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Fixed income bond funds such as VAB and XBB have been hitting fresh 4 year lows. Relatively though, they have been dropping less than the index, so they have been doing their job as a good portfolio stabilizer. Kind of reminds me of 10 years ago when everything went down together, just that bonds went down not as fast. Even shorter term bond funds are down. Of course, this may mean better returns going forward as yields slowly creep up.
 

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Even shorter term bond funds are down. Of course, this may mean better returns going forward as yields slowly creep up.
Bond market/NAV prices have to go down in the short term in order to provide the instantaneous increase in yield percentage the market demands each day. Absent further yield curve changes up or down, bond market/NAV prices will slowly increase as the lower yield bonds in the portfolio are cycled out. People continue to forget that 'duration' of the bond fund is an important criteria, e.g. XSB will fully recover its price in about 2.5 years AND have a competitive yield as well.

Of course, if bond yields continue to increase, bond ETF market/NAV prices will continue to lag until such time bond market yields cease to climb. Think about it like dragging that toboggan uphill. The climb is a PITA but the ride on the other side is highly rewarding.

Another anecdote: That 5 year GIC bought 2 years ago in a 5 year GIC ladder in the low 2% range looks like a beast today, but it will cycle out at maturity into the prevailing rate of the day. However, that 5 year GIC bought almost 5 years ago is now maturing and will capture current 5 year rates. Eventually interest rates will top out and start to decline again in event of a recession. That 3.5% 5 year GIC bought today will look pretty wonderful if interest rates collapse in 2020 and 5 year rates are 2% and HISA rates are 1.5%.
 

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I think you need to look at total return when viewing the XBB picture. On the 3 year time scale, it's (barely) positive. On the 4 year time scale, positive.

XBB is definitely getting hit over the last couple of years as bond yields creep higher... as would be expected. But again if you look at my visualization from an earlier post, what you're seeing is the volatile zag (ha ha) on the zig-zag along the path of the guaranteed positive return.

In fact, compare my bond fund visualization against the actual chart of XBB over 5 years: http://schrts.co/f9Qrbs

Pretty good match, I think. Sure, XBB has been treading water here for the last few years but it's all part of normal (and expected) volatility in bonds. The bond funds will increase in (total return) price -- they have to. And the bonds under the hood today are now generating a higher rate of return.

I'm buying more XBB these days.
 

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Indeed. This is a heck of a good time to be picking up bond fund units. About a month ago, my ex sold some equity ETF holdings and purchased XSB units.
 

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Why don't you buy ZAG instead of XBB? The MER is 0.10% (ZAG) compare to 0.19% (XBB).
The MER of XBB is about the same. The management fee was recently dropped to 0.09% and I think the MERs are within 1 basis point of each other. The iShares page shows the higher (old) MER because this comes from the year end financial assessment, and there hasn't yet been a full calendar year at the new low MER yet.
 

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Total Return of XBB may look OK at over 10 years - perhaps because all securities were hit in 2008. However 5/3/1 year total return performance is poor. Current yield is about 2.9%? This will go up as unit prices continue to drop. James is right - look at Total Return. It doesn't look good.

Seems much better to me to buy GICs or HISAs or other forms of fixed income where you know your capital will be 100% returned. FI should have minimum risk. Bond funds don't provide that.

GIC/Bond funds compared here: https://www.canadianportfoliomanagerblog.com/the-most-boring-battle-ever-bond-etfs-or-gics/
 

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I'm not trying to sway you to XBB nor ZAG – nor GIC's for that matter.

But make sure you're comparing apples to oranges when it comes to MERs.

As James pointed out above, the MER for XBB shows on the website as 0.19%. But this is based on 2017 numbers when their management fee was 0.30% for almost half the year.
Their management fee for all of 2018 has been 0.09%, so when the audited 2018 numbers come out, the MER for XBB is most likely to be 0.09% or at worst 0.10%.
Same as ZAG.
 

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Discussion Starter · #52 · (Edited)
Well Ill start by saying thanks for the help with the Bond world - some really good points by everyone - yes I have resurrected an old thread.

I analyzed Bonds and while I was doing that I read lots on the actual Portfolio construction.

I have decided that the money I control at Q-Trade will be 40/20/40 (Eq/Gold/FI), for money I have in Pensions ect where I dont have as many options I will just leave at 60/40 (Eq/FI), overall I think a pretty safe position.

As it relates to this thread, my FI in registered accts is XQB 15% / CLF 5% / HYI 8% - I have been using this since last fall and it seems to work. I have reservations with HYI - due to its risk factors, but right now I am just watching it. For my non-registered acct I am using HBB 20% / CLF 3% / HYI 5% - to reduce the tax side of things. XQB and CLF are not my first choice but I can trade in and out of them for free at Q-Trade so that efficiency swayed me.

I like the XQB/HBB positions and I am struggling with the CLF and the HYI.... If Interest rates are gonna drop I might be better off trading CLF for a longer (10+) year position for a while for a better return/gain. That is trying to time the market and generally that doesn't work well for people.... Also, if HYI stumbles thats no good if there is a recession, despite the 6.5% return it currently has.

Also, if HBB is no longer tax efficient (later this year) I will consider swapping to ZDB (non-reg acct) and still be watchful of CLF and HYI.

BUT, KISS has merit and maybe just XQB and HBB/ZDB is where I should be - and dont look back....
 

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I'm considering switching from XBB to ZDB (which is more tax-efficient, I believe), but my account is non-registered, and that would entail capital gains. Any thoughts on balancing tax efficiency of XBB vs. ZDB and capital gains incurred when switching?
 

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Discussion Starter · #54 ·
You got any capital losses ? maybe use them to offset ? otherwise just leave it.... add new $ to ZDB and leave your XBB well enough alone.....
 

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I'm considering switching from XBB to ZDB (which is more tax-efficient, I believe), but my account is non-registered, and that would entail capital gains. Any thoughts on balancing tax efficiency of XBB vs. ZDB and capital gains incurred when switching?
That's a tough one. Check the capital gain using the adjusted cost base that you see in the broker's interface. My sense would be, if the capital gain seems relatively small, go for it. Small meaning negligible effect on your taxes.

If you're trying to evaluate the tax trade-off: ZDB distributes approx 25% less interest income per dollar invested and the rest of the gain shows up in the share price. Here is how I might reason through the choice:

Say there's 300K invested in XBB currently (weighted average coupon=3.18%)
The generated interest income is approx the coupon amount = $9,540
Projected ZDB interest income = 0.75 x above = $7,155
So ZDB would reduce taxable interest income by about $2,385 per year

Let's say making the switch would cause you a 5K capital gain.
Included at 1/2 rate that would be equivalent taxable income = $2,500

If that were the case, incurring 2.5K net capital gain in order to get 2.4K interest income reduction per year, I would make the switch since it isn't costing you anything immediately and offers a long term saving. Maybe for this kind of reasoning you could look out something like 3 yrs to evaluate the interest income reduction vs immediate capital gain.
 

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I'm looking at ZAG to try and see what kind of carnage one could expect with rising rates. Looking at USGG10YR chart we had a bottom in March 2016 and peak in June 2018 before rate started trending down. During that time ZAG dropped about 10%....now what I find curious is that ZAG continues and always has continued to pay a distribution of 4 cents per month (except for a few random periods). Can anyone explain how that is possible during a time of fluctuating rates?
 

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I'm looking at ZAG to try and see what kind of carnage one could expect with rising rates. Looking at USGG10YR chart we had a bottom in March 2016 and peak in June 2018 before rate started trending down. During that time ZAG dropped about 10%....now what I find curious is that ZAG continues and always has continued to pay a distribution of 4 cents per month (except for a few random periods). Can anyone explain how that is possible during a time of fluctuating rates?
Why steady cash distributions? That's because the distributions come from the bond coupon payments. In a bond portfolio, the coupons are constant, until the bond matures and a new one replaces it at some different coupon rate. Over the span of a few years, you will see the coupon payments change gradually, but it has nothing to do with current bond prices. Even if bond prices plummet this year, the monthly distributions will be somewhat constant because the coupons haven't changed.

But the monthly distributions are just current income. To understand the magnitude of the "carnage" with rising rates, you have to look at the total return, which is share price + distributions combined.

In the 20 year history of XBB (which is about the same thing as ZAG), there have been many "drawdowns" of 6% to 8%, and even 14%. Just based on this history I think it's safe to say that a drawdown such as 15% is perfectly possible.

Note that 15% drawdown means something like a share price decline of 18%, because of that 3% cash yield.


Worst case scenario: evaluation of the carnage

You start with 100K invested in ZAG. Let's assume the worst case scenario plays out in one calendar year.

In this year, ZAG would pay out 3K in cash. The shares would be worth 82K at year end, down 18%. The combined ending value = 82K + 3K = 85K, which is the 15% drawdown according to my model.

During such carnage, I believe you would continue to get a steady monthly distribution as always. But does this really matter? Look at the share price decline. That's going to hurt.

I think that's the worst case scenario. If there was 15% loss in ZAG and XBB, it would be the largest drawdown they ever experienced.
 

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The XBB yield to maturity is now 1.65%. This is a higher yield than every high interest savings account in the country, with the closest being Canadian Tire Bank at 1.55%

I repeat ... even the highest interest savings account doesn't yield as much as XBB.

For someone who doesn't need the money in the next few years, what possible reason could you have for keeping the money as cash?
 

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As a ZAG holder trying to understand how bad this will get in terms of future price drops. As far as I know duration is about 8 years so if we get a 2% rise in rates I would be looking at a 16% loss (although already down about 8% from 52 week high)? One thing I don't understand....at current price it is the same as November 2011 pricing when rates were higher. How does that make sense? Would that imply that the market things we are headed back to November 2011 Bank of Canada interest rate level?
 

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So, the way I understand this, and someone correct me if I'm wrong, is that you can't just take the BoC overnight rate and claim that a 2% rise will incur a 16% loss in a bond fund, because bonds of different maturities pay all kinds of interest rates and they won't all move in lockstep with the BoC rate. This makes the prices of bond funds extra hard to predict and make sense of...
 
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