Bond index funds have a place in almost all portfolios, even in a low-rate environment. However, it’s important to match the right bond fund to your investment goals. To do that you need to know two important details. You can usually find both of these numbers on the web page or fact card of any bond mutual fund or ETF.
The first is the weighted average term to maturity of the bonds in the fund. For example, the iShares DEX Universe Bond Index Fund (XBB)—which tracks the most popular fixed-income benchmark in Canada—is about half short-term (one to five years to maturity), one quarter intermediate-term (five to 10 years) and one quarter long-term bonds. The weighted average term to maturity of all the bonds in the fund is 9.3 years.
This number is important, because the fund will behave much like an individual bond of about this same maturity. Sure enough, if you look up the current yield on Government of Canada 10-year bonds you’ll find it is 3.07%, almost identical to XBB’s current yield to maturity (3.03%). Now you know that XBB will be sensitive to the prevailing interest rate on 10-year bonds: if this yield goes up, the fund’s value will fall. Other interest rates—such as the Bank of Canada’s overnight rate that you keep hearing about on the news—are pretty much irrelevant.
The second key figure is your bond fund’s weighted average duration. This tells you the fund’s sensitivity to interest-rate movements: the longer the duration, the more your fund will lose if rates go up.
Duration is a calculated with a complicated formula that considers a bond’s term to maturity and its coupon. The important idea is that the longer the maturity, or the lower the coupon, the longer the duration. This is why short-term bonds are less sensitive to interest rate swings, and why higher-yielding corporates are less vulnerable than government bonds:
Ticker | Avg. Term | Coupon | Duration | |
---|---|---|---|---|
iShares DEX Short Term Bond | XSB | 2.9 years | 3.62% | 2.7 |
iShares DEX All Corporate Bond | XCB | 8.3 years | 5.21% | 5.5 |
iShares DEX Universe Bond | XBB | 9.3 years | 4.41% | 6.3 |
iShares DEX All Government Bond | XGB | 9.5 years | 4.00% | 6.6 |
iShares DEX Long Term Bond | XLB | 22.8 years | 5.72% | 13.7 |
iShares DEX Real Return Bond | XRB | 20.9 years | 3.40% | 16.2 |
As you can see in the table, XBB (and similar broad-based funds) have a duration of just over six. That means if the relevant interest rate rises one percentage point—remember, in this case it’s the yield on nine- or 10-year bonds—then the fund can be expected to fall in value by about six percentage points.
And the bond played on
There are a couple of subtleties to be aware of here. First, interest rates at the long end of the yield curve tend to be less volatile than short-term rates: it’s unusual for 10-year bond yields to move more than one or two percentage points in a year. So the chance of a fund like XBB suffering double-digit losses in any given year is remote—at least if history is any guide.
The iShares DEX Long Term Bond Index Fund (XLB) looks even scarier with its duration of almost 14: a 2% jump in the yield on 20-year bonds would theoretically mean the fund’s value would decline by some 27%. But this has never happened. Since 1948, the worst one-year return on the DEX Long-Term Bond Index was –8.9% in 1956, followed by –7.4% in 1994. In the U.S., long-term bonds have seen just one double-digit decline in 85 years (that happened in 2009).
Another often overlooked point is that rising interest rates have a silver lining: new bonds are issued with higher coupons, and this will eventually lead to more income. (Doesn’t it strike you as odd that fixed-income investors complain about low rates while also worrying they might go up?) As bonds in a fund approach maturity and are sold, the proceeds are reinvested in higher-yielding bonds that help offset the price declines. That’s why bonds recover from bear markets much faster than stocks do.
Stay in for the duration
Which leads us to the key message for investors: as long as your time horizon is at least as long as the duration of your bond fund, you won’t lose any capital.
You’ve probably heard people say they prefer individual bonds to bond funds, because as long as they hold on until maturity, they won’t lose principal. Well, the same is true if you hold a bond fund for a period equal to its duration. You can be sure that XBB will not have a negative total return over any period longer than 6.3 years: any price decline from rising interest rates will be offset by higher coupons within that time frame. In fact, history suggests the recovery is likely to be more swift than that: even a three-year period of negative bond returns is extremely rare.
So, if you’re saving for a child’s education with a three-year time horizon, steer clear of XBB and choose a fund with a duration less than three—or just put your money in a GIC or high-interest savings account. But if you’re investing for a retirement that’s 10, 20 or 30 years down the road, a broad-based bond index fund should still be a core holding in your portfolio.
Thanks for another interesting series of posts.
With regards to your comment that a bond fund will not lose money if it is held for at least as long as its duration, is there a difference between an index bond mutual fund vs. an index bond ETF?
If interest rates go up and bond prices fall, investors might flee the bond market, and a mutual fund would be forced to sell at low prices to pay redemptions, and would not have sufficient incoming money to purchase new bonds with a higher coupon. Those who bought and held, and kept the bond mutual fund would potentially be stuck with the loss.
In contrast, an ETF should behave differently, because a sell off of units could be satisfied by institutional investors redeeming creation units of the ETF. The remainig ETF units should behave as you describe in your post.
@John: I’m not aware of a situation like this happening, and I’m not sure that things would unfold that way. The argument for this would be even more compelling with equity index funds v. equity ETFs, would it not? And to my knowledge, there has not been a situation where index funds lagged comparable ETFs for any meaningful period because of forced redemptions.
I have much reading to do. But I’m now considering moving from XSB to XBB.
Thanks for another informative post.
You should consolidate all your posts, update them (when needed) and publish them as a book.
Ever thought of making a model portfolio that’s “low-maintenance”, with few dividends (ie, HXS, HXT) and as DRIP-friendly as possible ? I’m sure I’m not the only one who wants to set things up and then do as little as possible…
@Paul: A book may be in the future… As for the low-maintenance portfolio, remember that most brokerages will DRIP a wide variety of ETFs, including most of the TSX-listed ones in my model portfolios. Personally I wouldn’t recommend people make their fund decisions based on that criterion. I wouldn’t use a swap-based ETF in my RRSP just because I don’t want to reinvest the dividends once a year or so. Being hands-off is great, though a little housekeeping once or twice a year is probably warranted. :)
In this thread (https://canadiancouchpotato.com/2010/03/19/a-mutual-fund-refugee/ see your response to my question) you mentioned that most funds don’t hold their bonds to maturity, but sell them within a year of the maturity date. How does that square with the statement that you won’t lose money if you hold for the duration? Or is it just a whole bunch of math that works out to be true?
CCP: I think the DRIP issue might be a tie-breaker for CBO and CLF rather than Ishare offerings, and the swap-based ETFs I’m considering are for my non-registered investments, and they’d allow me to minimize taxes.
I’m with BMO InvestorLine, which doesn’t DRIP ETFs other than their own and Claymore’s.
Chris,
Unless a bond fund or ETF is trading and making big interest rate or credit bets, it’s unlikely that the trading will impact Dan’s argument. And I don’t think you need fancy math to figure this out.
Understand that this notion of holding for the duration or term of a bond fund is partly based on the idea of…the longer you hold an investment the less your chances of losing money.
Also, barring an environment with hyper-inflation (as in 1920s Germany) or where lots of companies and governments default on their debt, neither of which has happened in North America, the worst bond markets we’ve seen were low double-digit losses (i.e. -10% to -13%).
Those losses (i.e. in 1981 and 1994) happened after sharp increases in bond yields. The higher yields push prices down immediately, but then provide higher subsequent interest payments, which in turn helps speed up the recovery of the losses. And since yields don’t go in a straight line, they often fall after they rise – which also helps bond prices recover.
(On a related note, the % price increase from falling rates is larger than the % price decline resulting from rising rates; which is another factor that helps bonds recover reasonably quickly. For the technically-inclined, this is explained by the concept of bond convexity.)
@John “If interest rates go up and bond prices fall, investors might flee the bond market, and a mutual fund would be forced to sell at low prices to pay redemptions. Those who bought and held, and kept the bond mutual fund would potentially be stuck with the loss.”
This would seem to be the achilles heel of a bond fund compared to holding individual bonds in that novice investor panic could trigger a selloff of units resulting in a capital loss by bond fund holders as John describes. If you read the prospectus of a mutual fund there is provision for a suspension or delay and postponement of redemption of fund units to prevent such an unpleasant scenario so that buy and hold investors should not be punished hopefully!
Another great article Dan, and great reader posts. The bond world with its multitude of market possibilities to the novice like me is mind boggling. However, thanks to you Dan and a host of your intelligent readers/comment contributers this field is slightly less confusing. Thanks to all, and Dan sign me up for a copy of your book. Keep up the great articles with your clear and concise explanations!
Since Dan H. was too modest to link his related article on the effects of rising rates, here it is. http://thewealthsteward.com/2011/07/the-relevance-of-ytm-the-impact-of-rising-rates/
Thanks to both Dans for their insights on this timely topic.
@Dan H: Thanks for your insight here, and I’m glad gsp provided a link to your excellent post. It does a great job of revealing how bond funds might be expected to recover after a spike in interest rates. However, my favourite line is this one: “In all of my seventeen years in this industry there has been a near-constant sentiment that historically-low interest rates are poised to rise.” Some perspective from a professional with lots of experience.
@Superior John: Glad you’ve found the posts helpful. I am always pleased to get such smart feedback from readers. It certainly keeps me on my toes. :)
Dan, another excellent post with very insightful and valuable information! Your post answers my question about bond durations.
As Paul G mentions you must publish all this material into a book one day – I’d even promote it :)
For my bonds, I went with a TIPS and Short-term bond ETF (weighted avg term is 2yrs, I believe). If I had more funds I actually would put some in the long-term to grab some yield, but as my portfolio is pretty small, I’ll just wait it out a bit and hopefully in 2-years move some into the longer-term bond fund.
As to a book, I know lots of people get excited about eBooks for Kindle and the process to take your posts and create a book seems fairly straightforward.
Great stuff Dan. Thanks also to Dan Hallet, who commented here and posted an equally great article in the Globe and Mail this week. Maybe an ebook on bonds is in order? :)
A comment/question regarding DRIP for bond funds…
If you have a target ytm when buying a bond fund (like say a child attending post secondary school) and you wanted to be sure that your bond fund would not lose value over that time frame, wouldn’t using a DRIP throw the ytm off a bit? Instead of a single buy-in time, your overall buy-in would be in fact ongoing, pushing the ytm date back a little with each DRIP contribution. Or am I getting this wrong?
@Corey: The YTM should only change when interest rates move, so the DRIP shouldn’t make a difference if rates stay the same during your contribution period.
What is more of an issue is that when saving for a child’s education your time horizon keeps getting gradually shorter, but the duration of your fund stays the same. So if you put $3,000 into a bond fund with a duration of three, because your child starts school in three years, the fund won’t lose value over that period. But if you put in $1,000 a year for three years, that’s not the same thing. Only the first $1,000 is safe, because the other two deposits will be in the fund for only two years and one year, respectively. So as you approach your deadline for the money you need to shorten the duration (or move to cash) if you want to guarantee the principal. Make sense?
A question for both CCP and Dan Hallett
When taking over our own investments and carefully considering our asset allocation last December, the following article convinced me to not include any bonds, but to choose a 3-year ladder of GICs instead.
Back to Basics: Six Questions to Consider Before Investing by Ben Inkler, GMO
Click on title at: http://www.gmo.com/America/
See the section on bonds.
The article caused us to eliminate medium and long bonds as asset classes for now. And it made us question short term bonds too. Then, looking at the YTM and term to maturity of the short bond etfs (CBO, CLF, XSB and even PH&N Short Term Bond and Mortgage), I did a comparison with a 3 year GIC ladder with Achieva Financial (one of the Manitoba credit unions). The comparison was more favourable to Achieva and the article made me not want bonds, so we went with that. The plan is to reassess as each leg of the ladder comes up.
Now, you are causing me to wonder if I misunderstood in the GMO analysis or if their concerns are not valid… or just misguided. Could you guys look at this article and comment on it? I would be very appreciative.
@Flagen: Thanks for the comment. I’ll chime in with a few points.
I read the Inkler piece. I’m not sure that my takeaway message was “Don’t buy bonds, period.” It was a more subtle, “Last time interest rates were this low, bonds saw long periods where they did not outperform cash,” and therefore don’t expect them to deliver returns near the historical average.
Traditionally, “cash” means 30-day T-bills or some other money market instrument. A GIC is not really a cash equivalent, since you are locking up your money for a fixed term of one to five years: in that sense, GICs are much closer to short-term government bonds of the same maturity, since the credit risk is the same (i.e. zero). GICs are less liquid than government bonds, so they should compensate investors with higher yields, and indeed they do.
All of which is to say that your decision to buy a 3-year GIC ladder is not really a decision to accept cash returns. It’s roughly equivalent to buying short-term government bonds that you are not allowed to sell until they mature.
Over the last 12 months, CLF (short-term government bonds) has returned 3.1%, which is probably higher than you got with the GICs, but that is largely because CLF’s ladder goes out to five years and your GICs only go out three. One should expect a five-year GIC ladder to deliver slightly better returns than CLF (at the cost of less liquidity).
Hope that helps.
It helps.
But I guess that despite attempting to understand something in depth and make a good decision, I’ve discovered (why am I surprised?!) that I didn’t really understand the big picture. I was missing the info that you have now supplied in your post: that medium to long bonds, despite their scary durations, have rarely produced protracted bear bond markets, and, although I’d read about yield curve and bond convexity, their full implications were beyond my ken. Three years of bear… I could live with that (note we went for a 3-year ladder, not five… hoping choices would be better or clearer by then).
Yet again, the full couch potato idea wins in comparison with over-thinking, trying to understand/guess what markets will do, etc. I am a slow student :)
When making my decision, one element that weighed in the picture was the fact that your portfolio had CBO/CLF as its bond allocation – both obviously short bonds. The advice “du jour” was go short (as you pointed out). If I’ve understood correctly, you have changed your mind. Did you change your holdings?
A quick follow up: It would seem that two errors could have resulted in a reasonable strategy. Mistaking GICs for cash means we have the equivalent of a very short bond fund (without the liquidity, but with a tiny bit more yield… not worth it in hindsight, but there you have it.)
I have taken heart from Dan Hallett’s post previous to the one linked above:
http://thewealthsteward.com/2010/12/dont-forget-bonds/
It was written precisely in December as I was making the decisions. He says to go short to limit damage in the event of rising yields and ” Current market rates indicate that a short ladder can produce a current yield-to-maturity (YTM) approaching 2.5% annually. For example, looking the Claymore 1-5 Year Laddered Government Bond ETF and the Claymore 1-5 Year Laddered Corporate Bond ETF, a 50/50 split would offer a YTM of 2.4% and a duration of 2.9 years.”
This is what we saw too. Our three year ladder is just slightly higher. I feel better, but not smarter. Sigh.
@Flagen: I hope you won’t beat yourself up about this, because I don’t think you did anything wrong. The anti-bond rhetoric has been relentless for a couple of years now, so it’s not surprising that you were concerned. Compared with simply investing in a short-term bond fund, you will probably end up the same or even a bit ahead. This is a learning process for all of us.
In my own case, no, I have not changed my holdings. I still use a 50-50 split of CLF and CBO. I’ve kept my bonds short not because of current market conditions, but simply because I prefer the lower volatility. These two funds make up only 20% of my portfolio, and I have another 10% in real-return bonds, which of course have very long durations.
Keep in mind that a 3 year GIC ladder has a lower duration than CBO/CLF, and are not really comparable.
Hi CCP,
I’m having trouble wrapping my brain around some of this. If I put 10K into a bond fund with duration 3, and need it back in 3 years, am I not vulnerable to interest rate changes as my time horizon ticks down? e.g. In the final year, my time horizon is now 1 year, but my assets are still in a duration 3 fund. Do I not need to shift my assets into lower duration funds as I go?
Also, just want to say thank you a great site – full of lucid, insightful and often funny posts. Great work!
@Mark: Thanks for the comment. I’ll try to explain. If today you put $10K into a bond with a duration of three, then you can expect to get all of your principal ($10K) back in three years, regardless of interest rate changes. However, after two years, your investment will likely have grown: at 5% compounded, it would now be worth $11,025. Now if interest rates rise in the third year, your investment will fall in value, but it won’t fall below $10,000. (To do that, it would have to fall more than 10%, which would mean an interest hike of of more than 3 percentage points. And of course, the higher coupons would offset some of that capital loss.)
So, if you want to protect more of the $11,025, then yes, you could shift to a shorter duration as your time horizon gets shorter. The trade-off, of course, is that bond funds with shorter durations usually have lower returns.
Does that help?
Yes, that helps a great deal. Thanks very much, it’s starting to sink in now. That does suggest that if I’m in individual bonds then I’ll keep my capital and interest, whereas with the bond fund, some of my interest could have been nibbled away. Though looking back, your thesis is that you won’t lose capital if your bond fund duration equals your time horizon.
@Mark: “Your thesis is that you won’t lose capital if your bond fund duration equals your time horizon.” Yes, that is still true, as long as it’s clear that we’re talking about the original capital ($10K in this example), and not a moving target. In the example you give, after two years the investor’s time horizon is one year but the duration of his bond fund is three years, so it is possible for his current balance ($11,025) to decline over the next 12 months. But the same is true if you hold a three-year bond that you plan to sell in one year.
Having said all this, you may be interested in the target-maturity ETFs recently launched by RBC. These do, in fact, have durations that get successively shorter:
https://canadiancouchpotato.com/2011/09/23/ask-the-spud-rbcs-target-maturity-etfs/
Right, that all makes sense. But just for clarity, if I’d bought a three year bond originally, it would now effectively be a one year bond with 12-months to go. So it’s not going to decline in value as much as the duration 3 fund over the final 12-months, if interest rates go doolally (i.e. up)?
Equally, I suppose if interest rates went down, my individual bond that’s now 12-months from maturity wouldn’t benefit so much as the fund on the upside.
@Mark: You’ve got it exactly.
Dan, can you please tell me if I understand this correctly with my example below?
I should purchase XRB until 16.2 years prior to wanting to sell it. Then likewise, purchase XBB for the next 9.9 years (6.3 prior to wanting to sell it). Followed by, purchasing XSB for the next 3.6 years (2.7 prior to wanting to sell it). Then, 2.7 years later, all three would be sold and moved into a high-interest savings or GIC or something like that, depending on the need for cash.
Also, If you are planning for retirement which is more than 20 years away, would there be a reason to have XSB instead of XRB? I ask this since you mentioned you have 20% XSB and 10% XRB.
Thank you greatly.
@Que: I would not be that literal in interpreting bond duration. Most people will find that XBB is a perfectly good core holding for the very long term. (And XRB should be considered a different asset class altogether.) If you are worried that rising interest rates might cause bonds to lose value, that you may want to avoid XBB if you have a time horizon shorter than six years: XSB might be a better choice.
My own preference for short-term bonds has nothing to do with a prediction about interest rates. It’s simply that short-term bonds are less volatile. My portfolio is 30% bonds, including 10% XRB (which can also be volatile), so I like to keep the other 20% as stable as possible. But that’s just personal preference.
Hi, I am little late for this discussion, but would appreciate your thoughts/opinion. First of all I would like to say how much I appreciate your blog and the opportunity to to learn!
As a background to my question, my wife and I are in late 60th to early 70th. Improving the yield on RIF these days while not risking the farm is a problem. Looking at the bond side of investments, what would you say about investing in CBO or in PSB? Thanks !
Ivan
@Ivan: Thanks for the comment, and glad you’re enjoying the blog. CBO and PSF are almost identical in their strategy, cost, etc., but CBO has much more trading volume and is likely to be more liquid. That means it may be cheaper to buy and sell.
Another late couple of questions!
If I’ve understood correctly, staying in for the duration protects your principal. Is that assuming you have re-invested all distributions? And, when can you be sure you’ll receive not only your principal back, but also the fund’s YTM?
@Flagen: Yes, all distributions are included in the assumption. The idea is that any decline in the market value of the bond will be offset by coupon payments if you hold for the duration. That’s why if two bonds have the same maturity date but different coupons, the one with the higher coupon will have a shorter duration.
You really can’t be sure that you’ll receive the stated YTM of a bond fund, because a bond fund never matures. The YTM simply estimates your total return in the current year if interest do not change. Of course, interest rates will move over the course of a year, so YTM really has to be considered an estimate only.
This is why some people prefer individual bonds and GICs to bond funds. Often they say individual bonds are less risky, which isn’t true, but certainly they are more predictable. If you by a bond or GIC and hold it to maturity, you know exactly what your total return will be over that period. However, if you’re in the accumulation phase of your investment life, the predictability of income is not likely to be important.
“Doesn’t it strike you as odd that fixed-income investors complain about low rates while also worrying they might go up?”
Well, no more odd than stock investors complaining about high prices while also worrying that prices might drop.
I would like to apply this principle to the bond funds available through TD e-series. Have you by any chance calculated the duration for those funds? If not, should we be following the formulas in the Investopedia link you provided to do the calculations? (Though, in all honesty, I have no background in finance, or anything related, so I was thoroughly intimidated.)
Also, a question: does this mean that the duration of funds don’t change? (E.g., if I invest in XBB in 2013, then I cash in at 2019. If I invest in IBB in 2014, then I cash in at 2020. And so on.) Or if they do change, is there a way to stay on top of that?
@MJ: The TD Bond Index Fund has about the same duration as XBB, since both funds track the same index. These funds are suitable for people with a time horizon of at least seven years or so, though I hope you won’t take this idea so literally that you plan your sell date in advance. The general idea is to simply make sure your fund’s duration is appropriate to your goal: for example, don;t use a broad-based bond fund for short-term savings, and don’t use short-term bonds for retirement accounts.
The duration of a bond fund will change gradually over the months and years. As interest rates rise, for example, bonds of the same maturity will have a shorter duration. The only reasonable way to keep an eye on this is to look up the duration on the fund’s website. No one makes the calculations themselves.
CPP, thanks so much for the quick response. I am very new to all of this, and reading (and re-reading) through all your posts has really helped.
Right now in the process of breaking down my investments into short-term (laddered GICs), medium-term (bond fund), and long-term (equities).
For those of us investing in the bond fund long-term (20-40 yrs.), is it good practice to sell/re-invest every seven years, owing to the duration? Or is the duration-rule mainly intended for those who need to keep the principal secure, for whatever reason?
A second question: suppose the duration of a fund drops drastically (I don’t know if this happens, but suppose XBB went from 7 to 4). Does that mean, to protect the principal, I should sell approx. 4 years from the time of my original investment, or does the new duration apply to new investments only?
@MJ: I realize bond math is complicated, so don’t hesitate to ask questions. But you’ve misunderstood the concept of duration. The key idea here is not that you need to sell a bond fund after an interval equal to its duration. If you have a horizon of 30 or 40 years, you can hold a fund like XBB for the whole time. You might want to shorten the duration when you got to within a few years of retirement, but even then, you would not be spending all the money at once. Lots of retirees hold bond funds with a duration similar to XBB.
But if you know you will need 100% of your principal investment within six years or so, then XBB is not the right choice. For example, if you are saving for a child’s education and will need all of the money within a few years, a shorter-term bond fund is more appropriate.
I re-read your post again and now I see you did say that, very clearly! I don’t know how I managed to take away that if the investment went past the duration, the money became *more* at-risk…
I’ve realized (based on your feedback–thanks so much!) that I don’t have a very good sense of what time horizons different types of investments are suited for. I am 40-45 yrs. from retirement and very, very new to the nuts and bolts of personal finance. I don’t know what I don’t know. Would your book (MoneySense’s Guide to the Perfect Portfolio) be a good starting point for someone like me?
@MJ: Yes, I think the book would be a great place to start. It goes into detail about how to build a portfolio matched to your goals, and it avoids technical topics such as bond duration. It’s available as an e-book as well as in hard copy.
Hi CCP,
Sorry if I’m late to the party. I am also having difficulty wrapping my head around the concept of bond funds. I recently purchased into The TD e series bond index fund, and I have been seeing the NAV decreasing over that past month or so. What I am having difficulty understanding is whether or not that affects the interest I am being paid or not. I get that falling prices on individual bonds = increase yield but how does that relate to a bond fund.
Thanks
Marvee
@Marvee: A common question. Right now virtually all of the bonds in your index fund were bought at a premium (i.e. for more than their par value) because the long trend in declining interest rates has made them more valuable. So unless rates fall further, you will see your fund’s NAV decline gradually for the foreseeable future as those bonds mature at par.
However, a bond’s coupon (interest payment) never changes, so you will continue to receive those payments every month. If the bond was issued many years ago, its coupon will be higher than current rates.
If interest rates remain unchanged, the coupon payments will more than offset the losses in NAV. For example, right now a DEX Universe fund has an average coupon of about 3.9% and can be expected to suffer an annual loss of about 1.7%, for a total return of +2.2%. A sharp move in interest rates one way or the other will change that.
If TD’s index bond funds have a similar duration to XBB how would you recommend me transition my portfolio from index mutual funds to ETF’s (as the portfolio has grown past the 50,000 mark)?
@Jon: I think you’ve answered your own question. The TD Canadian Bond Index Fund and XBB are virtually identical, since they track the same index. So if you are ready to switch to ETFs, you can just swap the two funds without changing your exposure at all.
Ahhh, thanks! I thought if I sold the TD index say after 6 months and changed it to XBB, I’d get penalized.
Random thought: I think the assumption many people have that we’re in for a rising interest rate environment could be an incorrect one. No one can predict how long we may stay low or even if we may go lower again. One only needs to look at Japan. Look at their benchmark 10 year bond yield over the last 20 years to see an overall decline with a bump up in the middle. Also, Canadian bonds are much higher yield than many (like the US and Japan) right now. Their could be an argument they will all normalize over time.
I’ve been really appreciating your posts – I have a question I have not found an answer to yet. I just finished reading Tony Robbins’ new book “Money: Master the Game” where some of the big investors like Ray Dalio and David Swenson recommend portfolios in ETFs/index funds. Both of these guys recommend allocating significant portions in long-term federal bonds – I am looking to do this – but the one’s I have found have low numbers of holdings (between 15 and 50) and I am curious to hear your perspective if this is diversified enough or does this increase the risk significantly?
Thanks,
Chad
@Chad: Be wary of following US-based investment advice too closely: the realities in Canada are often different. The broad-based bond funds in my model portfolios have bonds of all maturities, which is a good choice for investors with a long time horizon. Long-term bonds can be very volatile, and they generally do not offer much additional yield in exchange for that additional risk.