply fortuitous, i.e. reflects judicious timing (June to June) , just as 5 year bond yields were headed up on market sentiment in 2013, and then back down again by this year.


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## Belguy (May 24, 2010)

No it's not a question of any fear that I have about locking money in GIC' s. It's just that I don't want to lock money up as I prefer liquid investments. Over the last several decades, my bond investments have done very well for me and now they will serve to provide a ballast going forward. In short, I am willing to accept a slightly lower return in exchange for not having to lock anything up. Does this make reasonable sense?


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## leeder (Jan 28, 2012)

Fair enough. If GICs are out of the question and stability is what you want, either HISA or a short-term bond index are most reliable.


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## Moneytoo (Mar 26, 2014)

AltaRed said:


> True, if you only held for a year, you'd have made out well, but not over 6%. I cannot comment fully on how trailing yield is constructed (don't care actually). However, either the trailing yield includes the capital appreciation and current distribution yield, or again it is based on coupon yield which is meaningless in an ETF of premium bonds at the time.


*12-Month Trailing Yield*

_The yield an investor would have received if they had held the fund over the last twelve months assuming the most recent NAV. The 12-month trailing yield is calculated by summing any income distributions over the past twelve months and dividing by the fund NAV from the as-of date. This figure is net of management fees and other fund expenses._

I.e. it looks to me that if I calculated this figure using the purchase price - it'd be even higher  The reason I question YTM is because I looked as far as 4 years back (Weighted Average Duration (yrs) for CBO is 2.68) - and every year YTM (future yield?) was much less than the actual 12-Month Trailing Yield (past yield?) Hence my attempts trying to understand what's wrong with my math or their calculations? I mean, why something is constantly expected to yield less than it actually does?

Sorry for questioning things that you take for granted - whether from experience or from reading - but when the numbers don't add up, I want to understand why? 

And I don't see the problem selling CBO shares when the interest rates go up - and buying better-yielding long-term bonds etf at that time. But that's beside the point


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## Soon Forget (Mar 25, 2014)

YTM is the combination of distributions PLUS capital changes held for the duration of the fund. So, if you bought a lump sum of a bond fund and held it for its average duration, reinvesting all distributions along the way, the final value will correspond to the YTM.

The Trailing Yield calcualtion does not take into consideration capital changes that have occurred over the past 12 months. It is simply the total of distributions divided by the CURRENT fund price. If you look at the 5-yr chart of CBO you'll see that its price has declined each year since the beginning of 2010 (with the exception of 2011 where it ended basically flat). So even though the distributions have been higher than another bond fund with a similar YTM, it has suffered more capital losses than the other fund. If held for duration and everything reinvested, both funds would have ended with the same value but taken different paths to get there.


About holding CBO or any other short-term bond fund until rates rise and then swapping it for a longer duration fund... this is essentially just market-timing the bond market. Yes if rates rise tomorrow you could do this and you'd be better off than if you currently held the longer duration fund. But the unknown is WHEN interest rates will rise, because in the meantime you are foregoing a higher YTM. If a rise in interest rates is still years away or happens very slowly then the best result would be from holding the higher duration fund right from the start.


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## AltaRed (Jun 8, 2009)

Moneytoo said:


> [Sorry for questioning things that you take for granted - whether from experience or from reading - but when the numbers don't add up, I want to understand why?


The reason YTM doesn't add up in the way you think it should is because the fund is not static. It is constantly rolling over bonds in the mix, selling out bonds less than 12 months to go and buying bonds on the open market to maintain duration relatively constant. But the fund cannot tell you what the future holds for rolling over bonds. So it has to essentially say... in the event the fund stayed as it is today, you would get a yield of X if held to maturity.

Via Google, I found that Morningstar says it better than I can although SEC yield is not relevant in Canada. http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?id=539553

So... it is likely correct that one's own personal experience over time will be a higher yield over the duration period than the YTM but it is not quaranteed to be so.


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## Moneytoo (Mar 26, 2014)

Soon Forget said:


> The Trailing Yield calcualtion does not take into consideration capital changes that have occurred over the past 12 months. It is simply the total of distributions divided by the CURRENT fund price..


And that's what triggered my question: if the share price went up within a year (not mentioning the DRIP) - then the actual yield is even higher? Doesn't really matter as we bought CBO this April - so by next summer I'll see for myself if it's gonna be 1.5% or 4%+ or something in between And act accordingly 



Soon Forget said:


> About holding CBO or any other short-term bond fund until rates rise and then swapping it for a longer duration fund... this is essentially just market-timing the bond market. Yes if rates rise tomorrow you could do this and you'd be better off than if you currently held the longer duration fund. But the unknown is WHEN interest rates will rise, because in the meantime you are foregoing a higher YTM. If a rise in interest rates is still years away or happens very slowly then the best result would be from holding the higher duration fund right from the start.


What's wrong with timing the market when you know exactly how bonds etfs will react? I posted this link earlier in this thread:*http://www.moneygeek.ca/weblog/2013/06/01/open-challenge-canadian-couch-potato/ - what do you think?

In addition to *3 Future Scenarios*, there're some nice comments there, like this one:

_the yield curve is fairly flat at the moment, you are not being adequately paid for the risk of going longer than one year or so._


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## My Own Advisor (Sep 24, 2012)

I would think the GIC ladder is a good way to go for retiree these days, a retiree who wants some fixed-income. CDIC insured.


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## Moneytoo (Mar 26, 2014)

AltaRed said:


> Via Google, I found that Morningstar says it better than I can although SEC yield is not relevant in Canada. http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?id=539553
> 
> So... it is likely correct that one's own personal experience over time will be a higher yield over the duration period than the YTM but it is not quaranteed to be so.


Thank you for the link! It actually confirmed my empirical observations:

*12-Month Yield:**Gives an indication of the income investors actually received in the fund and not a hypothetical calculation on the future.

*Average Yield to Maturity: *Most ETFs do not hold bonds to maturity, so the fund will never actually receive the return stated.

Now I know so much more than a month before - and it didn't change my initial decision


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## Soon Forget (Mar 25, 2014)

Thanks for pointing out that MoneyGeek article - I read it last summer and it's actually why I bought a lump sum of CBO in Sept 2013. You made me curious so I just checked my current market value of that lump sum (which includes DRIPed shares) plus added back in all the small leftover cash distributions that didn't DRIP each month. The result is that my CBO has gained 3.47% in the past 9 months.

I forget what the YTM was at the time I made the purchase (is there a way to look that up?), but I think it was ~2% with average duration ~2.7yrs similar to what it is now.

The only way I can explain this is that there must be some serious capital losses coming ahead such that if I continued to hold for another 2 years my end result would be a 2% annualized gain on the initial investment. I think these capital losses are predictable based on the bonds held within the fund being purchased at a premium, and therefore suffering a capital loss when they are sold. Maybe now is the time for me to get out of CBO while i'm ahead


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## Soon Forget (Mar 25, 2014)

Yes we know how bond funds will react when interest rates change, but the problem of market timing still exists because we don't know when the change will happen. Even short-term bond funds will lose value whenever rates go up. But since values normalize around the duration, they will recover more quickly than longer duration funds.

In Scenario 3 he talks about XBB losing money when rates rise - this is true but the losses are only realized if the fund is sold. If it's held for its duration, I believe the return will still be equal to the YTM.

Wouldn't the best way to time the bond market be to keep your fixed income allocation in a HISA (earning 1.25%) which will not lose any capital, and then move it into bonds when rates rise? But what if rates don't rise for another 6-7 years (duration of a fund like XBB)? That cash will have earned 1.25% instead of 2.5% if it had been in the bond fund - that's a big opportunity cost.


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## Moneytoo (Mar 26, 2014)

Soon Forget said:


> The result is that my CBO has gained 3.47% in the past 9 months.
> 
> I forget what the YTM was at the time I made the purchase (is there a way to look that up?), but I think it was ~2% with average duration ~2.7yrs similar to what it is now.
> 
> ...


Hurry - the yield to maturity was 2% for the last 2 years or so lol

*PuckiTwo
2012-12-07, 02:10 PM
4% is the cash yield. The yield-to-maturity is just 2%. Deduct MER and you are looking at earning 1.7% or so on this product.*

CC- I just don’t get it. Here’s my rough figuring:

Re CBO - price is around $20.00. Distributions are about $.075 x12 = $.90/ annum. In 2011, the distributions were about 95% income, and 5% return of capital. Even if we only consider the 95% of the $.90 (= $0.85) , isn’t this about 4.25% income in my bank account for every $20.00 invested? And the MER is already taken into account. I don’t see that yield to maturity matters - in my understanding the ETF never matures, so therefore the ytm is not relevant to current yield. Am I missing something important?

------------------
So people like me question "common wisdom" all the time, huh? Love your username


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## Moneytoo (Mar 26, 2014)

Soon Forget said:


> That cash will have earned 1.25% instead of 2.5% if it had been in the bond fund - that's a big opportunity cost.


I'm gonna sell all shares of PH&N Short Term Bond & Mortgage Fund after I get the second dividend - bought it in March, it pays quarterly (yes, I was still buying MFs before April of this year when I decided to try stocks and ETFs ) YTM 1.7, MER 0.6 (so should yield 1.1%/year if that formula was correct) It will have earned more than 1% in a quarter (invested 10K, will earn more than a $100) Again, it's in 3+ months, not in a year. And it's free to buy and sell MFs with WebBroker, so no commissions. 

Sometimes I wonder - why most people here dont question "the bible" (be that couch potato or warren buffet) and at least try something different?


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## gibor365 (Apr 1, 2011)

Just checked CBO Weighted Avg YTM and it's down to 1.45% ...maybe better to switch to VSC with 2% YTM and lower MER?


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## Soon Forget (Mar 25, 2014)

Ouch, that 1.45% is only 1.18% after subtracting MER. 

gibor, I think Vanguard doesn't update their websites as frequently as Blackrock so I bet we'll see the YTM on VSC decrease soon too. The two funds should be fairly similar before MER.


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## gibor365 (Apr 1, 2011)

Soon Forget said:


> Ouch, that 1.45% is only 1.18% after subtracting MER.
> 
> gibor, I think Vanguard doesn't update their websites as frequently as Blackrock so I bet we'll see the YTM on VSC decrease soon too. The two funds should be fairly similar before MER.


Yeah, you are right...I didn't notice that Vanguard published YTM as per Dec 31, 14
I hold both CBO and VSC... because CIBC has free ETF trades now, was thinking sell CBO and buy VSC... now I'm confused.... maybe HFR will be better choice with YTM - MER = 1.39% ?

not too many options with fixed-income.... just month ago bought 2y GIC 2.15%, now best rate (3rd party GIC in CIBC IE) for 2y = 1.65% and for 5 years = 2.06%!!!


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## GreatLaker (Mar 23, 2014)

gibor said:


> Just checked CBO Weighted Avg YTM and it's down to 1.45% ...maybe better to switch to VSC with 2% YTM and lower MER?


VSC has 24% BBB rated securities, whereas CBO does not have anything lower than A rated. That may account for VSC's higher YTM, but could make it more volatile in a bear market and more susceptible to defaults in a deep recession.


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## Soon Forget (Mar 25, 2014)

gibor said:


> Vanguard published YTM as per Dec 31, 14


I just checked again today and Vanguard is now updated as of close Jan 31/15. YTMs listed as:

VSC 1.4%
VSB 0.9% ! (lower than HISA rates)
VAB 1.6%


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## gibor365 (Apr 1, 2011)

Thus, choices (after substracting MER) are:
CBO 1.18 
VSC 1.23 
HFR 1.33 
ZSC 1.21
HISA(ATL5000) 1.1

any other similar ETFs?


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## Moneytoo (Mar 26, 2014)

Is it a typo on people's trust website or they really offer 1 year 2.6% GICs in TFSAs, same rate as 5 years?

1 year- 2.600
2 year- 2.450
3 year- 2.450
4 year- 2.500
5 year- 2.600

http://www.peoplestrust.com/high-interest-accounts/todays-rates-2/


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## gibor365 (Apr 1, 2011)

I think this is promotion... when they reduced TFSA HISA from 3 to 2.5%, for limited time (like other rates are unlimited ) they introduced this 2.6% rate..., but it's nothing...you lock for 1 year and get $10 more on 10K


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## gibor365 (Apr 1, 2011)

Because CBO is 1-5 Year Laddered , I check CBO return for last 5 years... so share price was down 5%, average annual yield was about 4.3%, so annualized return last 5 years was around 3.3% .... however, I don't remember YTM was ever more than 2.0-2.1%...so from what I see, real return is average between YTM and current yield...
similar numbet I got with VSC .... a little lower 2.2-2.3% with HFR


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## Moneytoo (Mar 26, 2014)

I was thinking to start a GIC ladder (before BoC lowered the rates again - presumably next month), since PT can lower their TFSA rates again - but even my risk-averse husband said screw it and opened a Questrade account (to buy index ETFs ) 

Showed him this thread - now he also wants to sell CBO and buy VFV instead! If he does, we'll be GICless and bondless - just as Miller advises lol


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## Franky Jr (Oct 5, 2009)

Couple days ago I started digging in and found this.
CBO (5 yr corp ladder) YTM-MER= 1.18% duration 2.8yrs
CBH (10yr corp ladder) YTM-MER= 1.49% duration 4.1yrs
XSQ ( short term ) YTM-MER= 0.82% duration 2.7yrs
XQB YTM-MER= 1.45% duration 6.6yrs
VAB YTM-MER= 1.48% duration 7.9yrs
XLB (long term) YTM-MER= 2.56% duration 14.3yrs

I compared this with a 5 year Steinbach CU 5 yr laddered approach =2.27%

The last 30 years of declining interest rates were good for fixed income, if the next 20 go the other way fixed income will be a swear word.
I want to add fixed income to balance my portfolio but with the amount we get paid for the risk, it's hard and the GIC's are safer with more return.


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## arc (May 19, 2012)

Franky Jr said:


> Couple days ago I started digging in and found this.
> CBO (5 yr corp ladder) YTM-MER= 1.18% duration 2.8yrs
> CBH (10yr corp ladder) YTM-MER= 1.49% duration 4.1yrs
> XSQ ( short term ) YTM-MER= 0.82% duration 2.7yrs
> ...


Sorry what is 5 year Steinbach CU 5 yr laddered approach =2.27%?


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## arc (May 19, 2012)

gibor said:


> Thus, choices (after substracting MER) are:
> CBO 1.18
> VSC 1.23
> HFR 1.33
> ...


Hi Gibor,

Did you end up choosing HFR or VSC? Any risk with HFR with the higher yield?


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