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Discussion Starter · #1 · (Edited)
So I need to beef up my fixed income. I’m looking at my options for safety and return/yield.

I think that there is another year and maybe more of rising rates. So right away I look at something like VSC, but when you look at the 5 & 10 year charts its really just a slow demise that is going on.

So I thought maybe something with a longer horizon like ZLC or maybe ZAG. It’s a similar story with a downward trend with these rising rates…..

I know that with the yields (a few %) the negative chart is not totally correct.

Then, since I am a bit of a risk taker I was thinking HPR. I could hold here for a year and then move into the Bonds…

I am not a bond GuRu & any feedback is appreciated. I know there are comparable funds and I don’t know all of them. If there are similar funds that perform better or a piece of wisdom that I am missing let me know.

Thx (thats not a ticker)


VSC vs ZLC vs HPR (or alternates)
 

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No harm going w a St bond fund like VSC or XSC for a year.

If you are holding for > 10 yrs, you could look at ZAG or XBB. The key measure is yield to maturity - YTM - the return you will get/yr if you hold the fund for its avg maturity. ZAG and HBB are ~ 10 yrs. YTM ~ 2.8%

If you want a little more return you could look at corporate bonds too. XHB or ZMU. both ytm ~ 4%. Maturities are ~ 6 yrs.

HPR & Preferred share ETFs also good. YTM 4.5% and they rise w int rate hikes. Maturities 5 yrs

Some mix would be ok. 1/2 in a bond fund & HPR. Low risk % decent returns
 

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I have not looked into them though there are target date bond funds out there that mature on specific date.
 

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So I need to beef up my fixed income. I’m looking at my options for safety and return/yield.

I think that there is another year and maybe more of rising rates. So right away I look at something like VSC, but when you look at the 5 & 10 year charts its really just a slow demise that is going on.

So I thought maybe something with a longer horizon like ZLC or maybe ZAG. It’s a similar story with a downward trend with these rising rates…..
The main question you have to ask yourself is, what is your time horizon for this portfolio. If the money will be invested for at least 10 years, then your fixed income should probably be in ZAG or XBB. If it's a short horizon like 2-3 years, then VSC or XSB.

Over long periods of time, bonds further down the yield curve (ZAG, XBB) are guaranteed to outperform the short end of the curve (VSC). There is virtually no way to successfully time the bond by strategically jumping between short term bonds and regular term bonds.

These bond funds will not necessarily respond as you are anticipating. In the last 3 years for example, the Bank of Canada has increased the overnight interest rate. Many retail investors predicted this and thought the smart way to play this was to invest in short term bonds.

They were wrong. In the last 3 years, XSB returned 0.59% annually. In the same period, XBB returned 1.63% annually, nearly triple the return!

This is a great illustration of how it's very difficult to time and predict the bond market. Investors who were "hiding out" in short term bonds were correct that interest rates were going up, but what they did not foresee is that the yield curve flattened. This is what resulted in the inferior performance of short term bonds.

The point I'm trying to get across ... which I've been arguing for several years now on this message board ... is that it's pretty much impossible to time the bond market. It's not any easier than timing the stock market. On average, regular-long term bonds like XBB/ZAG/VAB will outperform short-term bonds like XSB/VSB.

Simply pick the bond fund that matches your time horizon. If your time horizon is > 10 years, then use ZAG or XBB. If the volatility of these or prospect of rising interest rates really concerns you, then a ladder of 5 year GICs is another good way to go.

Also keep in mind that your forecast could be wrong, and interest rates could go down. Nobody knows.

A final thought:
10 year return of XSB was 2.6% annually
10 year return of XBB was 4.0% annually... significantly higher

During most of these years, many people were certain that short term bonds (XSB) were the best choice because interest rates were so low and were going to go up "any moment now". People have posted this weekly on this message for years now!

My advice is: don't try to time the bond market. Use the couch potato strategy and pick the bond fund that matches your time horizon.
 

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Discussion Starter · #5 ·
As I research these ETFs on morning star I dont seem to see the YTM and average maturity ?

For Bonds and other FI is there a better tool than morningstar ?
 

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As I research these ETFs on morning star I dont seem to see the YTM and average maturity ?

For Bonds and other FI is there a better tool than morningstar ?
They are remiss as that is about the only meaningful yield you need to know. You have to go to the provider sites. Ishares show all theirs for all the FI ETFs in a tab . BMO , Horizons you have to look at each individually.
 

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My current M.O. is :
ZLC and HPR in equal amounts...
ZLC is awfully risky. This goes far down the yield curve, around 22 years avg maturity, and it's corporate bonds. If interest rates (bond yields) go up, ZLC would drop by a lot.

It's also vulnerable to deterioration in corporate credit. Look at LQD (an American high grade corp bonds) during 2008. This fell as much as 22% during the credit crisis. Your ZLC is even more vulnerable to price drops due its longer maturity, so in a similar credit crisis, you might expect to see roughly a 30% to 50% drop in the short to medium term. And if defaults are high, you can have actual losses that don't recover.

In summary: you're taking on a huge amount of risk for a relatively small return. With risks of this magnitude you might as well take stock exposure, then at least you get a better risk vs reward tradeoff. IMO you're kind of getting ripped off by accepting such big risks for such small returns.

So I need to beef up my fixed income. I’m looking at my options for safety and return/yield.
Maybe getting back to basics: what's your goal? Fixed income is not the high performance part of a portfolio. It's the safety or anchor, the part that does well during market chaos, recession, depression, and that does OK even while stocks are tanking. The two funds you suggested (ZLC and HPR) don't have the safety characteristics that most of us want in our fixed income.

Myself, I like to keep my fixed income in safe things that give me the desirable traits of fixed income. GICs and XBB/VAB. Then I hold my high-risk, high-reward stuff in stock investments.

By separating those out, you will be more clear about where you have safety and where you are getting high returns. There is no such thing as simultaneous safety and high return. Separating the roles makes it easier to calibrate risk vs reward. Want more return? Hold more stocks!

However by conflating the two (ZLC, HPR, junk bonds, etc) you don't know where you stand overall. It's very tough to figure out how risky your overall portfolio is, and this in turn means that your portfolio is probably not in line with your personal comfort level -- a huge problem!!

Look at the best "balanced funds" out there, things like Mawer Balanced. They all hold their fixed income in things like XBB.
 

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If you want to park your money until things stabilize, maybe just buy a GIC. Maybe 3 yr? Personally, I wouldn't touch any bond etfs. Over 3 yrs, they will probably have a negative return.
 

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Personally, I wouldn't touch any bond etfs. Over 3 yrs, they will probably have a negative return.
There's no way to know that, even if you accurately predict whether or not the Bank of Canada raises rates (which itself is not certain).

Bond funds can perform well during periods of rate hikes, such as 2004-2007, and 2016-2018 so far.
 

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James, you are always going on about bond returns, what about after-tax real returns? They are negative. Bonds and GICs are where money goes to die.
If you read my post #8 above, you'll also see that I'm always going on about risk vs reward characteristics. I agree that returns of fixed income are low.

Fixed income is a different beast than stocks. Lower risks, lower returns. Low correlation with equities. It's up to each investor to decide if they want to have any of it, and if these characteristics appeal to them.

My point is that if you're going to have fixed income in your portfolio, you should go for the safe stuff because this actually has the ideal characteristics an investor typically wants from fixed income. If you're going for something like junk bonds or long maturity corporates, then what's the point... it's not going to act like fixed income in your portfolio.
 

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There's no way to know that, even if you accurately predict whether or not the Bank of Canada raises rates (which itself is not certain).

Bond funds can perform well during periods of rate hikes, such as 2004-2007, and 2016-2018 so far.
You are right. There is no way to predict how bond etfs or MFs will perform. So why buy them? GIC you can predict.
 

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GICs are great, I agree they give more predictable returns. My own fixed income allocation is about half bonds, half GICs.

The 5 year GIC ladder is a beautiful thing.
 

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Split preferreds and retractable preferreds are also an option. They have fixed maturities so the return can be more predictable. For the most part they pay dividends so they have better after tax returns.
 

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Split preferreds and retractable preferreds are also an option. They have fixed maturities so the return can be more predictable. For the most part they pay dividends so they have better after tax returns.
I use split pfds as well as conv debentures and corporate bonds (all with fixed maturities unless called). However, the original post was about what to do in the short term while interest rates are in flux. Earning 2-3% using GICs might be the safest way of not losing any capital. In fact, GICs are getting to the point where I might start a new GIC ladder. Maybe dump some of the stocks that will get hurt by all this nonsense that is going on south of the border.
 
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