It’s been a tough few months for bonds. Since early February, the yield on Government of Canada five-year bonds has climbed from 0.59% to about 1.07%, and 10-year bonds yielding 1.24% have ticked up to 1.82%. The seesaw relationship between yield and price means bond values have fallen sharply: over the same period broad-based index ETFs such as the Vanguard Canadian Aggregate Bond (VAB) have lost well over 3%.
A 3% decline over several months is modest—it’s a bad day for stocks—but bond investors have been so accustomed to steady gains in recent years that it’s caused a lot of anxiety. More worrisome, it’s revealed that many investors have some fundamental misunderstandings about the relationship between bonds and interest rates, which admittedly can be confusing. Inaccurate information leads to poor investment decisions.
If the last five years have taught us anything it’s that forecasting the direction of interest rates is futile, and countless armchair economists have paid the price for trying to do so. A better approach is to get out of the guessing business and simply understand the risks of various fixed income investments. Then you can make a rational decision about which ones are appropriate in your situation.
It’s also key to appreciate that short-term and long-term risks may differ: avoiding the possibility of loss in the short-term, for example, often comes with the risk of lower long-term returns. That’s why investors with a long time horizon can safely ignore the guru on BNN who only cares about his quarterly results and not your retirement plan.
The following table should help you understand the effect of changing interest rates on different types of fixed income investments, in both the short term and the long term. Since you can’t know where rates are headed in the future, the best you can do is understand what to expect from your fixed income holdings under both scenarios.
| Type of investment | If interest rates fall... | If interest rates rise... |
|---|---|---|
| Short-term bond fund | Short term: The price of your holding will rise. If the fund has a duration of 3, it would rise in price by about 0.3% if short-term interest rates decrease by 0.1% (10 basis points). Longer term: With rates on newly issued bonds now lower, reinvested interest and proceeds from maturing bonds will quickly have lower expected returns going forward. | Short term: The price of your holding will fall. If the fund has a duration of 3, it would fall in price by about 0.3% if short-term rates increase by 0.1% (10 basis points). Longer term: With rates on newly issued bonds now higher, reinvested interest and proceeds from maturing bonds will quickly benefit from higher expected returns going forward. |
| Broad-based bond fund | Short term: The price of your holding will rise, and more sharply than short-term bonds. If the fund has a duration of 8, it would rise in price by about 0.8% if interest rates decrease by 0.1% (10 basis points) across the board. The fund will be sensitive to changes in 5-, 10- and 20-year bond yields as well as short-term rates. Longer term: With rates on newly issued bonds now lower, reinvested interest and proceeds from maturing bonds will gradually have lower expected returns going forward. | Short term: The price of your holding will fall, and more sharply than short-term bonds. If the fund has a duration of 8, it would fall in price by about 0.8% if interest rates increase by 0.1% (10 basis points) across the board. The fund will be sensitive to changes in 5-, 10- and 20-year bond yields as well as short-term rates. Longer term: With rates on newly issued bonds now higher, interest and proceeds from maturing bonds will gradually benefit from higher expected returns going forward. |
| Five-year GIC ladder | Short term: Unlike with bonds, you’ll see no increase in the value of your GICs. However, you can take comfort knowing that your GICs have rates higher than those currently offered. Longer term: As each rung of the GIC ladder matures, you will need to reinvest the proceeds at lower rates. The overall yield on your ladder will therefore gradually decrease. | Short term: Unlike with bonds, you’ll see no decrease in the value of your GICs. However, you’ll have some opportunity cost, as your GICs will be locked in for up to five years at rates lower than those currently offered. Longer term: As each rung of the ladder matures, you will be able to reinvest the proceeds at higher rates rate. The overall yield on your ladder will therefore gradually increase. |
| Cash | Short term: Unlike with bonds, you’ll see no increase to the value of your cash account. Banks may lower the rates on savings accounts almost immediately. Longer term: Cash is almost guaranteed to lose to inflation, and you will likely pay a high opportunity cost by avoiding bonds. If you were sitting in cash waiting to get back into the bond market, it backfired: the cost of doing so will be higher and expected returns lower. | Short term: Unlike with bonds, you’ll see no decrease to the value of your cash account. Banks may raise the rates on savings accounts. Longer term: Cash is almost guaranteed to lose to inflation, and you will likely pay a high opportunity cost by avoiding bonds. However, if you were sitting in cash waiting to get back into the bond market, you got lucky: the cost of doing so will be lower and expected returns higher. |
Good Synopsis. Thanks!
I agree with your summary, but find it interesting that in the current yield environment there are high interest savings accounts (eg. People’s trust TFSA) that are yielding 2.25%. At that interest rate in the long term they are probably less likely to lose out to inflation than many bond ETFs even ones with longer duration.
These types of accounts appear to me to be clear winner over a short term bond ETF which is probably the closest to it in risk profile with VSC having a yield to maturity of 0.95 (after deducting the MER). Even VAB has an effective yield to maturity of 1.7%.
I attribute it to a strange period where individual investors have access to higher interest rates than institutional money as individual financial institutions try to attract more depositors. I doubt that this abnormal situation will last forever, but in the meantime I am happy to get the higher interest while keeping my fixed income position 100% liquid and CDIC ensured.
When the yield to maturity on short and intermediate bond funds become competitive with these high interest savings accounts I will begin invest in bond ETFs again.
I recognize that the problem with these temporary phenomena is that it is hard for financial writers to endorse them as it would normally be bad advice; for example to hold cash.
@ccp
Absolutely love the table breaking down the scenarios. will be bookmarking this for future reference.
what I don’t always understand is when they say on the news etc that the bank has kept interest rate the same etc but yet my bond fund has decreased or increased in value, very confusing for folks like me. I think you have explained this before, bonds aren’t tied to the interest rate you hear about from bank of canada.
For me it seems lately the experts are trying to say to dump bonds and go in to equities. no doom and gloom for equities!!!!!!!!!
GIC’s for me are easier to understand
And to me as you’ve said before higher interest rates should be a good thing, that is also very confusing when hearing the “experts” say it’s a bad thing and it’s doom and gloom for bonds.
at the end of the day i guess if you get the basic understanding of the duration of the bonds it should help you in the long run.
I’m thinking of dumping the VAB holding I have for VSB or even GIC’s when I hear of the doom and gloom from the “experts”.
I guess at the end of the day it’s best to just be a lazy couch polatoe by saving as much as you need or want to and rebalance back to your risk level.
@RJ: Thanks for the comment. As you point out, accounts like those offered at People’s Trust (i.e yielding much more than short-term bonds) are extremely unusual, perhaps even unique. The normal rate for the investment savings accounts offered by brokerages these days is 1.1%.
Moreover, it doesn’t change the fact short-term bonds can go up in value when rates fall, whereas savings accounts are more likely to see their rates cut when that happens. Over the last 12 months (ending April 30), for example, VSB returned 2.9%.
Holding cash at 2.25% instead of short-term bonds is probably a good decision, given the risk/reward trade-off. But as always I like to help people understand that tradeoff and make a rational decision rather than trying to guess about the direction of rates.
@Jake: Yes, the key point (often totally lost on the media and on investors) is that there are many interest rates, and they don’t all affect the same types of investments.
The only one the central banks can control directly is the overnight rate, which will affect your savings account and your variable rate mortgage as well as your bond fund. But your bond fund is also affected by changing yields on longer-term rates. Since the surprising cut by the Bank of Canada in January, the overnight rate has not changed, but the yields on longer-term bonds (driven by supply and demand) have gone up. That’s why bond funds have suffered losses.
Doing the couch potato thing, I have my fixed income split evenly into short term, a somewhat fluid medium term, and real return, inflation protected (which in time horizon is eons :) so supposedly I’m covered for any interest rate impact. I just wish right now they weren’t all so correlated and going down, albeit the medium term not as much.
@Brad: “I just wish right now they weren’t all so correlated.” Holding all maturities of bonds to spread out your interest rate risk can lower volatility, but realistically you shouldn’t expect interest rates to be non-correlated. They won’t move in lockstep, but it’s rare, for example, to see long-term rates move sharply in one direction and shorter-term rates to move in the opposite direction. It’s more likely to see all rates move up or all rates move down, just to different degrees.
Great chart. Can you provide the same information for real return bonds. Thanks Larry
@Larry: https://canadiancouchpotato.com/2013/02/28/ask-the-spud-the-role-of-real-return-bonds/
Nice summary of how interest affects bonds. This is must-know info for investors.
For my personal ETF portfolio, I for now exclude bonds. One reason being that I have a lot of cash that is blocked, the other reason being that I expect interest rates to go further up.
I am not sure yet what would be the right moment to start adding bonds to my portfolio. Any suggestions for that (I am a EU based investor, so it is the ECB that rules the world.)
I have a difficult time understanding bonds. That’s probably the main reason I don’t have any in my portfolio.
Scenario…Lets assume I want to own bond funds and never wish to sell any of the principle, rather wanting to live solely off distributions in 4 years time. Lets also assume the interest rates rise gradually over the foreseeable future. If I wanted to purchase 20K of bonds (XBB) in total should I purchase the works all at once now or layer in gradually over 4 years.
Question…In my scenario would my income stream, at the beginning of the distribution phase in 4 years, be greater with the lump sum purchase or with the layer in purchases?
I think it would be nice to have one more option in that table: a ladder of individual bonds held to maturity (with an option to sell if their prices go up)
@Bernie: There’s no way to answer that in advance. The main factors determining your income stream after year 4 is the number of ETF units you own and the average coupon of the bonds in the fund at that time. Your purchasing pattern will affect the first number (if you buy gradually over four years the number of units you buy will be affected by the current price of the fund). And market conditions will affect the second number. So there is very little predictability.
If it helps you wrap your head around it, this is really not that different from buying dividend stocks. Say Company XYZ is trading at $50 with a 3% dividend ($1.50) and you want to live off those dividends four years from now. Should you buy $20,000 worth of the stock today (400 shares) or buy $5,000 a year for four years? If you do the latter, you may end up with more or less than 400 shares, depending on how the price of XYZ moves. And the dividend may be more or less than $1.50 per share in four years.
I think the lesson here is that bond ETFs are not a great choice for investors who are looking for predictable income. GIC and individual bonds are much better suited for that objective, because you know what the coupon will be, and you know what you will get back at maturity. People can take this idea too far and say that bond funds are more risky, which isn’t true, but they are certainly less predictable.
Sorry, in my comment above I wanted to ask a further question. If I purchased laddered CBO or CLF instead of XBB how would my income stream look in the distribution phase? IE; would my income increase gradually in a rising interest rate environment?
@m2: A portfolio (or ladder) of individual bonds, considered collectively, behaves the same way as a bond fund. After all, a bond fund is a portfolio of individual bonds with various maturities.
@Bernie: There is no fundamental difference between a laddered bond fund and traditional bond fund. The differences between CLF, CBO and XBB have more to do with the duration of each fund. CLF and CBO have shorter durations (because the bonds have shorter terms and higher coupons) than XBB, so they would fall less in value and recover more quickly. But the same would be true of non-laddered short-term bond funds.
@CCP: I appreciate your replies! OK, one more if you will.
let’s say CLF and CBO have durations of 2.5 years and XBB has a duration of 7 years. I’m not concerned with capital gains or losses only income. If I owned the same dollar amount of each security with a fixed amount of units how would my income stream look in a rising rate environment?
Not really since bond funds never mature – and with individual bonds I also have a choice how to redeploy the money when they mature (and can buy bonds that yield more now than VAB’s 1.7% YTM minus ~0.2% MER)
The thing that I don’t understand about bonds ETF is the notion that if you keep it till its weighted average maturity (7.8 years for VAB) – you won’t lose the money. Say the interest rates start going up this year 0.1% every year for 8 years (with no major market crashes in between) – VAB shares will be falling every year, but will cost the same in 2023 as they are now? More? Less?
@Bernie: “I’m not concerned with capital gains or losses only income.” It’s impossible to make a decision about a fixed income strategy if you take that position. Are you planning to hold the bond ETF in a taxable account? If so, then this distinction is huge in terms of tax efficiency. If you’re holding it in a registered account, then it doesn’t matter, because there is no reason to prefer income over capital gains (except for behavioral reasons).
http://www.moneysense.ca/invest/the-income-illusion
http://www.moneysense.ca/retire/selling-etfs-to-generate-retirement-income
https://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/
@m2: Remember that within a fund like VAB, interest payments from the bonds are constantly being used to buy new bonds at prevailing rates. As well, as soon as a bond is one year from maturity it is sold and the proceeds are also reinvested in new bonds. That means that if interest rates rise every year, prices will fall in the short term, but the yield on all of those new bonds will go up. If you hold the fund for its entire duration, any decline in price will be offset by the higher interest payments and you won’t lose your original investment.
Just keep in mind this assumes two things: first, that you make one lump sum contribution today and don’t add or withdraw anything for a period equal to the duration. And second, that you reinvest all interest payments and don’t spend them.
Thank you for a detailed reply, and I re-read a few older articles (to refresh my memory on the subject), but the math just doesn’t make sense to me…
Say I buy a 6 year BCE strip bond yielding 2.40% for $6,064 (a real life example, not a hypothetical one :)) In 2021, it matures and I collect 7K. If VAB catches up by then (meaning – starts yielding more than inflation), I buy VAB (paying less per share than I would now) If not – I buy a GIC or another bond (or just withdraw cash from RRSP if I lost a job or got seriously ill)
Anyways, I think I made my choice – at least for now… :)
@CCP,
“If you’re holding it in a registered account, then it doesn’t matter, because there is no reason to prefer income over capital gains (except for behavioral reasons).”
And risk! IMO there is far less risk in living solely off the income stream than there is in liquidating securities, which may or may not have capital gains at the time of sales.
I don’t wish to get into a debate on capital gains, dividend income or taxes. I merely want to know how increasing interest rates affect bond fund distributions assuming the number of units held doesn’t change. Do the $ distributions go up or down? I’m referring to RRSP holdings
@Bernie: I don’t think there is any difference in risk taking income in the form of dividends or capital. If you take dividends you have the same number of shares that are worth less; if you sell some shares (a home made dividend), you have less shares but they are worth more so the money you have left is the same. This is just a behavioural issue. If you do decide to only “live off the dividends”, with today’s low yields you will have to save more, work longer or spend less in retirement, none of which is particularly appealing. This is explained in detail in the two Moneysense articles that CCP listed in his reply to you above.
@m2: No worries, this is a difficult and counterintuitive idea that many investors find difficult.
In your example, the issue again is predictability. Your strip bond today is worth $6,064 and will mature in six years for $7,000, resulting in a yield of 2.40%. Barring default, you know exactly what your return will be. By contrast, if you put you $6,064 into a bond fund today (and let’s assume for argument’s sake that the fund has a yield to maturity of 2.40% and a duration of six, the same as the strip bond) you don’t know what your return will be six years from now. It would only be 2.40% if all interest rates remained identical for the whole six years, which of course will never happen.
The reason for this discrepancy is that the bond fund is a moving target. You hold a six-year strip bond today, but next year it will be five-year bond, and the year after it will be a four-year bond, and so on. But if you buy a bond ETF with an average term of six years, it will still have an average term of six years next year, and the year after, indefinitely. That’s because a fund is designed to maintain more or less consistent exposure to the bond market over the long term. It’s a little like selling your strip bond every year and buying a new one with a six-year term each time. If you did that, you would not be able to predict your return over the next six years.
That’s why bond funds are not an appropriate vehicle for investors who want to fund a specific liability, i.e. a known amount on a known future date. But they are excellent vehicles for investors with an indefinite time horizon, such as those saving for retirement.
Hope this helps.
Thank you, CPP, you nailed it – predictability and (maybe just an illusion of :)) control. I don’t need the income in the near future, just want to protect a portion of our rather aggressive portfolio. From what I gather, it might take 8-10 years for interest rates to rise in small increments. So with a ladder of 1-5 year GICs and 6-10 year bond strips we’ll have 5-8K maturing every year. I guess it just gives me a peace of mind knowing that if/when interest rates go up and equity ETFs go down – the fixed income portion of our portfolio will remain, well, Fixed :)
(Maybe in 10 years I’ll be laughing at my today’s worries and concerns, but as a relatively new semi-potato – I’ll just need to see it to believe it :))
And huge thanks for your website and numerous articles, they saved a lot of us from being baked and fried! =)
@Tristan,
The risk I’m referring to is tied to volatility and predictability. There is much greater volatility and far less predictability in price action than there is in volatility and predictability of dividends and their growth. There is also more risk of running out of money if shares need to be liquidated in the distribution phase.
So suppose one has used bond ETFs in the accumulation phase and now, in the aid of moving toward more predictable income, decides to buy individual bonds. Is a regular full-service brokerage able to find, recommend and purchase these individual bond offerings? What minimum amount should such a purchase be to mitigate commission costs? Would it be a reasonable tactic to just make an annual purchase of five-year bonds, with the amount of purchase being approximately one fifth of one’s total bond exposure?
@Jerry: I wouldn’t recommend that strategy for a few reasons. First, while you can buy individual bonds from discount brokerages, the markup is usually high (and always hidden). Holding only a small number of individual corporate bonds is also risky with a large portfolio. Finally, there is no need to move all of your fixed income into individual bonds once you start the drawdown stage.
With our clients we often use a ladder of GICs to provide five years of predictable cash flow and keep the rest of the portfolio in a max of bond and equity funds, which gets rebalanced annually. This is explained in detail in my recent MoneySense feature:
http://www.moneysense.ca/retire/a-better-way-to-generate-retirement-income/
@Bernie: Although getting of topic, I don’t think it’s the relative volatiltity of the stocks and the dividends that matters. It’s the volatilty (and return) of the portfolio that is important, and you control that with your asset allocation according to your risk tolerance. If you follow safe withdrawal rate rules you are not going to be running out of money, and you will not have to save as much for retirement income. I think you’d find it helpful to read the two Moneysense articles mentioned above.
@Tristan,
I agree we’re off topic so I’ll just reply just once more. I did read the articles you suggested. I didn’t really get the info there for what I’m looking for. Again off-topic but from some of the comments made here and in articles I really don’t think you and Dan fully understand dividend growth investing. You have several misconceptions which may have originated with the views of academics who, in large part, have not studied the strategy to any great detail. I’ve practiced dividend growth investing for many years, it’s been quite successful and profitable for me. I’ve studied several strategies and tried a few, even employed a full service financial advisor along the way. IMO DGI is the best low risk, high reward investment strategy in existence. I highly suggest you and anyone else interested read “The Single Best Investment” by Lowell Miller and pertinent articles by David van Knapp & Chuck Carnevale in Seeking Alpha to get a better feel of this investing style.
@Bernie
Bernie, you are on a blog that specializes in furthering information and education on passive/(index) investing, which is strongly supported by academic research and empirical evidence
It’s great that you have experience in an alternate, actively managed, style of investing (in your particular case one that focusses on dividends rather than total return), but it is not a particularly compelling way to invest efficiently. The authors of this website, along with many academics and other professionals, have come to this conclusion through evidence, rather than “opinions”
Believe me when I say that your approach may work for you, and may even generate superior returns if you are lucky, but it will not, on average, provide a superior risk adjusted return to a passive (index) approach.
The amount of money one makes, i.e. total returns from dividends, income, capital gains, after tax, is the only thing that matters. Period. Your questions that focus on an active style that works ‘in your opinion’ is not logical, that is why the posters are unable to answer your questions.
@Bernie: “I merely want to know how increasing interest rates affect bond fund distributions assuming the number of units held doesn’t change. Do the $ distributions go up or down?” I’m sorry if I didn’t answer this question explicitly. If interest rates go up then (by definition) the interest payments from bonds (and bond funds) will also go up.
Bernie, to more directly answer your question. The etfs you mentioned, like XBB, do not pay any “income” in the way that you are describing.
You would have to purchase bonds directly (not through an index fund like XBB) to get the coupon income stream directly. The coupon amount is fixed, hence the term “fixed income” for term notes, so it wouldn’t change in a rising rate environment, unless the issuer defaulted (then you would get less, or none).
After your 4 year period, you would then need to calculate your total return. As described the longer duration the more the market value of the bond would be impacted by a changing rate environment.
@SH: “You would have to purchase bonds directly (not through an index fund like XBB) to get the coupon income stream directly.” That isn’t accurate. Bond funds pass along all of the interest payments they receive from the underlying holdings, so investors do get the coupon payments every month. However, the specific bonds in the portfolio are frequently changed, so it’s not possible to know what those coupon payments will be in advance. (The weighted average coupon published on the website is a good estimate, but it will change over time.) The income stream would indeed change in a rising rate environment, since the fund would gradually acquire newly issued bonds with higher coupons.
@CCP, Thank you for answering my question.
@SH, It was not my intent to get in a pissing match debating which strategy is better but it is obvious you know very little about DGI yourself. For your information dividend aristocrats tend to underperform the broad equity index in bull markets slightly but outperform in sideways & down markets. Overall the US dividend aristocrat index has outperformed the S&P 500 by an average of 2.5% annually since 1972. Personally, I have outperformed the equity markets (US & Canadian) over the past several years, as have many other DG investors, but my primary goal is maintaining a safe, consistent income stream that increases on a pace exceeding inflation. My dividend growth has been averaging close to 10% annually with a dividend yield currently about 4.6%. My goal is to draw 1% of portfolio per quarter in retirement so I will monitor to ensure my current yield is in the 4% to 5% range. I hold over 30 stocks. My style is buy and monitor which some argue is active management and others say is near-passive management. It’s not for everyone but don’t criticise something you know little about, especially on a practical basis.
Let say you purchase VAB at market price and bond prices go down would this not also mean that your dividend would go up? Would this not be close to a wash with the percentage in value of the ETF that you lost to the percentage increase in dividends you receive?
Is there any correlation between laddered Preferred Share ETFs (say ZPR) and laddered bond pricing (say CBO) based on changing interest rates? Would both be considered as ‘income’ in a portfolio as opposed to ‘growth’. Would owning both diversify risk at all? Or would a US Preferred, (say PFF:US) be a better choice for diversification as it shifts to the US market. (Assuming all are kept in an RRSP)?
Thanks
@CCP, I stand corrected. I was under the (mistaken) impression that the income generated from the underlying holdings in the DEX Universe index would simply be reinvested.
@Bernie: Again, I think its great that you have found a strategy that works well for you. There is nothing wrong with making investments your way per se, and it sounds like you have a reasonable approach that has performed well over time. Just note that actively managed portfolios both professionally managed and individually will, on average, under perform broad market indices over time, which is the central thesis of passive investing. You keep assuming that I don’t have practical experience in these matters, but I can assure you that I do.
Hi There.
Thanks for the summary chart and the great info at you site. Excellent info! I’m not as knowledge as most at this site. I am a TD e-series self directed investor with approximately 65% of my portfolio currently in the TDB909 bond fund. My portfolio has grown to the point where I’d like to switch my bond fund to an etf to save further on fees. Given recent happenings in the bond market, I’m wondering if I should modify my strategy somewhat by selecting a bond etf with a shorter duration than the TDB909 that I currently hold. Or maybe I should switched to a couple of ETFs…one with a longer duration and one shorter…The ETF that I am considering is ZAG and I understand that its duration is similar to TDB909. I’m 47 and would like to start an a early retirement in about 10 years. Any advice would be appreciated!
Thanks
@Patrick: Sure, any time the price of an ETF goes down its yield goes up, but it’s not necessarily a wash. Think of an ETF that trades at $20 with a $0.50 dividend (2%). If the ETF falls in price to $15 and the dividend is still $0.50, the yield is now 3.3%, but you have a loss of 25%.
@Mack: See my earlier post and white paper on preferred shares. Surprisingly, preferred shares have showed almost no correlation with corporate bonds in recent years:
https://canadiancouchpotato.com/2015/03/12/the-role-of-preferred-shares/
@Blair: As you point out, ZAG is almost identical to TDB909, so the only reason to switch would be to lower your costs. As for changing your bond exposure, that should only be done according to your own risk/return needs, not because of “recent happenings in the bond market.”
As long as you are 10 years from retirement there is no burning need to move to short-term bonds unless you are uncomfortable with the volatility of TDB909 or ZAG. A middle ground might be holding half in a broad market ETF (duration about 8) and half in a short-term bond ETF (duration about 3), which gives you a duration of about 5.5.
ccp, thanks for another great article!
Assuming I have a couch portfolio of Vanguard, and adding capital every month, does it still make sense to add to VAB at this point, knowing that interest rates are going up and VAB is likely to go down?
@Kim: The problem is that we don’t know that interest rates will go up. If you’re a long-term investor with a target asset allocation (say, 30% or 40% bonds) then the best strategy is to simply stick to those targets and rebalance as necessary.
Hi CCP,
One can never know what’s going to happen next in the Markets but your timing of articles (you know what goes on in an investor’s mind) is superb.
Have you covered any article in the past about Global/Foreign bonds? I am just curious to know that would adding some foreign bonds will provide some diversification by not keeping all our eggs(bonds) in one basket (Canada)? I think there may be some currency and tax risk too. But will it counter our domestic rate changes?
@JS: Thanks for the comment. I have indeed written about global bonds in the past:
https://canadiancouchpotato.com/2014/08/29/ask-the-spud-should-i-use-global-bonds/
Thanks for the reply ccp! Is there a particular short term bond etf that you recommend?
@Blair: VSB is a broadly diversified and low-cost option.
Thank you for your valuable insights and for your efforts to keep those of us that are just learning on the right path. :)
@ccp
A friend has recently committed to becoming an index couch potatoe. My friend has a BMO rrsp mutual fund account at the branch and is sticking with that until it reaches the bmo investorline $25,000 minimum account value and transfer there.
There’s a problem when it comes to finding an index fund for fixed income, so far my friend is putting funds into the bmo canadian equity etf fund, the U.S. equity etf fund and the International equity etf fund. They are all the lowest cost equity funds bmo mutual funds offer and are index funds. But there’s no etf or index fund for fixed income, their bmo bond fund mer’s are very high, the only etf fund and lower cost than their managed bond fund i could find for my friend is what they call the BMO Fixed income etf fund. Would this be the best fund for my friend for a core fixed income until he can get to investorline and get the true low cost index etfs ???? I looked up the underlying funds fo the bmo fixed income etf fund and it shows the bmo etf aggregate bond index and a couple corperate etf funds etc.
@Jake: As a temporary measure I’m sure it’s fine. The BMO “ETF funds” were created for mutual fund advisors who are not licensed to sell ETFs. They are simply mutual funds that use ETFs as their underlying holdings, with the advisor’s fee added on.
Allen Roth has a comment out today re: individual bonds vs. bond funds
http://www.etf.com/sections/index-investor-corner/fact-checking-suze-ormans-take-on-bonds?nopaging=1
@CCP: Thank you for your article. One question, what are your thoughts about the effect of interest rates changes on REIT etfs?