Tag Archives: interest rates

Retired Money: How Bond ETF investors can minimize risk of rising rates

My latest MoneySense Retired Money column has just been published: click on the highlighted text to retrieve the full column: Should investors even bother with Bonds any more?

In a nutshell, once again pundits are fretting that interest rates have been so low for so long, that they inevitably must soon begin to rise. And if and when they do, because of the inverse relationship between bond prices and interest rates, any rise in rates may result in  capital losses in the value of the underlying bonds.

In practice, this means choosing (or switching) to bond ETFs with shorter maturities: the risk rises with funds with a lot of bonds maturing five years or more into the future, although of course as long as rates stay as they are or fall, that can be a good thing.

As the column shows, typical aggregate bond ETFs (like ETF All-Star VAB) and equivalents from iShares have suffered losses in the first quarter of 2021. Shorter-term bond ETFs that hold mostly bonds maturing in under five years have been hit less hard. This is one reason why in the US Vanguard Group just unveiled a new Ultra Short Bond ETF that focuses on bonds maturing mostly in two years or less.

The short-term actively managed bond ETF is called the Vanguard Ultra Short Bond ETF. It sports the ticker symbol VUSB, and invests primarily in bonds maturing in zero to two years. It’s considered low-risk, with an MER of 0.10%.

Of course, if you do that (and bear the currency risk involved, at least until Vanguard Canada unveils a C$ version), you may find it less stressful to keep your short-term cash reserves in actual cash, or daily interest savings account, or 1-year or 2-year GICs. None of these pay much but at least they don’t generate red ink, at least in nominal terms. Continue Reading…

What about the Bond Market?

John De Goey, CFP, CIM

(Special to the Financial Independence Hub)

Over the past several months, much has been said about the stock market, and for good reason.  What can be lost in the shuffle is what has been going on concurrently in the bond market.  It’s at least as bad. Therefore, if you’re worried about stock valuations, you should probably be really, really worried about bond valuations.  There are, in my view, a lot of borderline reckless income ‘investors’ out there who hold bonds simply because of industry dogma.  Bullshift applies to bonds, too.

Some observers fear inflationary pressure on the horizon.  I’m less convinced, but still, real yields have moved higher due to both an improved growth outlook and additional expected fiscal stimulus.  Today, many people seem comfortable in referring to the environment as the ‘end of the bull market’ in bonds.  The obvious next question is: ‘does that mean we are at the beginning of a bear market in bonds?’.  To me, this is a distinct possibility.

After 40 years, interest rates can’t go much lower

For nearly 40 years, interest rates have been dropping throughout the western world.  Now, we’re at the point where, as a practical matter, they can’t really go lower.  We’re also at a point where, policy guidance from central bankers notwithstanding, rates might have to rise sooner than we thought if the inflationary pressure some expect begins to materialize. Continue Reading…

A discussion about Value and Small-cap Factors with Avantis Investors’ CIO Dr. Eduardo Repetto

Avantis Investors’ CIO Dr. Eduardo Repetto (Link to YouTube clip is in text below)

Over the years, I’ve encountered several financial advisors who liked to use the mutual funds of Dimensional Fund Advisors or DFA, which was founded by alumni of the University of Chicago and based on research on the long-term return premiums offered by small-cap and Value stocks around the world. Even today I own a DFA International Equity fund that was a legacy of my time with a fee-only advisor: that’s generally the requirement for accessing DFA funds.

So I was intrigued when certified financial planner Mike Bayer [CFP, CIM, FCSI) asked me to help him interview two senior executives of Avantis Investors (a unit of American Century Investments) which for the past 18 months has been marketing Avantis ETFs, which take a similar approach with small-cap and value factors and are more accessible to do-it-yourself investors who can buy the ETFs at discount brokerages, just like any other ETF.

Regular readers of the MoneySense ETF All-Stars may recognize the name Avantis. As you can see here, the Avantis US Small Cap ETF [AVUV] was a Desert Island pick of PWL Capital’s Ben Felix and Cameron Passmore. We are about to publish the 2021 edition and as mentioned in the video interview also linked below, that pick is back along with another Avantis selection, which you can learn by watching the video.  In addition, Felix has just released a 15-minute video covering Avantis: https://youtu.be/jKWbW7Wgm0w

In the end, possibly influenced by the arrival of Avantis, DFA itself brought out three of its own ETFs: https://us.dimensional.com/etfs

Bios

Dr. Eduardo Repetto is Chief Investment Officer of Avantis Investors. Previously he was Co-Chief Executive Officer and Co-Chief Investment Officer of Dimensional Fund Advisors. He earned a Ph.D. degree in Aeronautics from the California Institute of Technology, an MSc degree in Engineering from Brown University, and a Diploma de Honor in Civil Engineering from the Universidad de Buenos Aires.

Phil McInnis is also a DFA alumnus, where he was Head of Portfolio Solutions. Today he is director of investments at Avantis Investors®, responsible for marketing content development surrounding Avantis’ investment approach.

Mike Bayer, CFP, CIM, FCSI, is a Toronto-based financial planner with Strategic Analysis Capital Management and blogger at Free Speech Media.

Highlights from the transcript

So without further ado, here is a link to the full interview, which runs almost an hour. However, you can click on a “transcript” link within YouTube, for those who prefer reading and skimming. Below are some highlights:

Continue Reading…

Fear the GIC Refugee renaissance

By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

When I started in the business in September of 1993, it was a great time for new client acquisition.  The reason is simple: there were so many new clients to be had – in the form of first-time investors.  As interest rates plummeted from their all-time highs in the early 1980s, the fulcrum began to shift.  Specifically, as the risk-free rate (anything that could be attained on a guaranteed basis) dropped, people became increasingly willing to absorb risk.

Starting around 1982, the long-term macro trend that continues to this day began.  That year marked the cyclical high in long-term interest rates (in the mid to high teens!) along with a multi-generation low in price/earnings ratios (well into the single digit range!).  For nearly 40 years, interest rates have been seeing a secular decline, while market valuations the world over have been creeping up.  The correlation is predictable.  As rates drop, people are prepared to take on increasingly large amounts of risk in their quest for financial reward.  Totally understandable.

Rates are essentially at Zero

Now that rates are essentially at zero throughout the developed world, the trend has become acute.  The question that people might now be asking themselves is: will people stay out of traditional income investments for the foreseeable future?  Continue Reading…

Q&A on the new Harvest global bond ETF

 

By Bradley Komenda

(Sponsor Content)

Harvest Portfolios Group launched a global bond ETF in January 2020 to complement its equity ETF offerings.

The  Harvest US Investment Grade Bond Plus ETF (HUIB:TSX) is managed by Boston-based Amundi Pioneer Asset Management, a subsidiary of Amundi Asset Management, a leading global manager based in France. In a Q&A, Bradley Komenda, the ETF’s portfolio manager, discusses how Amundi’s value investing approach helps guide its strategy. Mr. Komenda joined Amundi Pioneer in 2008 and is also Senior Vice President and Deputy Director of Investment Grade Corporates at the firm.

Financial Independence Hub: What is the demand for these bonds for the Canadian investor?

Bradley Komenda:  Canadian bond market opportunities are pretty narrow and heavily weighted towards energy and financials. Because there is a lot of demand for these bonds, yields are less attractive than in the US.

This bond ETF gives you breadth. It is Canadian dollar hedged, but with access to top quality US, European and Global issuers.  Expectations of further fiscal stimulus will all be supportive of the corporate bond market, so we think that this is where we want to be.

Q: What is Amundi Pioneer’s approach?

A: We are value investors. We invest in credits that we think over a one to three-year time horizon are going to generate a superior return. By value investing, I don’t mean buying the cheapest securities. It means trying to identify the securities that have the best risk adjusted return potential.

Q: How do you assess risk?

A: We look at risk in three ways. We look at nominal risk, which is how much we have invested in a single issuer. Then we look at the maturity of the bonds. We know that if we buy a one-year bond, it is a lot less risky than buying a 30-year. And then we look at duration times spread, (DTS) which is a way to measure the credit volatility of a bond.

Q: Where is the Harvest US Investment Grade Bond Plus ETF on the risk spectrum?

A: From an overall portfolio perspective, this bond ETF is rated low risk, and within the fixed income universe, I’d say it’s medium.

If you want lower risk, you can do a couple things. You can buy government bonds, but after inflation your purchasing power will be eroded even with longer duration bonds.

If you go for a short-term ETF, or cash, you’re going to struggle to get a yield similar to inflation. So, this ETF is for someone with patience, a one to three-year time horizon and a willingness to accept short-term volatility but with the expectation of attractive returns relative to risk-free or very short bonds.

Q: What about bond quality?

A: HUIB is concentrated in the Triple B space (BBB) or higher. The breakdown is roughly 60% BBB, 30% A or higher and 10% Non-rated.

Q: Who is the core investor for this bond ETF?

A: Anybody who wants exposure to fixed income. That’s because it has a negative correlation to stocks which means they move in different directions.  If you buy a high yield fund, you’re going to get more yield, but you’re going to have a positive correlation to stock market movements.

 

Q: Investors worry about liquidity. How easy is this ETF to sell?

A: It’s highly liquid. We had a liquidity crisis in the corporate bond market in March of this year. The Fed stepped in and now is backstopping things by purchasing bonds as needed. It means the draw down we saw in March and early April is unlikely to occur again.

Q: What is the relative advantage of this ETF?  

A: This ETF is part of our investment grade corporate bond strategy. Continue Reading…