Tag Archives: fixed-income ETFs

Retired Money: What to do about falling GIC rates

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PWL Capital’s Ben Felix

My latest MoneySense Retired Money column has just been published. It looks at the reversal the past year in interest rates, which impacts seniors who had started to look forward to at least half-decent GIC rates near 3%. You can find the full piece by clicking on the highlighted headline: Are GICs right for retirees looking for Fixed Income? 

Short of embracing high-yielding dividend paying stocks, the more palatable alternative for conservative retirees might be fixed-income ETFs. The article focuses on a recent video by CFA Charterholder Benjamin Felix, an Ottawa-based portfolio manager for PWL Capital. Felix argues that at a minimum such investors should have a mix of both fixed-income ETFs and GIC ladders.

The latter let you sleep at night because they are invariably “in the green” in investment accounts. But while in the short term fixed-income ETFs can be in the red — just like equity ETFs — Felix makes a compelling argument for the higher potential returns of bond ETFs.

Felix believes that what really matters for investors is total return: “Holding a lower-rate GIC after a rate increase still results in an economic loss.” Bond returns consist of principal, interest payments and reinvested interest, so focusing only on return of principal misses the point. Individual bonds are not ideal for individual investors, as they require extensive research, are relatively expensive and tricky to trade.

Short-term GICs miss out on the term premium

But short-term GICs miss out on the term premium, which is substantial over time. Going back to 1985, Felix says short-term bonds returned 6.51% annualized versus 7.97% for the aggregate bond universe (which includes some short-term bonds).  This shows how much mid- and long-term bonds bring up the overall return. To be clear, this period captures one of the greatest bond markets in history but Felix says it is still reasonable to expect a relationship between riskier longer-term bonds and higher expected bond returns. Risk and return should be related.

GICs are also illiquid, so even if an investor chooses to include GICs in a portfolio, they will generally also include bond ETFs, which – like stock ETFs – can be sold any trading day. Nor do GICs provide exposure to global bonds.

Of course, a nice alternative are those asset allocation ETFs we have often discussed on this site. See for example this excellent overview by CutthecrapInvesting’s Dale Roberts: Which All-in-One, One-Ticket Portfolio is right for you? 

The Felix video can be found at his Common Sense Investing YouTube series here.

 

Latest crop of fixed-income ETFs keeps pressure up on fees

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My latest MoneySense blog on ETFs looks in more depth at the four new fixed-income ETFs Vanguard Canada debuted in February, and how they sit versus existing funds in the category. Click on the highlighted text to retrieve the full article: Latest crop of Vanguard ETFs keeps up pressure on fees. 

The Hub noted the arrival of these new fixed-income ETFs when they were announced — here — but since then the 2017 edition of the MoneySense ETF All-stars has come out. For this article, we were interested in what some of the six panelists responsible for selecting the All-Star ETFs had to say about the new Vanguard funds.

The chart below, prepared by Forstrong Global Asset Management Inc. from industry sources, shows the four fixed-income categories the new products cover: Canadian Broad Government bonds; Canadian Broad Corporate; Canadian Short Government; and Canadian Long Aggregate.  As the chart shows, before these new arrivals, there was one iShares fixed-income ETF in three of those categories, except for the well-served Canadian Short Government bond segment, which had one iShares offering, two BMO products and one from First Asset. Actual product names and tickers are shown below, along with data on Duration, MERs, credit quality and the mix of government and corporate issues:

Canadian Broad Government
Ticker Name MER1 Duration1 AAA2 AA2 A2 BBB2 Federal/ Agencies2 Provincial/Municipal2 Corporate2
VGV Vanguard Canadian Government Bond Index ETF 0.25%3 8.0 54% 42% G4% 0% 51% 49% 0%
XGB iShares Canadian Government Bond Index ETF 0.39% 7.9 55% 28% 16% 0% 51% 49% 0%
Canadian Broad Corporate
Ticker Name MER1 Duration1 AAA2 AA2 A2 BBB2 Federal/ Agencies2 Provincial/Municipal2 Corporate2
VCB Vanguard Canadian Corporate Bond Index ETF 0.23%3 5.5 7% 30% 24% 40% 0% 0% 100%
XCB iShares Canadian Corporate Bond Index ETF 0.44% 6.1 4% 25% 34% 38% 0% 0% 100%
Canadian Short Government
Ticker Name MER1 Duration1 AAA2 AA2 A2 BBB2 Federal/ Agencies2 Provincial/Municipal2 Corporate2
VSG Vanguard Canadian Short-Term Government Bond Index ETF 0.18%3 2.7 77% 18% 4% 0% 74% 26% 0%
FGB First Asset Short Term Government Bond Index Class ETF 0.25%3 2.9 72% 17% 12% 0% 71% 29% 0%
ZFS/L4 BMO Short Federal Bond Index ETF 0.23% 2.6 100% 0% 0% 0% 100% 0% 0%
ZPS/L4 BMO Short Provincial Bond Index ETF 0.28% 3.0 9% 55% 36% 0% 0% 100% 0%
CLF iShares 1-5 Year Laddered Government Bond Index ETF 0.17% 2.5 61% 21% 18% 0% 49% 51% 0%
Canadian Long Aggregate
Ticker Name MER1 Duration1 AAA2 AA2 A2 BBB2 Federal/ Agencies2 Provincial/Municipal2 Corporate2
VLB Vanguard Canadian Long-Term Bond Index ETF 0.17% 14.8 32% 54% 8% 6% 26% 64% 10%
XLB iShares Core Canadian Long Term Bond Index ETF 0.18% 14.4 29% 30% 33% 9% 24% 54% 22%
1. MER and duration data as of February 28, 2017
2. Credit quality and issuer breakdowns are approximate and based on the most recent publicly available data from the ETF issuers
3. Represents management fee only, as an audited MER is not yet available.
4. ETF offered in both distributing units and accumulating units (L)
Sources: BMO Capital Markets, National Bank Financial, ETF Issuer Websites

Vanguard Canada launches four new domestic Fixed Income ETFs

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Vanguard Investments Canada Inc. has announced that four new domestic fixed-income ETFs began trading on the TSX today, doubling a lineup that previously included a couple of short-term bond index ETFs, an aggregate bond index ETF and two currency-hedged foreign bond ETFs.

The new funds add coverage to government and corporate bonds,  long-term bonds, and to domestic short-term government bonds. The full release is here on Canada Newswire. Here are the names, ticker symbols and Management fees of the four new ETFs:

ETF

TSX Symbol

Management Fee1

Vanguard Canadian Corporate Bond Index ETF

VCB

0.23%

Vanguard Canadian Long-Term Bond Index ETF

VLB

0.17%

Vanguard Canadian Short-Term Government Bond Index ETF

VSG

0.18%

Vanguard Canadian Government Bond Index ETF

VGV

0.25%

These four new ETFs round out a list of domestic fixed-income ETFs that also include the Canadian Aggregate Bond Index ETF (VAB), the Canadian Short-term Bond Index ETF (VSB), the Canadian Short-term Corporate Bond Index ETF (VSC) and two foreign (US and global) bond index ETFs hedged back into the Canadian dollar (VBU and VBG respectively). You can find the full list, including the four new products, here. (Select Fixed Income as the asset class to zero in on the full list of nine bond ETFs.)

In the press release, Vanguard Canada head of product Tim Huver said “These ETFs provide the flexibility to position portfolios along the yield curve and take advantage of targeted exposure to corporate and government bonds.”

BMO slashes fees on bond ETFs

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Kevin_Gopaul_Feature
BMO’s Kevin Gopaul

BMO Asset Management Inc. says it is slashing fees on its flagship bond ETFs, and that after they are implemented on or about June 22 BMO ETFs will sport some of the lowest-cost fixed-income ETFs in Canada.

Some of the fee cuts on its broad fixed-income products are more than 50%: Given the minuscule interest rates being paid out on bonds these days, that should get investors’ collective attention.

Here’s the new fee structure BMO issued in a press release today:

BMO ETFs

Ticker

Current Maximum Annual Management Fee (%)

New Maximum Annual Management Fee (%)
BMO Aggregate Bond Index ETF

ZAG

0.20

0.09
BMO Discount Bond Index ETF

ZDB

0.20

0.09
BMO S&P 500 Hedged to CAD Index ETF

ZUE

0.10

0.08
BMO S&P 500 Index ETF

ZSP/ZSP.U

0.10

0.08
BMO Short Corporate Bond Index ETF

ZCS

0.12

0.10

Kevin Gopaul, Global Head of ETFs for BMO Asset Management says the move follows earlier fee reductions in 2012, 2013 and 2014. “Clients are recognizing the value and liquidity of using low-cost ETFs for fixed income exposures in their portfolios.”

The 50% cut on the broad-market  ZAG and ZDB makes them the lowest-cost fixed-income ETFs in the country, at nine basis points. As the chart shows, it has also reduced fees on its currency hedged and non-hedged S&P500 ETFs (ZUE and ZSP/ZSP.U respectively) to 8 basis points from the previous 10 basis points.