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i agree, very good article, thank you

so the answer is to hold one or more funds with a duration that matches your need or needs for the money ..

like XSB with half and XBB with the other half as an example ...

if you hold for the full duration of the fund you are getting the "equivalent" of buying individual bonds ...

as far as GIC's go, the very best 1-year rate is 2.50 from maxa credit union in manitoba .. you get a provincial rather than a federal guarantee though .. (if that means anything)

not really worth locking in at 2.5% when you can get a cdic insured hisa at 2% though
from my point of view, it does not make sense to mix XSB and XBB, since XBB bonds holding contain 40% of relatively short term (1-5 years) bonds.

Would be better to mix XSB and XRB, maybe some junks bond too.

Or someone could just say, i am going trust the wise folks who manage PHN110 :)
 

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Discussion Starter #24
from my point of view, it does not make sense to mix XSB and XBB, since XBB bonds holding contain 40% of relatively short term (1-5 years) bonds.

Would be better to mix XSB and XRB, maybe some junks bond too.

Or someone could just say, i am going trust the wise folks who manage PHN110 :)
@larry81 - that's what I keep coming back to, if I already own XBB, with 40% short bonds, then am I really gaining much by holding XSB also given my 20-year time horizon. I'm not convinced. I think I'm going to keep my XBB and in another 15-20 years, just start creating a bond ladder as I get closer to retirement.

As I get close to retirement, age 50, I plan on having a 50/50 equity/bond split in my registered holdings; a bunch of XBB or similar and at least 10% in
CLF or CBO.

The lads at PH&N do have a good bond product, although MER is twice as much as XBB and 80% of their holdings are long issues which I'm not a fan of.
 

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@larry81 - that's what I keep coming back to, if I already own XBB, with 40% short bonds, then am I really gaining much by holding XSB also given my 20-year time horizon. I'm not convinced. I think I'm going to keep my XBB and in another 15-20 years, just start creating a bond ladder as I get closer to retirement.

As I get close to retirement, age 50, I plan on having a 50/50 equity/bond split in my registered holdings; a bunch of XBB or similar and at least 10% in
CLF or CBO.

The lads at PH&N do have a good bond product, although MER is twice as much as XBB and 80% of their holdings are long issues which I'm not a fan of.
Your thinking is correct.

Sure with interest rates that are (supposed) to rise this year, the NAV will take a hit but with your time horizon its a non-issue.

When it come to bonds holding, you simply cant go wrong by simply holding XBB.

Try to keep your fixed income in your registered accounts if you can :)
 

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Even if your time horizon is 20 years?
Right now that is the best yield with the lowest risk. If I didn't need liquidity I'd go with 100% GIC ladder for bond component. It's sensible to keep some cash for rebalancing in the event of an equity correction.

XBB is basically strictly dominated by a 5 year GIC ladder. You get more money after five years. There is no chance of capital gains in XBB, and plenty of risk of capital loss.
 

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With the discussion on bond ETFs here, I did not see reference to XHB, iShares recently insituted Hybrid bond product, I think it was available as of October 2010 or so. In our non-registered portfolio, I hold XBB (66%) and some XHB (33%) of the 40% total bond holdings.

Yield = 5.3%
Mer = .45%
HST - .05%

I bought our holdings shortly after the New Year, and so far am pleased with the results. Presently sitting at +.47% since January. Any other comments or opinions on XHB? (perhaps I should have started a new thread?)
 

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Andrew : I'm not an apologist for the way Yahoo Fin. calculates yield and I agree with you that for anyone holding a fund for the average duration of the bonds in it that the capital loss as the bonds mature must be factored in. However, Yahoo takes a shorter snapshot and if one looks at the fund like an individual stock I suppose you can measure the yield -as they do - by taking a four quarter gain and relate it to the average NA value of the fund. Anyway people find many ways to measure the long or short term performance of a fund. Maybe the psychological effect is worth something !
 

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Discussion Starter #29
Thanks Larry81, re: with your time horizon its a non-issue. (20 years).

XBB is my all-in-one bond. I probably should have mentioned I'm not a fan of bonds for the most part, I think they are barely winners when compared to inflation, certainly a laggard vs. equities.

The only place I keep XBB, is in my RRSP.

My TFSA is all dividend-paying stocks, I have a growing list of Canadian dividend-paying stocks unregistered and I have a defined benefit pension plan at work.
 

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^Nope. That is the coupon yield. It will be reduced by capital loss as the bonds mature. Yield to maturity is the way to look at these bond funds.
Agreed. I see no sense in purchasing this type of ETF for capital appreciation. If you can get some, ok ... but it should not be your main goal with this type of security.

Besides, given that these funds are comprised of laddered bond maturities, those that mature sooner will be replaced by newer issues (at, hopefully, higher coupon rates) in time. Yield to maturity is the way to go.
 

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With the discussion on bond ETFs here, I did not see reference to XHB, iShares recently insituted Hybrid bond product, I think it was available as of October 2010 or so. In our non-registered portfolio, I hold XBB (66%) and some XHB (33%) of the 40% total bond holdings.

Yield = 5.3%
Mer = .45%
HST - .05%

I bought our holdings shortly after the New Year, and so far am pleased with the results. Presently sitting at +.47% since January. Any other comments or opinions on XHB? (perhaps I should have started a new thread?)
The difference is that this is a high yield fund, and so more credit risk. It has a yield to maturity of about 5.3% and a duration of 6.35 years. That's pretty long duration if interest rates rise.

I think CSD is more interesting for the high yield space. It had a duration of about a year and a higher yield to maturity. The return of that fund it also return of capital/capital gains to boot. It's pretty new and since the fund is small it's invested in a smaller number of issues, but I think it's something interesting to keep an eye on.
 

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Discussion Starter #32
After doing only some quick searches on XHB, I wouldn't own it.

XBB has a) much lower MER, b) solid returns, c) more short duration bonds, d) mostly AAA bonds, e) 3x the holdings, f) lower weighted average duration and g) a proven track record against a widely accepted/standard index.

I'll definitely stay with XBB over XHB.
 

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I continue to hold the PH&N Bond Fund D as my core bond holding on the theory that I would prefer to have professional managers with a proven track record managing my bond allocation during the predicted rising interest rate environment. This is not to say that some losses would still be unexpected but there are times when professional management helps me to sleep better.
 

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An active bond fund with a strict mandate (100% invested, only say Canada bonds, etc.) is likely to get just as hurt by active management as passive. Paying big MERs on a bond fund is crazy.
 

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Hi..thought I'd jump in here - I have a question or two
I'm in the process of completing a 5 yr GIC ladder - I'm a buy & hold type of investor (aka Belguy and others). I have about 27% in DRIP equities (TRP, T. SLF, CDZ, FIE), 30% in bond funds & fixed income (one bond fund - NexGen - has a high MER, the other 2 fixed income funds have low MER's - Beutel Goodman and McLean Budden some cash (3%), and 40% in a 4 yr GIC ladder. I plan to cash in a portion of the fixed income and buy a 5th GIC to complete a 5 yr GIC ladder - all interest is to be used to buy more equities in the future. I'm 50 and won't need anything for another 10-12 yrs.

My questions.

1. If and when interest rates go up, will 5 yr GIC rates go up? I guess this is like timing the market to some extent, but what are you thoughts?

2. Many of you are pooh-poohing high MER bond funds - if not bond funds, then I conclude that many of you recommend buying bonds outright (I know little about bond investing) or buying bond ETF's. Seeing that interest rates are going up, and I already have short term bond like products in GIC's, are long term bond funds the way to go? XLB?
 

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dubmac, that is a very conservative allocation.

1. Yes, 5 year rates on GICs will increase a bit as rates rise. Into the mid 4 and 5% range.

2. Yes. Bond ladders, GIC ladders, savings accounts and bond ETFs are the way most here go. Bond MFs (except perhaps high yield) are usually a crazy idea. A MER of 1% on a bond fund is not low. Bond ETFs are nice for their liquidity and the ease of management, but for a reasonable size bond portfolio it is a bit cheaper to buy bonds directly.

Long term bonds have one way to go: down. It's a great way to lose a lot of capital over the next 5 years. Stick with short duration bonds or GICs for now, until rates rise.
 

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Financial Cents said:
I don't believe in a GIC ladder, yet, because I'm still in my 30's.
...
[GIC ladder] Even if your time horizon is 20 years?
What does your age or time horizon have to do with it? If one's asset allocation includes a fixed income component, then in today’s interest rate environment a ladder is a reasonable candidate for at least a portion of that component, regardless of one's age. I don’t see why anyone would intentionally opt for lower returns coupled with higher risk. Sure a young person has more time to recover from the lower returns, but if they didn't go down that road in the first place, there'd be no lower returns to recover from.

Financial Cents said:
what is the best GIC laddered product out there right now?
The best laddered “product” isn’t a product at all, but a selection of separate and discrete GICs of staggered maturities that you assemble yourself. Or bonds if you wish to sacrifice some return in exchange for liquidity. There are some ETFs (ie. CLF) that use a regimented laddered structure, but their disadvantages outweigh their advantages, and they’re not recommended. That may change in the future, or it might not.

dogleg said:
Yahoo Fin. would have you believe ... etc. etc. ... Right now it would be about 3.38 % minus the MER of 0.25% or about 3.13 %
No ... it would be about 3.38% minus nothing ... they are measuring what was actually distributed to unitholders, not the gross amount that was received by the fund ... 3.38% is net of MER.

dogleg said:
In some ways I suppose it makes more sense to use the Yahoo (etc. ) method .
No ... the current yield is only one part of the overall return with a bond fund, so is rather meaningless on its own ... people get drawn into bad decisions by the current yield all the time (ie search this forum for any mention of CLF) ... it would perhaps make more sense if Yahoo didn’t report the yield on bond funds at all ... the distribution history is readily available from the fund sponsors directly, along with various more meaningful and relevant metrics.

andrewf said:
^Nope. That is the coupon yield.
Actually, its the current yield ... the coupon yield is even higher.

Dubmac said:
I plan to cash in a portion of the fixed income and buy a 5th GIC to complete a 5 yr GIC ladder
...
If and when interest rates go up, will 5 yr GIC rates go up? I guess this is like timing the market to some extent, but what are you thoughts?
Dubmac ... if you wait until GIC rates have gone up, then your bond fund will most likely have gone down ... its difficult to say whether the increased return on the GIC would make up for the smaller amount of capital you’re earning interest on ... if you plan to shift some money from bond fund to GIC, then you should either just go ahead and do it now, or sell the bond fund now and sit on the money in a HISA for a while ... the problem with the latter approach, of course, is knowing how long do you wait? ... and what would be the signal for you to deploy the funds? ... and would you recognize the signal when it came?
 

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I took a look at the iShares page and saw that the yield to maturity on XBB was 1.49% on Friday. XBB dropped more today, so it's safe to say that the yield has hit 1.5%

Kind of a milestone there. 1.5% is a somewhat impressive yield these days! There are few savings account in the country which pay this much interest. Every savings account that I use myself pays less, so XBB actually has the best yield among my various fixed income investments.

If one holds XBB for a decade, the estimated return is 1.5% annualized. If inflation remains at the current 1.0% level, that's a good return.

If inflation goes down, and/or if interest rates go negative, XBB will be a fantastic investment.
On the other hand if inflation goes up, and rates go higher, XBB will perform poorly.
If inflation gets out of control and rates increase a lot, XBB will be a terrible investment.

My perspective here is that I can't predict which of these will happen. Therefore I continue to invest (passively) in XBB without trying to predict interest rates or inflation rates.
 
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