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Discussion Starter #1
I’m new to the world of ETFs and fixed income investing. I’m heavily invested in Canadian dividend producing stocks.

I’m looking for some recommendations on bond ETFs and thoughts on the general outlook with what appears to be sustained low (and falling) rates.

Any major differences between the big ETFs......Xbb, zag, vab?

Thanks
 

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One factor is your time horizon. XBB/ZAG/VAB all have an average term to maturity of 10 years, so they are appropriate only if your time horizon is something on the 10+ year time scale. For people who are starting retirement and withdrawals sooner, a short term bond ETF could be more appropriate (like XSB or XSH). Or a mix of XSH + XBB so that you can choose to take withdrawals out of the more stable short-term fund.

The last time I looked at these in detail, I found that XBB/ZAG/VAB were all pretty equivalent and I don't think you'll go wrong with any of them.

Personally I prefer XBB just because it's the oldest, and iShares has experience managing this through two bear markets. XBB came through the 2007-2009 credit crisis like a champ, and that counts for something. If I had to pick one of the three that I thought would fare best through a catastrophe of never before seen levels, I would guess XBB and that's why I hold (a lot) of it in my RRSP.
 

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The stat to look at is yield to maturity which is the return you can expect for the weighted maturity of the bond ETF. For the big ETFs mentioned it is ~ now 1.84% before fees over ~ 8-10 yrs. I don't know if now is the best time given those yields to invest in bonds given eveyrone has been piling into them driving prices up and yields down.

I know the HISA cash ETFs are good and had yields of 2.25% before fees and are < 1 yr maturities. That could change if the BOC cuts the over nite rate. CSAV and PSA are 2 or HSAV which is a a total return ETF for a non registered account.
 

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Over the long term (I mean well over 10 years) an investor in a bond ETF is going to get a superior return to cash. It's pretty much guaranteed by the bond yield curve; this is a fundamental rule of the bond market.

You can always encounter situations like today's which are weird, where cash yields more than the entire yield curve, but these are rare exceptions to the general rule. The yield curve today is totally inverted.

Let's say over 20 years, if XBB does not outperform cash, then it basically means we've been in a two decade recession or ongoing crisis. Yes that is possible but presumably, if you are investing at all, you must assume historically normal conditions.

IF

(a) you expect a 10-20 year perpetual recession or depression, you probably keep everything in cash and don't invest at all

OR

(b) as I do, if you expect historically normal conditions (normal yield curve), XBB is virtually guaranteed to outperform cash over 10-20 years
 

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Discussion Starter #5
The stat to look at is yield to maturity which is the return you can expect for the weighted maturity of the bond ETF. For the big ETFs mentioned it is ~ now 1.84% before fees over ~ 8-10 yrs. I don't know if now is the best time given those yields to invest in bonds given eveyrone has been piling into them driving prices up and yields down.

I know a the HISA cash ETFs are good and had yields of 2.25% before fees and are < 1 yr maturities. That could change if the BOC cuts the over nite rate. CSAV and PSA are 2 or HSAV which is a a total return ETF for a non registered account.
How are these different from TDB8150? Never heard of them for my cash portion.
 

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I don't know if now is the best time given those yields to invest in bonds given eveyrone has been piling into them driving prices up and yields down.
That's timing the bond market. People have been posting this same argument approximately every week or so for the last 10 years, and been wrong the whole time.

I'll say it again. XBB/VAB/ZAG are very likely to outperform cash vehicles over long periods like 10-20 years. Sure, maybe not over 5 years.

It's a law of the bond market that money deployed at longer terms (XBB/VAB/ZAG) yields more, and performs more, than cash. This only fails to hold true during periods of crisis, recession, depression, and severe central bank intervention.
 

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That's timing the bond market. People have been posting this same argument approximately every week or so for the last 10 years, and been wrong the whole time.

I'll say it again. XBB/VAB/ZAG are very likely to outperform cash vehicles over long periods like 10-20 years. Sure, maybe not over 5 years.

It's a law of the bond market that money deployed at longer terms (XBB/VAB/ZAG) yields more, and performs more, than cash. This only fails to hold true during periods of crisis, recession, depression, and severe central bank intervention.
We are in a situation of crisis and severe central bank intervention.

You are much wiser than I am but weren't they recently considering raising rates? This about turn would signal to me that this is a severe intervention.

My advice to the OP is that if you are not highly experienced I would exercise extreme caution. The market is in a very serious state of disruption right now. Markets go up and down but not normally like this. You might be able to catch a good stock for cheap or you might see it go cheaper.
 

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Over the long term (I mean well over 10 years) an investor in a bond ETF is going to get a superior return to cash. It's pretty much guaranteed by the bond yield curve; this is a fundamental rule of the bond market.
Can you elaborate a little more on that.
 

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That's timing the bond market. People have been posting this same argument approximately every week or so for the last 10 years, and been wrong the whole time.

I'll say it again. XBB/VAB/ZAG are very likely to outperform cash vehicles over long periods like 10-20 years. Sure, maybe not over 5 years.

It's a law of the bond market that money deployed at longer terms (XBB/VAB/ZAG) yields more, and performs more, than cash. This only fails to hold true during periods of crisis, recession, depression, and severe central bank intervention.
No it isn't and I wasn't talking about a 10 yr horizon. I was talking about right now and we are in the scenarios you describe as well. There is no argument to invest in bonds when they yield less than inflation or less than HISAs or cash. I listen to many advisors on BNN on market call who are saying the same thing. There is simply no pt in taking the extra risk especially when cash pays more. It isn't much of a timing issue either. Just wait until the 5 and 10 yr yields rise above cash.

Ultimately they are a good place to be but there are concerns right now
 

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Can you elaborate a little more on that.
A normal bond yield curve slopes upward and gives higher yield for longer maturity. Cash is at 0 maturity and, in a normal yield curve, always yields less than bonds at longer maturities. The bond market rewards an investor with more yield, the farther out in time they go.

yieldcurve.png

Long term, what a bond fund gives you is an ongoing rate of return which tracks the yield found at X years on the curve. So at times like today, the bond fund is giving a return of only perhaps 1%. That's low. Presently it's lower than cash because we have inverted yield curve --- a rare situation. Let me talk about XBB to be more concrete.

Once we get back to a normal yield curve, XBB will still be achieving a rate of return based on the yield at 10 years on the curve. That yield at 10 years is higher than the cash yield (due to a normal yield curve).

Think of XBB as a little money generating engine which is constantly generating money at the rate of return (yield) found at 10 years on the curve. If that yield goes up, it makes more money... this is because bonds are continuously reinvested at an average 10 years maturity.

The time will come when the yield curve slopes upward more sharply. At that point the yield found on 10 years will far exceed the cash yield. XBB continuously benefits from whatever yield is found at 10 years.

Is today ideal to buy XBB? No... it is not ideal. However, it takes extremely sharp bond trading skills to know when to switch out of cash into bond funds. You will want to make sure you're back in XBB when (a) the yield curve is normal and especially when (b) the yield curve is steeper.

However, because the bond market (like the stock market) tends to not hand over FREE MONEY, by the time you are able to notice that situation, it will likely be too late and you will have missed the price gains in XBB.
 

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A normal bond yield curve slopes upward and gives higher yield for longer maturity. Cash is at 0 maturity and, in a normal yield curve, always yields less than bonds at longer maturities. The bond market rewards an investor with more yield, the farther out in time they go.

View attachment 19972

Long term, what a bond fund gives you is an ongoing rate of return which tracks the yield found at X years on the curve. So at times like today, the bond fund is giving a return of only perhaps 1%. That's low. Presently it's lower than cash because we have inverted yield curve --- a rare situation. Let me talk about XBB to be more concrete.

Once we get back to a normal yield curve, XBB will still be achieving a rate of return based on the yield at 10 years on the curve. That yield at 10 years is higher than the cash yield (due to a normal yield curve).

Think of XBB as a little money generating engine which is constantly generating money at the rate of return (yield) found at 10 years on the curve. If that yield goes up, it makes more money... this is because bonds are continuously reinvested at an average 10 years maturity.

The time will come when the yield curve slopes upward more sharply. At that point the yield found on 10 years will far exceed the cash yield. XBB continuously benefits from whatever yield is found at 10 years.

Is today ideal to buy XBB? No... it is not ideal. However, it takes extremely sharp bond trading skills to know when to switch out of cash into bond funds. You will want to make sure you're back in XBB when (a) the yield curve is normal and especially when (b) the yield curve is steeper.

However, because the bond market (like the stock market) tends to not hand over FREE MONEY, by the time you are able to notice that situation, it will likely be too late and you will have missed the price gains in XBB.
Sure, that's how it should work. The problem I have right now is with the 10 year bond below 1%, how long might an investor wait to outperform that cash alternative, if they lose 20% on their bond EFT very quickly as rates rise to more normal levels. Obviously neither of us can predict where rates will be at anytime in the future and how they will get there. It just seems to me that an ETF like XBB has more downside risk then upside benefit. In other words it has a very horrible risk to reward ratio. That, even if it is true, does not mean that cash will outperform it but at least cash always has a positive risk reward ratio. At least without factoring in inflation.

Anyway, thanks for the explanation.
 

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Sure, that's how it should work. The problem I have right now is with the 10 year bond below 1%, how long might an investor wait to outperform that cash alternative, if they lose 20% on their bond EFT very quickly as rates rise to more normal levels. Obviously neither of us can predict where rates will be at anytime in the future and how they will get there. It just seems to me that an ETF like XBB has more downside risk then upside benefit. In other words it has a very horrible risk to reward ratio. That, even if it is true, does not mean that cash will outperform it but at least cash always has a positive risk reward ratio. At least without factoring in inflation.

Anyway, thanks for the explanation.
Those are valid concerns. And absolutely, in the short term there could be pain for a bond fund investor... no question. However everything I am writing is from a long term perspective, meaning 10+ years.

To address a few of those points you raise though:

A person is not going to lose 20%. The worst case, maximum drawdown in history (even in 1970s where rates went sky high) was more like 12% to 15% loss and that was a total bond crash. And yes 15% loss is concerning, but we still have to keep that in perspective. The worst possible case in XBB is still far milder than a stock correction!

In fact, if rates suddenly were to spike from current 1% to say 9% (and yes this would destroy the XBB price) I can assure you it will absolutely destroy the stock index to a far worse degree. If we're talking stocks vs bonds, in this horror scenario, you are better off in bonds. Cash would win, of course.

Second, you're assuming one particular way that the yield curve could steepen. There are other ways that I think you are not thinking about. For example, with negative interest rates (probably coming soon) the short end of the curve could sit at -1% while the long end is way up in the stratosphere at +1%. XBB does well in this scenario. Cash does not. And there is no crash in XBB price. In my view this is just as possible as "rates rising" to steepen the curve.

Third, bond funds do surprisingly well with gradually changing interest rates. Most people think that bond funds would crash in higher rates, because they incorrectly apply the logic of what happens with a single bond's price. Bond funds are a portfolio... and they work beautifully with gradually rising interest rates. One of the best scenarios would be if interest rates gradually move up from the current 1% back towards say historical 6%, in baby steps, while the yield curve steepens. XBB would initially stay flat or a bit negative, but after a couple years, quickly start rising at a faster pace as more normal bond conditions return.

As a bond investor, I would pray for this situation: gradually rising interest rates, back up to 6%, with a steepening yield curve.

In summary, I think a lot of investors focus a lot on these horror scenarios for bond funds while forgetting about other potential scenarios (equally likely) which are actually quite good for bond funds. As mentioned above, negative rates and a positive sloping curve, or gradually rising interest rates, would be fine for XBB... and will outperform cash.

In the end we don't know what will actually happen, and there is a mix of potentially bad and good scenarios that could happen. But on the balance of them (having studied these various scenarios) I think just buying XBB is still a reasonably good bet.
 

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In the end we don't know what will actually happen, and there is a mix of potentially bad and good scenarios that could happen. But on the balance of them (having studied these various scenarios) I think just buying XBB is still a reasonably good bet.
In my mind, that is a very bad bet. Just like stocks, an investor can fall in love with a bond fund. They need to shake that off! If you must be in fixed income, buy a short term GIC or bond with known yield and fixed maturity. Then revisit when it matures. Your capital will be intact. Forget about those high risk bond ETFs.
 

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I have over 150k in GICs. I'm not married to bond ETFs, but they are good structures... especially for passive, hands-off investing. I continue to love GICs too.

You're saying the same thing everyone else does: stick to short term bonds. Yes there is less risk, but by definition* you will get less reward. There's no problem investing heavily in short term bonds but I think you have to realize that you are signing up for lower returns over the long term.

* the yield curve
 

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I have over 150k in GICs. I'm not married to bond ETFs, but they are good structures... especially for passive, hands-off investing. I continue to love GICs too.

You're saying the same thing everyone else does: stick to short term bonds. Yes there is less risk, but by definition* you will get less reward. There's no problem investing heavily in short term bonds but I think you have to realize that you are signing up for lower returns over the long term.

* the yield curve
Too much theory James. We are in very uncertain times. Hold onto cash. Or put it in short term GICs, Bonds, PFDs with fixed maturity. No risk in losing capital. Once things stabilize, then resume regular programming.
 

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I’m new to the world of ETFs and fixed income investing. I’m heavily invested in Canadian dividend producing stocks.

I’m looking for some recommendations on bond ETFs and thoughts on the general outlook with what appears to be sustained low (and falling) rates.

Any major differences between the big ETFs......Xbb, zag, vab?

Thanks

Well what is your purpose ? Long term hold ? Short term hold ? That would help get the most appropriate feedback....

The 3 ETFs that you mention are in reality VERY similar, the only real difference that I was able to dicern is the govt vs corp allocation. Due to the current levels of corporate debt and some recent information that claims a bunch of the BBB corps would fall to less than investment grade debt if there was a capital crunch or rates were to rise, I chose to use VAB as it had at the time the lowest allocation to corp debt - thus reducing my risk on corp debt/insolvency/ect....

Will it happen - who knows, if there is a recession and corp earnings due drop there would be less cash to use to pay interest on outstanding bonds/debt. Choose your choice based on your needs. All 3 funds have similar duration and yield, but just 2x check the govt vs corp allocations... I think the VAB yield is a hair less due to less risk through less corp exposure - which I am fine with...
 

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Yes I think VAB has, over time, kept less corporate paper and more government. So one might say VAB is a bit safer than the others.

Or to be more precise, safer on credit risk, but not on interest rate risk.
 

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I was looking at TLT in the US. That is the ETF that buys only 20 year treasury bonds. It has gained 31% in the last 12 months. I figure that something that can earn that much in 12 months can probably lose a similar amount in the same time frame. Also, rates did not go from 9% to 1% in the last year, they went down only a couple percentage points, so it would not take much of an upward move to start dropping that ETF price quickly. Now XBB is not TLT, but it is still interesting to look at.

I am also not saying XBB is riskier then the stock market. What I am saying is that you can make a lot of money in the stock market but also lose a lot of money in the stock market. So it has a reasonably fair risk-reward relationship. However, with XBB you can make very little money with it, when interest rates are now this low, but you can lose a lot of money on it, especially from this level of interest rates. In my opinion, it has a horrible risk-reward relationship attached to it.

Of course, it is just my opinion. One that can easily go on the large list of wrong ones that I have accumulated over the years, when this future story is told.
 
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