# Bond ETFs - to VAB or not to VAB?



## Moneytoo (Mar 26, 2014)

In light of the recent Couch Potato article Should You Replace Bonds With Cash? and its comments, are you/will you keep buying Bond ETFs in general and VAB in particular? I'll try a poll - what's in the Fixed Income portion of your portfolio?

Thank you!


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## My Own Advisor (Sep 24, 2012)

It depends...

If bonds are supposed to be part of my long-term portfolio, then 0% bonds for me. I prefer equities. 

"What's in the Fixed Income portion of your portfolio?"

I consider my workplace pension my bond.

If short-term, mostly cash, albeit it's not very much.


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## GreatLaker (Mar 23, 2014)

Mostly GICs, but enough bond ETFs to enable me to sell some to rebalance to equities if ever needed. Of the bond ETFs, it is split roughly equally between VAB and VSC.


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## Synergy (Mar 18, 2013)

Combination of HISA's, GIC's & Cash (TDB8150). No bonds.


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## Video_Frank (Aug 2, 2013)

VAB / XBB at 40% of my portfolio, 5% cash at PT.


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## AltaRed (Jun 8, 2009)

By a large margin, HISAs and 5 yr GIC ladder. Also a bit of ZCM and a few bonds/debentures in the RRSP/TFSA to keep it interesting. The bond yield curve has to improve significantly to move into 7-10 year bonds.


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## Moneytoo (Mar 26, 2014)

Last year Peoples Trust TFSA looked like a no-brainer at 3%. But now that it dropped to 2.25%, I don't want to add more money to it. After the long weekend my husband and I will be adding more money to our accounts - I was set on buying two strips in our RRSPs (to start), but my husband wants to wait some more for the rates to go up... So sometimes I wish we would just VAB


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## My Own Advisor (Sep 24, 2012)

VAB is a great product. If you feel you need FI, then this is a good one to own as you know!

Geez, 3% at People's Trust? That was great....


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## larry81 (Nov 22, 2010)

Hbb


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## Ihatetaxes (May 5, 2010)

Equal split GICs and XSB.


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## mf4361 (Apr 11, 2015)

I have CBO and CLF, 60:40 split. But this part of my portfolio is saving for down-payment for a house, unlike the rest (For retirement). I also have a smaller 5-year GIC ladder.

Fixed income is used to dampen the heart-attack factor when a market correction / crash happens. But now short-term bonds yield is so low that you might as well put it in HISA and forget about interest rate risk.


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## Moneytoo (Mar 26, 2014)

mf4361 said:


> Fixed income is used to dampen the heart-attack factor when a market correction / crash happens. But now short-term bonds yield is so low that you might as well put it in HISA and forget about interest rate risk.


Yeah, for us it's just a matter of protecting a portion of our combined portfolio. I liked the idea of a GIC ladder (2.25-2.65% at PT) for short term and strip bonds ladder (2.40-3.50%) for mid term. This way we would have 5-8K maturing every year for the next 8 years - which we would hopefully be able to redeploy at higher rates (and wouldn't have to worry about rate fluctuations in between) We also have 1.6% PT HISA, where my husband would prefer to park his extra cash - at least till Feb next year (RRSP contributions deadline )

But after reading that article I started to doubt that maybe I'm thinking too short-term indeed and overcomplicating things, and VAB with its 7.8 years average duration (but only 1.7% YTM at the moment) would achieve similar or better results?.


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## StockTrader (Apr 21, 2015)

My Own Advisor said:


> If bonds are supposed to be part of my long-term portfolio, then 0% bonds for me. I prefer equities.


This. No bonds in the portfolio currently. And since it's probably too late to get in, it'll probably remain like that the first few years.


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## Moneytoo (Mar 26, 2014)

StockTrader said:


> This. No bonds in the portfolio currently. And since it's probably too late to get in, it'll probably remain like that the first few years.


I loved having REITs and dividend stocks "in lieu of bonds", but since some of them dropped 10-30%, figured it would be nice to have a bit of something we can count on in our 50's... but yeah, my husband keeps telling me that it's too late to start buying bonds now, might as well wait till the rates go up - I wish they did already...


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## My Own Advisor (Sep 24, 2012)

It could be years until they rise...who knows! Experts keep saying things will go up but the experts don't know


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## Moneytoo (Mar 26, 2014)

My Own Advisor said:


> It could be years until they rise...who knows! Experts keep saying things will go up but the experts don't know


Yeah, I noticed  And regretted not starting the GIC ladder in the beginning of the year - before the unexpected rate cut... lol So part of me wants to wait till they at least "restore" the rate to 1% - yet I can't discount the probability that they may surprise us again...


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## MRT (Apr 8, 2013)

VAB, which represents about ~10% of my overall portfolio.

(A bit of cash too).


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## Feruk (Aug 15, 2012)

VAB mostly at ~25% of portfolio. Some XBB from back in the day before



My Own Advisor said:


> I consider my workplace pension my bond.


Can you elaborate on this? Is your pension invested in some sort of bond fund?


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## AltaRed (Jun 8, 2009)

DB pension is the same as an annuity, which is fixed income, albeit potentially with a higher default risk factor (depending on employer). If it is the civil service, then no risk of default. If Nortel, well...... Credit risk your DB pension the way you would a bond (AAA all the way to junk).


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## fstamand (Mar 24, 2015)

Looking at the couch potato recommended ETF, / conservative portfolio, it has VAB as 70% of your investment. 

Looking at last 5 year graph, VAB did a whopping 2.2% which is not very far from the inflation rate.

Not sure I understand all the hype about VAB ? Not bashing it but there's got to be better investments for that 70%


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## GreatLaker (Mar 23, 2014)

VAB has not existed for 5 years but Vanguard's site shows 3 yr return = 4.3% and 1 year = 8.3% as of April 30. If you are looking at a graph you probably see the price return only. It also issues monthly distributions. Its 12 month trailing yield was 2.75%, which will not show in charts.

There are other investments that people substitute for bonds, but all of them have some other drawback or risk. GICs may have higher return but they are less liquid and restricted by the $100k limit if you want a CDIC guarantee. Dividend paying shares, preferred shares, and high yield bonds are sometimes substituted for investment grade bonds; they may have higher yield, but are higher risk, more volatile, and subject to low or negative returns in bear markets or recessions.


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## AltaRed (Jun 8, 2009)

^+1

A 5 year GIC ladder has been outperforming short term bond funds/ETFs, but not medium term bond ETFs like VAB. The issue with GICs, of course, is lack of immediate liquidity, but can be fairly liquid if a GIC matures every 3-6 months in that 5 year ladder. But the point of a Couch Potato portfolio is to set and forget and not have to manage maturing GICs on a regular basis. Couch potato portfolios are by far the best option for the vast majority of investors who are too busy in their lives to spend time online dealing with personal business decisions.

VAB or XBB or anything similar is a compromise for slightly higher yield than a short term ETF like XAB or VSB, at the possible risk of higher underperformance (lag) as interest rates increase. IF people cannot live with 'lag' which is equivalent to the ETF's duration, they should be in short term bond ETFs or GIC ladders. 

Reaching for yield carries considerably higher risk. I have a bit of money in ZCM (medium term corporate bond ETF) for the higher yield, but I know it will 'lag' in performance as interest rates increase AND be more volatile due to lower credit rating than an equivalent government bond ETF. That said, I do not plan to tap into that ETF for a very long time, and thus can ride out those 'storms' for the foreseeable future.


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## CPA Candidate (Dec 15, 2013)

I think you are better with cash in a high interest account that touching bonds right now. The risk reward profile of bonds is pretty terrible currently. If things go right, you'll make 2%, if they go wrong you can lose 10% or more.

My bond allocation across my family's accounts is virtually nil. If not equity, then cash.


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## newuser (Sep 16, 2014)

CPA Candidate said:


> I think you are better with cash in a high interest account that touching bonds right now. The risk reward profile of bonds is pretty terrible currently. If things go right, you'll make 2%, if they go wrong you can lose 10% or more.
> 
> My bond allocation across my family's accounts is virtually nil. If not equity, then cash.


Unless the bond issuer defaults, when you hold to maturity you will not lose 10%. The market value will drop but yields go up. If you could sell your GIC on the open market, and rates increased, the market value of GICs would also drop to be inline with the yield.


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## CalgaryPotato (Mar 7, 2015)

newuser said:


> Unless the bond issuer defaults, when you hold to maturity you will not lose 10%. The market value will drop but yields go up. If you could sell your GIC on the open market, and rates increased, the market value of GICs would also drop to be inline with the yield.


But this thread is more about bond funds, rather than individual bonds. So holding until maturity isn't a choice the person owning the fund will directly make.

Anyway, not to repeat what others have said much better than I could, bond funds are intended to be a counter balance in a long term portfolio to equities. Often times at least historically holding bonds has provided value during times of larger crashes. 

However, I think if you have a conservative portfolio of 70% fixed income, you are expecting that fixed income to do more than counter balance your equities, and in that case, I'm not sure you'd want bond funds to make up the majority of it, at least not currently. You also wouldn't want bond funds for your short term goals.

If you're talking individual bonds, those are more like a GIC with added liquidity and in the case of corporate higher risk & reward.

For myself for the long term part of my portfolio I am rebalancing to 25% long term bond ETFs. For anything shorter than 10 years, I'm holding GIC's/cash for my fixed.


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## Moneytoo (Mar 26, 2014)

CalgaryPotato said:


> But this thread is more about bond funds, rather than individual bonds. So holding until maturity isn't a choice the person owning the fund will directly make.
> ...
> If you're talking individual bonds, those are more like a GIC with added liquidity and in the case of corporate higher risk & reward.


I also have a thread about individual bonds - hopefully will update it next week with my first purchase... 

Thank you all for your answers!


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## gaspr (Mar 24, 2014)

Here is a quote from Dan Bortolotti that I think has some relevance here:

"Here’s one place Couch Potatoes can learn a lesson from dividend investors. If a company raises its quarterly payout and its stock price falls, dividend investors scramble to buy more shares. And why not? The higher yield means they’re paying less for all future cash flows. Tell a dividend junkie to stop buying shares (or trim his current holding) when the yield goes up and he’ll think you’re taking crazy pills. Yet long-term investors who want to stop buying bonds because rates have risen are using the same loopy logic."


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## gibor365 (Apr 1, 2011)

Don't hold VAB, but on different accounts hold HFT, VSC and CBO


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## Moneytoo (Mar 26, 2014)

gibor said:


> Don't hold VAB, but on different accounts hold HFT, VSC and CBO


In line with what most professional portfolio managers are doing? 

"We have been minimizing our bond exposure as much as possible within client’s ranges and keeping maturities under 5 years."


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## gibor365 (Apr 1, 2011)

Moneytoo said:


> In line with what most professional portfolio managers are doing?
> 
> "We have been minimizing our bond exposure as much as possible within client’s ranges and keeping maturities under 5 years."


No, just my intuition 
YTM of 3 ETFs I hold is practically the same as VAB's , but duration is much shorter


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