Jan 052017
 

Narrowing Down the Choices

Most bond ETFs have pulled back meaningfully over the last few months. Now is probably a good time to consider buying some bonds in your TFSA. There are over 60 bond ETFs on the TSX to choose from. So which is the best one? Rob Carrick wrote an article about bond ETFs for the Globe & Mail back in 2011. I’ve narrowed the list down to the following 5 exchange traded funds which I think are the most appropriate for Canadian retail investors!

  1. Vanguard Canadian Aggregate Bond Index ETF (VAB)
    A favorite fund among couch potato investors. The default go-to bond ETF. Portfolio manager Justin Bender recommends it in his model ETF portfolio.
  2. Vanguard Canadian Short-Term Bond Index ETF (VSB)
    This is similar to VAB, but contains shorter maturing bonds. Very safe and steady. Popular with conservative index investors.
  3. iShares Canadian Universe Bond Index ETF (XBB)
    This one has been around for a long time. It’s the largest bond ETF here by net asset value. Great track record overall.
  4. iShares Canadian Corporate Bond Index ETF (XCB)
    Holds corporate bonds only. Withstood the great recession very well. Relatively high management fees though.
  5. BMO Mid Corporate Bond Index ETF (ZCM)
    Similar to XCB, but more diversified and lower fees.

Honorable mentions: Horizons Active Corp (HAB), iShares Canadian HYBrid Corp (XHB), TD e-Series Bond Mutual Fund (TDB909)

Maybe there’s a bond fund I didn’t include above that is a better fit for you. Check out Rob’s article to see a more complete list of funds. The following table breaks down the five bond ETFs into categories so we can compare them. 🙂 You can read my previous post about what bonds are if you need a refresher. (Bond table below)

Breakdown of the Top Five Bond ETFs

Comparing Bond ETFsVABVSBXBBXCBZCM
Price per unit as of Jan 2016$25$24$31$21$16
Government / Corporate mix %77 / 2371 / 2969 / 310 / 1000 / 100
Net Assets$1.1 billion$0.8 billion$2.1 billion$1.7 billion$1.2 billion
MER (annual fees)0.13%0.11%0.34%0.45%0.34%
Average duration7.6 years2.7 years7.4 years6.1 years6.2 years
Annual yield2.75%2.45%2.80%3.19%3.18%
Avg yield to maturity2.0%1.2%2.1%2.7%2.8%
% Credit rating AAA45%57%41%4%0%
% Credit rating AA37%23%27%26%22%
% Credit rating A9%11%21%33%26%
% Credit rating BBB8%10%11%38%52%
1 year total return1.2%1.3%1.3%3.2%3.6%
5 year average annual return3.0%1.9%2.9%3.7%4.8%
Morningstar ETF Rating4 stars4 stars4 stars5 stars5 stars
Sector breakdownGov’t 77%
Financial 12%
Industrial 8%
Utilities 1%
Gov’t 71%
Financial 19%
Industrial 8%
Utilities 1%
Gov’t 69%
Financial 12%
Infrastructure 4%
Energy 5%
Industrial 2%
Utilities 1%
Others 8%
Financial 42%
Energy 18%
Infrastructure 16%
Communication 10%
Industrial 7%
Real Estate 6%
Energy 28%
Financial 25%
Communication 15%
Real Estate 13%
Industrial 10%
Infrastructure 9%

 

 

How to Decide Which Bond ETF to Buy

Let’s go down the list of categories one at a time, starting with the government/corporate bond mix. Government bonds in Canada are considered very safe investments. Low risk means low reward. The current yield on a 10 year Canadian bond is only 1.7%, which leaves much to be desired.

However, a 10 year corporate bond can go for roughly twice that yield, reaching between 3.0% to 3.6% return. Here are a couple of corporate bonds I’ve found using my broker’s online web interface – Brookfield Asset Management and Bell Canada bonds. 🙂

As we can see, Brookfield and Bell Canada have investment-grade credit ratings of A- and BBB+ respectively. Both companies are very financially sound, and are well known among stock investors as blue-chip, large-cap stocks (BAM.A) and (BCE).

Bell is literally the largest telecommunications company in the country, worth over $50 billion, and is a full fledged dividend aristocrat. So although there’s a chance BCE could go bankrupt in the next 10 years, the risk of that happening is really low. Government bonds are the safer variety. But after adjusting for risk, I still prefer corporate bonds like Bell that yields 3.2%, over Canadian government bonds that only pay a disappointing 1.7%. Seriously – even GICs offer higher yields than 1.7% right now. 😄

Since I’m comfortable with a 100% corporate bond portfolio, my bond ETF choice is between XCB and ZCM. This is not to say all government bonds are bad. I just think there are better alternatives at this time, given my personal risk tolerance. Continue reading »

Dec 122016
 

A Shift in Focus

Money can’t buy happiness. But it can help us look for it quicker, in a BMW. 😉 In order to maximize our chances to earn more money we have to reassess our investment strategies from time to time and be flexible to changing market conditions. Currently the price to earnings (P/E) multiple for the S&P 500 is around 25 times, compared to 16 times per historical average, suggesting the stock market today is probably overvalued.

If we invert the P/E ratio we would get the earnings yield, which is currently 3.9% for the index. 🙁 This means if we invest in the S&P 500 today, we can expect to make 3.9% return by next year. That doesn’t sound very attractive does it? And it’s not much better for Canadian stocks. The S&P/TSX Composite index has an earnings yield of 4.3%.

This is why I’ve been focusing a lot on fixed income investments over equities in 2016. I can get 7% or 8% on high yield bonds or mortgage investment corporations, with arguably the same or even lower risk than buying stocks. 🙂 I prefer to buy individual junk bonds because ETFs are too mainstream for me. 😉 But if you want to buy a basket of high yield bonds in a neatly packaged fund, Nelson from Financial Uproar wrote an informative post on high yield bonds with some useful ETF suggestions.

Anyway, last week I purchased $5,000 face value of Baytex Energy junk bonds. Here is how I did it using my broker, TD Direct Invest. Other brokerages may have similar procedures.

How to Purchase High Yield Bonds

On the main account page.

 

On the next screen.

On the new pop up screen.

I now hold 3 individual high yield bonds in my retirement account. 

Continue reading »

Oct 272016
 

Received My SolarShare Bond Certificate!

If you meet someone new, start talking about global warming. It’s a real icebreaker! 😄 Climate change is very real and as a concerned citizen I want to help however I can. According to top scientists, earth is the only known planet with bacon. This is why I care so deeply about protecting the world.

So about a month ago I purchased $10,000 of bonds from SolarShare, which is a renewable energy company that allows investors to earn a competitive return while doing something good for the environment. I am finally stepping up and doing my part to save the planet and the next generation of food animals. 😉

Well this week I received a letter from the President of the company along with a certificate that looked so awesome I decided to frame it and hang it up. 🙂

16-10-solarshare-bond-certificate-copy

The small words on the certificate say that SolarShare “acknowledges itself indebted and promises to pay, in Canadian money, to the Investor….” This piece of paper represents my $10,000 investment. But it’s actually a copy. The original certificate is securely kept with SolarShare for safe-keeping. It feels good to have someone else owe me money for a change, haha. 😉

2 Ways to Invest

The future looks green, and I’m not just talking about money. 😛 SolarShare offers 2 types of bonds that investors can buy; a 5-year bond with 5% return, or a 15-year self-amortizing bond with 6% return.

16-10-solarshare-options

The 5 year bond has a lower minimum investment so folks who don’t have a lot of money can still take part investing in solar energy. But I bought the 15-year bond because I like the higher interest rate. 🙂 In either case, interest is paid semi-annually to an investor’s bank account via electronic fund transfer, or by direct deposit into a registered account.

The 5-year option works just like any other bond, which I’ve explained in the past. But the 15-year bond I purchased is self-amortized which means it works more like a mortgage. Every 6 months I will receive a payment made up of both principal and interest. This will continue for 15 years, or 30 payments in total, until all my principal is paid back in full.

So how much will I receive each payment? I know there’s a way to calculate the amount, but unfortunately math is not my strong suit. If I had a nickel for every time someone said I’m bad at math, I reckon I’d have 47 cents. But thankfully SolarShare sent me a customized payment schedule so I don’t have to do any math. Phew. 🙂

16-10-solarshare-payment-plan

As we can see, every year I’ll earn $1,020.40 of income from this bond. By the end of the 15th year, I will have received over $15,000 for my initial $10,000 investment.

Continue reading »

Oct 102016
 

Investing in a Brighter Future

16-10-thomas-edison-solar-power

The Easiest $300 I’ll Make This Year

Hello eco-conscious friends! I recently discovered a way to earn $300 in interest/year by using leverage and low interest rates. 🙂 For those who are interested in the details, here’s how it’s done.

  • Step 1: Borrow $10,000 from the bank at 3% annual interest rate.
  • Step 2: Download the online SolarShare purchase form.
  • Step 3: Fill out the form with instructions to invest $10,000 in bonds that pay 6% annual interest.
  • Step 4: Send the completed form back to SolarShare and start collecting net interest of $300/year. 🙂

That’s all there is to it. 🙂 Simple right? Once I made my decision to go for it the entire process only took about 30 minutes.

What I essentially did was borrow money at 3% to buy an investment that pays 6%. This means my net investment return is 3% pre tax. All the investment capital comes from someone else so I don’t have to spend a dime myself. This is the easiest way I know how to make $300, lol.

But of course just because this strategy works for me doesn’t mean it’s right for everyone else. So in today’s post I will discuss how my new investment works and why I chose to buy it. If you don’t yet believe in solar energy, maybe this post will help you warm up to the idea, haha. 😉 But please do additional research on your own and consult with a professional before making any financial decisions.

An investor who uses $10,000 of savings to buy these bonds would make the full 6% return since there would be no cost of debt. I didn’t use my savings for this investment because my money is earmarked to make another big purchase later this month.

Why Invest in Solar Energy

Sustainability is very important to me. This is because I love bacon, lobster, steak, sea bass, and all things delicious. Animals require a sustainable habitat to live and grow. But if there is too much pollution then entire ecosystems or farms where animals live could be destroyed. I simply cannot allow that happen.

So as you can see, investing in renewable energy is a matter that’s very close to my heart. 😆 And we are lucky here in Canada where we receive a decent amount of sunshine throughout the year, unlike some other parts of the world.

16-10-optimism-uk-solar-panels

I had previously wrote about how to invest in renewable energy. Not only is it environmentally responsible, but it can also be quite profitable. My investment last year in Brookfield Renewable is now up by 12%, including dividends, which is not too shabby. 🙂 But this time I ventured into the world of alternative investments to directly invest in solar energy projects.

Continue reading »

Aug 112016
 

Sherritt Restructures its Debt

Earlier this year Sherritt International, a Canadian mining company, announced plans to extend its debt maturity by 3 years in order to weather the current commodity downturn. Out of the $720,000,000 debt that will get the extension, $5,000 of it is owned by me. 😀 A couple of years ago I purchased some Sherritt bonds for $5K with the expectation that I would be paid 8% interest rate every year until maturity in 2018, at which point my principal will be returned to me.

But last week I received the following online message from my discount broker.

16-08-sherritt-bond-pushed-back-to-2021 Sherritt Restructures

I always knew this was a potential possibility. Making 8% investment return a year comes with a fair chunk of risk. I can understand the plight of the mining company. I first realized Sherritt was in trouble when the value of my bond dropped 38% last year, and prepared myself or the worst. Sherritt’s profits are tied to the underlying commodity that it’s trying to sell. The price of nickel has dropped to just under $5/pound today, compared to $12/pound 5 years ago.

Continue reading »