[migperreault]

Hi guys,
Always a pleasure to read you all!

A simple question for you today : What is your choice for ETF bonds?

US, World, Canadian?
Short, mid, long term?

My choise right now is the Vanguard ETF VAB : Great performance during the last few years, long-term Canadian bond...
The other choice is VSB (Short-term) and I read that it's better short-term because it fluctuates less than long-term bonds when the market fluctuates, but VSB's performance isn't really good...

I'm waiting your advices to buy bonds, all the rest of my portfolio is bought :

XAW : 60%
VCN : 15%
VAB or VSB or ? : 20%
SWY : 5%

Thanks!!

 

[GreatLaker]

A mix of around 50% VAB and 50% VSC (short term corp) for my bond ETFs. I also have some GICs. All in registered accounts.

VSC has about the same YTM as VAB, but shorter duration for less interest rate risk. It has slightly higher credit risk, but nothing less than investment grade.

Main reason for using VSC is because I was uncomfortable with the duration of VAB (getting close to retirement). VSC has higher YTM than VSB, with what I see as only incrementally more risk.

 

[migperreault]

Main reason for using VSC is because I was uncomfortable with the duration of VAB (getting close to retirement).

What's wrong with the duration? If I want to sell bonds before the end of the duration, am I penalised or something?

Also, I'll probably get my TFSA full, so is it a good option to buy bonds in my RRSP? What about income and dividends?

 

[GreatLaker]

What's wrong with the duration? If I want to sell bonds before the end of the duration, am I penalised or something?

Duration is an indicator of interest rate sensitivity. 1% increase in interest rate will cause the price of a bond to drop by its duration. VAB's weighted average duration is 7.8, so a 1% rise in interest rates will cause it to drop by 7.8%. That's only an issue if you don't hold it for its duration.
http://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/

Also, I'll probably get my TFSA full, so is it a good option to buy bonds in my RRSP? What about income and dividends?

See this link from My Own Advisor blog for where to hold assets: http://www.myownadvisor.ca/dividends/
Also this: http://www.finiki.org/wiki/Tax-efficient_investing

I'd put Can equities then global equities in your TFSA, and GICs, Bonds & US equities in your RRSP. Avoid US equities in TFSA. It's all for for tax reasons that are explained in the above links. Maybe others will weigh in with exactly what assets to hold where between RRSP/TFSA with no non-registered accounts to verify (or correct) what I said.

 

[migperreault]

I'd put Can equities then global equities in your TFSA, and GICs, Bonds & US equities in your RRSP. Avoid US equities in TFSA. It's all for for tax reasons that are explained in the above links. Maybe others will weigh in with exactly what assets to hold where between RRSP/TFSA with no non-registered accounts to verify (or correct) what I said.

I bought XAW for US and Global equities, so I can't put US in one account and Global in the other... I bought XAW in my TFSA.

 

[mf4361]

http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/

The time where you avoid US equity in TFSA and instead put in RRSP makes a difference is when you hold US-listed ETFs. Eg, If you hold VTI in RRSP, US withholding tax does not apply. It does apply to VUN in TFSA and RRSP, and VUN in RRSP.

XAW is a Canada-listed ETF that holds 3 US-listed, US equity ETF, 1 Canada-listed, International stock ETF, and 1 US-listed, int'l stocks ETF.

So this is like the case of VUN. It won't make a difference whether you put it in TFSA or RRSP.

One more note, on the international side, the US-listed IEMG get 2 layers of tax, while because Canada-listed XEF holds int'l stocks directly, it gets 1 layer of tax only.

 

[migperreault]

http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/

So this is like the case of VUN. It won't make a difference whether you put it in TFSA or RRSP.

Ok... So I should have bought XAW in a non-registered account...?

*EDIT : I made the right decision. In a non-registered account I would have payed taxes on many things (gains, dividends, etc), and even if there are credits for taxes, it's better for me to full my TFSA and RRSP before going in a NRA.

 

[mf4361]

@migperreault

That's right. You pay capital gain tax if you sell it at a gain (or capital loss credit if you sell at loss). What I was saying is it makes no difference between putting XAW in TFSA or RRSP. It does, however, make a big difference in putting it in non-registered account.

IMO for long term investors, one should max out their registered account before looking at non-registered. Over long term (30+ years), stocks are likely to gain.