In the article he has a section labeled:
''3. Enough with the bond funds already''
My question is whether you agree with his comments on bond funds (well ETFs in my case).
I thought the point of 'laddered' bond ETFs (like CLF and CBO ) was to reduce the problem Rob is mentioning; or if you are really worried, what about buying real return bond ETF like XRB?
I completely agree with point 3. about bond funds.
I've held the TD eSeries DEX bond index fund for many years and the returns are mediocre at best.
In retrospect, I feel I could have bought a 5 year GIC back when they were yielding 4% or so (around 2006) and had better returns and slept better.
The Canadian guru of bonds - Hank Cunnigham - is also very critical of bond funds and ETFs in his writings/books/commentaries for similar reasons as this article.
We also discussed issues with the laddering ETFs like CLF in another thread.
I'm still not clear exactly how these ETFs are "rolling over" the bonds instead of laddering, so I'll appreciate if anyone can describe that problem with ETFs.
I am, however, still a believer in bonds and have modified my approach to buying and holding individual bonds to maturity.
There are issues with doing this approach though, such as:
- Higher risk than holding a bond ETF because unless you have a multi-million dollar bond allocation, you can't replicate the diversification of a bond ETF
- Ineffective laddering: again because of a small portfolio, you can't achieve good laddering. You'll have to make small purchases and sometimes may not have funds available to make a purchase.
- Higher spreads and poor selection: most discount brokerages have a very poor selection of bonds. Your brokerage may not have a bond you want, or may not list it in their online searches or screenings.
If you hear of a bond and wanna buy one, you'll need to talk directly to their trading desk and they'll have to go find it for you.
The spreads you pay are higher as well and often you can't figure out exactly how much spread you are paying.
Sometimes, the person at the trading desk may be forthright with you and tell you exactly what the spread is but they are under no obligation to tell you the exact truth.
And if you buy online, you won't know the spread.
But then the MER of a bond fund/ETF balances out with this, I suppose.
The spread is a one time thing, while the MER is an yearly thing the larger your portfolio gets, the more it starts to be an issue.