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Discussion Starter · #21 · (Edited)
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.
Good point


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!!
I think that with the mess in the USA (tariffs, ect) markets are vulnerable. So, a light reduction in equities/US eq is in order. Hence my FI drive - just dont want it to backfire if rates rise and it goes down - maybe an inevitability. XBB/ZAG/VAB just might be where my hat should hang - keep it simple & HBB in my non-reg.

Heres my current allocation:
20% Mawer Global Bal
20% Mawer Bal
10% Steadyhand Eq
6% Horizons SP/TSX60
6% Mawer Can Eq
6% Horizons SP500
6% Mawer US Eq
6% PHN Global Eq
6% Mawer Global Eq
2% RBC Emerg Market Eq
2% RBC Global PM

Totals 90%

So I want a FI @10%

I have HISA (@ 2.1%) and a few other pieces outside my QTrade acct.

My Steadhand might also be on the short list but it is heavy Can Eq and I think there is room for growth in Can, so I'm hoping.
My Global Might need adjusting to find products that are lighter on the US Eq.

Yes I am a Mawer fan & Yes I like a split between Index and AM.
 

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You are right. There is no way to predict how bond etfs or MFs will perform. So why buy them? GIC you can predict.
Liquidity, if you need it.

Imagine a situation for someone (like a retired person) that needs to withdraw funds in a portfolio in a stock market crash, their next GIC does not mature for a while. Bonds, or a bond ETF can provide readily available liquidity, with far less volatility than equities.

Horses for courses.
 

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Liquidity, if you need it.

Imagine a situation for someone (like a retired person) that needs to withdraw funds in a portfolio in a stock market crash, their next GIC does not mature for a while. Bonds, or a bond ETF can provide readily available liquidity, with far less volatility than equities.

Horses for courses.
Read original post. Not talking about having 100% of savings in fixed income.
 

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Read original post. Not talking about having 100% of savings in fixed income.
OP asked about options for fixed income and more specifically about VSC, ZLC, ZAG and HPR ETFs. You replied:
There is no way to predict how bond etfs or MFs will perform. So why buy them? GIC you can predict.
I responded with some differences between bonds and GICs, and reasons why bond ETFs may be preferable. Hopefully the OP gained some insight that will be helpful in making his or her portfolio decisions.
 

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Bonds are good for liquidity. The reason I mix GICs + bonds is to provide additional liquidity. Over the years I've found that liquidity is very useful to me, so I'm willing to forego some of the higher GIC returns to get that liquidity.

And by the way, bond ETF returns can be somewhat predicted, for (1) high grade bonds, (2) over the time horizon of the portfolio average maturity. The return will be approx equal to the yield to maturity at the time of purchase. I showed in another thread that XSB's disappointing returns in the last few years were well within (about +/- 10%) of the CAGR estimated at the time of purchase a few years ago.

Any money you deploy into XBB today will return about 2.5% over the next decade, with price volatility along that route. Not too complicated. The whole point of fixed income is that the returns are quite predictable. This is true whether we're talking about GICs or high grade bond ETFs.

The GICs have price volatility too, the bank just hides the price quote from you ;)
 

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Bonds are good for liquidity. The reason I mix GICs + bonds is to provide additional liquidity. Over the years I've found that liquidity is very useful to me, so I'm willing to forego some of the higher GIC returns to get that liquidity.
I do something similar. FI split among GIC ladder and bond ETFs. GICs give me absolute certainty of fund availability and should return at least inflation. Bond ETFs give more flexibility in withdrawals, and the possibility of capital gains (although unlikely in today's rate environment). Bond ETFs in RRSP because most of them hold premium bonds and are so inefficient in non-registered accounts.


And by the way, bond ETF returns can be somewhat predicted, for (1) high grade bonds, (2) over the time horizon of the portfolio average maturity. The return will be approx equal to the yield to maturity at the time of purchase. I showed in another thread that XSB's disappointing returns in the last few years were well within (about +/- 10%) of the CAGR estimated at the time of purchase a few years ago.

Any money you deploy into XBB today will return about 2.5% over the next decade, with price volatility along that route. Not too complicated. The whole point of fixed income is that the returns are quite predictable. This is true whether we're talking about GICs or high grade bond ETFs.
I think the important point here is "somewhat predicted". If interest rates went up significantly and stayed there, bond ETF returns would initially drop, then go up higher as older bonds mature or are sold and replaced with newer higher coupon bonds. So in that scenario, long-term bond ETF returns should be higher than predicted by the current YTM. And the opposite would happen when rates fall and stay low.

It is interesting that holders of GIC ladders are happy when interest rates rise, because they know their future GIC purchases will be at higher rates, giving better returns. Holders of bond ETFs live in fear of higher rates because the unit value of the ETF will fall if rates rise. But a bond fund is similar to a GIC ladder with many more rungs, and the fund manager has flexibility to sell bonds before maturity to manage the average duration and average maturity of the fund.
 

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Bonds are good for liquidity. The reason I mix GICs + bonds is to provide additional liquidity.
That makes sense IF liquidity in FI is important to the investor. Many of us hold most of our FI in registered accounts where liquidity is not too important, except perhaps when making the mandatory annual RRIF withdrawal. Even then, most of us would also have equity that could be used.

I certainly wouldn't use FI if I needed liquidity unless it was just cash in a savings account.

Right now, I have no GICs, no ETFs but lot's of corporate bonds and debentures in a ladder. Given investment climate, considering getting back into GICs as bonds mature or are called.
 

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It is interesting that holders of GIC ladders are happy when interest rates rise, because they know their future GIC purchases will be at higher rates, giving better returns. Holders of bond ETFs live in fear of higher rates because the unit value of the ETF will fall if rates rise.
Personally I think this fear is irrational. When rates rise, GIC prices plummet as well, but the only reason people aren't upset by this are that GIC prices are not visible on statements. The banks show a "fake" value based on a simple accrual method (principal grows at the YTM rate).

If you wanted to, you could price a bond portfolio the same way using a simple accrual with each bond's YTM -- just like the GICs are priced. Each bond in the portfolio has a guaranteed return. The perception that the bond portfolio's price is plummeting is due to the method of calculating the price of a liquid security.

But a bond fund is similar to a GIC ladder with many more rungs
Right. Still amazing to me how we perceive them differently. Even I do!
 

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I think that with the mess in the USA (tariffs, ect) markets are vulnerable. So, a light reduction in equities/US eq is in order. Hence my FI drive - just dont want it to backfire if rates rise and it goes down - maybe an inevitability. XBB/ZAG/VAB just might be where my hat should hang - keep it simple & HBB in my non-reg.
If you really want some security to offset the current market risk why not just allocate more to a HISA? BOC is expected to raise rates again next month so HISA rates should get a little better.

Tangerine is currently offering 2.75% for the next 6 months plus $25 bonus for opening a new HISA account. Zero risk.
 

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I wanted to expand upon my post above and compare buying a bond fund like XSB compared to a HISA like the one from tangerine.

$25,000 principle investment, assuming best case scenario and XSB returns 4% per annum for the period. Trading fees of 2x$9.95 for xsb to buy and sell.

Yeild fees Bonus Yeild Return Total Value at 6 months
XSB 0.004 19 0 50 25,031.00
HISA 0.00275 0 25 34.38 25,059.38

If you use Questrade and don't pay fees on ETFs.

Yeild fees Bonus Yeild Return Total Value at 6 months
XSB 0.004 0 0 50 25,050.00
HISA 0.00275 0 25 34.38 25,059.38

Hisa is still better in the short term and there is zero risk. XSB could perhaps have a negative return in a worst case scenario so what's the point?
 

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Personally I think this fear is irrational. When rates rise, GIC prices plummet as well, but the only reason people aren't upset by this are that GIC prices are not visible on statements. The banks show a "fake" value based on a simple accrual method (principal grows at the YTM rate).
... interesting scheme but care to explain?

If you wanted to, you could price a bond portfolio the same way using a simple accrual with each bond's YTM -- just like the GICs are priced. Each bond in the portfolio has a guaranteed return. The perception that the bond portfolio's price is plummeting is due to the method of calculating the price of a liquid security.
... but wouldn't this perception based on the ETF's overall unit price plummeting? I wouldn't want to have bought high, only to sell low when I then need those funds.
 

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... but wouldn't this perception based on the ETF's overall unit price plummeting? I wouldn't want to have bought high, only to sell low when I then need those funds.
That's why one of the fundamental tenets of fixed income investing is to match the duration of your holding with your investing timeline. It helps avoid unanticipated loss if interest rates rise and the drop in the unit price is greater than the interest received.
https://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/
 

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Hisa is still better in the short term and there is zero risk. XSB could perhaps have a negative return in a worst case scenario so what's the point?
Exactly. I learned the hard way to avoid bond etfs & MFs

How much potentially greater yield should a bond etf provide over a HISA for short term, or a GIC for longer term, to overcome the inherent risk of the bond etf?

Besides, I like control over my investments, so if I want a bond ladder, I will chose what goes into it.
 

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If you really want some security to offset the current market risk why not just allocate more to a HISA? BOC is expected to raise rates again next month so HISA rates should get a little better.

Tangerine is currently offering 2.75% for the next 6 months plus $25 bonus for opening a new HISA account. Zero risk.
I wanted to expand upon my post above and compare buying a bond fund like XSB compared to a HISA like the one from tangerine.

$25,000 principle investment, assuming best case scenario and XSB returns 4% per annum for the period. Trading fees of 2x$9.95 for xsb to buy and sell.

Yeild fees Bonus Yeild Return Total Value at 6 months
XSB 0.004 19 0 50 25,031.00
HISA 0.00275 0 25 34.38 25,059.38

If you use Questrade and don't pay fees on ETFs.

Yeild fees Bonus Yeild Return Total Value at 6 months
XSB 0.004 0 0 50 25,050.00
HISA 0.00275 0 25 34.38 25,059.38

Hisa is still better in the short term and there is zero risk. XSB could perhaps have a negative return in a worst case scenario so what's the point?
It seems to me that HISA interest rates are high relative to their risk and liquidity.

Technology has enabled online banks to establish themselves, with lower costs than brick and mortar banks. Now there are many of them, competing for savers' money, therefore they offer good rates for a product that is 100% CDIC guaranteed and totally liquid with no principal volatility.

The question is how long will it last. Banks like Tangering already have lowered rates for existing customers and are trying to attract new deposits with targeted promos, and trying to partition offers away from existing clients.

And short term bond funds still have a lot of assets, possibly from clients that want to keep all their assets at one financial institution, or that need to deposit much more than the $100k CDIC limit.
 

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Why?

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.
Compared to the stock market almost everyone on the forum would be best of investing in GICs instead
 

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... but wouldn't this perception based on the ETF's overall unit price plummeting? I wouldn't want to have bought high, only to sell low when I then need those funds.
Nobody's making you sell the bonds. When you hold a 5 year GIC, do you sell it (at a loss) when you need the funds? No, because you can't sell the GIC. If you could sell that GIC, you'd also get a loss when you did that (if interest rates went up).

... interesting scheme but care to explain?
OK let me explain what I mean when I say that GICs are shown at fake prices in your portfolio (whereas bonds are shown at real prices).

Start with the familiar, a 5 year GIC at 3.0%. You can buy it today for $1000 and it will have a final value of $1159 at maturity. The GIC's value between now and 5 years is loosely defined (or not defined), since the GIC cannot be sold. To keep things simple the banks often calculate the price using accrual at the interest rate. So in 1 year, they will show its value as 1000*1.03 = $1030. In 2 years they will show its value as 1000*1.03*1.03 = $1061.

It's that price calculation that gives all of us the perception that the GIC price is stable. In reality, we can't realize any of that value. At year 2 is it really worth $1061 ? Not quite... you can't get $1061 cash for it.

Now move on to a 5 year government bond. This will have a lower yield but to avoid complicating things pretend it's also 3.0% yield to maturity. The 3.0% YTM means that you can buy the bond for $1000 and that at maturity, its total value (after all coupon payments) will be $1159. This is exactly the same as the GIC so far.

So here you have two equivalent instruments. Both can be bought for $1000, and both will have a total final value of $1159. Both have 3% yield.

But the bond is priced differently, due to accounting regulations and conventions. Because the bond is liquid, a brokerage shows it at its current market price. After 1 year, the price may fluctuate (perhaps interest rates went way up) and maybe it now shows as $950 on your broker statement.

It's that pricing method that creates the perceived loss on your bond. But did you actually lose money? Of course not... unless you sell it at a loss. If you do nothing, the bond continues on its merry way until it eventually matures at the end at the original $1159.

There is an alternate way to price that same bond, though the brokerage won't do it. At that point in time where it showed at $950, you could have used the alternate method of valuation ... the GIC method ... and its price would have showed as $1030. However you would not be allowed to sell it at that price (same as a GIC).

My point is that the perceived loss of these bonds is due to the accounting and pricing method.

Now the "fund" (a portfolio of these instruments) : If you hold a portfolio of 5 year GICs, then obviously the total price will be the sum of all of those individual prices, each of which is steadily creeping higher. We perceive our GIC portfolios as having stable values that never decline. This is why we all love holding a bunch of GICs long term.

The bond fund/ETF can have an equivalent portfolio of 5 year (average) bonds. Because they are liquid and have prices, we see the value of the entire ETF wiggle around as the price of the individual bonds changes. What's actually happening is that the bond ETF is still steadily gaining value over the long term ... the positive return is guaranteed as long as bond yields are positive ... but the price zig zags with the volatility.

This chart demonstrates it well. Here you're looking at XBB's persistent price gain over the years (the blue line) with the wiggles along the way (red line). You are looking at the guaranteed positive return of bonds, the same phenomenon as the guaranteed positive return of GICs: http://schrts.co/ZqXGKc

If you held GICs instead of a bond fund, you'd see a "smoothed" line (volatility removed artificially) with the same guaranteed increase.

You will undoubtedly notice what looks like the flattening in 2017. What's happening here is that interest rates dropped so low ... to about 1.5% ... that the rate of guaranteed increase slowed down. As this rate of guaranteed increase reduced, the volatility -- the swings in the red price -- started swamping the picture. So now the XBB value is barely increasing over time while the volatility is quite severe, in comparison.

That certainly is the problem with ultra low interest rates. However this rate is starting to increase now and many of us expect it will increase further (this is a good thing).

The blue line in that chart, XBB with the volatility removed, will continue trending higher over the long term. The volatility, the red line, will always be there too.

Some people won't believe me (that bond funds steadily gain over time) and will say that I'm just showing a chart of a bond ETF during falling interest rates, and that the blue line only went up because interest rates were falling. To prove this isn't true, look at the period 1970-1980, when interest rates went up dramatically. I took the following chart from this bogleheads discussion, and it's showing an old bond fund going back to 1971.

Notice how it does what I describe. It steadily gains value over the years -- because bonds provide a guaranteed positive return -- but with price volatility along that path. There is no reason to fear rising interest rates. The tradeoff for the liquidity you get in a bond ETF is that you see real prices, and that means volatility.



White Text Line Map Plot
 

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If you want to be sure that you get your capital back plus interest in some time frame, bond Mutual Funds and ETFS do not offer that. They are influenced by external factors and you could very well lose you money. GICs or bonds with fixed maturity are the safest bet and will likely even have a better yield. And for longer term, a ladder made up of those is a good way to go. This based on hard learned experience, not theory :)
 

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The original poster was looking at 1 year investment period. One option for this could be GCS.PR.A, a split preferred. It has an YTM presently of approximately 4% and a maturity date ( redemption date) of 2019-07-31. It is one of the highest rated preferreds with a DBRS rating of Pfd-2H and downside protection of appox. 66% so safety should not be an issue. The after tax return in a non-registered account would be approximately twice that of HISA and GIC's.
 

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The original poster was looking at 1 year investment period. One option for this could be GCS.PR.A, a split preferred. It has an YTM presently of approximately 4% and a maturity date ( redemption date) of 2019-07-31. It is one of the highest rated preferreds with a DBRS rating of Pfd-2H and downside protection of appox. 66% so safety should not be an issue. The after tax return in a non-registered account would be approximately twice that of HISA and GIC's.
I have never looked at that split. It is quite interesting. It invests almost totally in US and foreign companies. Yet the dividends paid qualify in Canada as eligible dividends.

Canadian Tax Information – Eligible Dividend


Nature of Global Champions Branded Split Corporation Dividends

For purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends (and deemed dividends) paid by Global Champions branded split corporations to Canadian residents on our common and preferred shares after December 31, 2005 are designated as “eligible dividends.” Unless stated otherwise, all dividends (and deemed dividends) are designated as “eligible dividends” for the purposes of these rules.

Tax Reporting
Dividends paid by Global Champions branded split corporations are reported annually on Form T5 which is distributed to shareholders in February.
Have to see if I have some spare cash. Even in registered account, the 4% yield isn't bad.
 
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