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 »

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 »

Aug 012016
 

Stock Markets Reach Record Highs… Again 

Both the Dow Jones and the S&P 500 indexes have climbed to all time highs in late July. 🙂 But corporate earnings have been stagnant and economic growth remains weak. Restaurant sales have slowed. The U.S. economy only grew a disappointing 1.2% in the second quarter, well below expectations. 😕

So what’s producing so much excitement in the stock market? In short, I believe it’s largely caused by Negative Interest Rate Policies (NIRP). For example, in Europe the benchmark lending rate is negative 0.4%. Usually the bond issuer pays interest to the investor. But with negative rates, the investor pays the issuer. Currently about 1/3rd of the world’s government bonds are producing negative yields. Investors can’t get rich by holding these securities anymore. So in this kind of environment bonds really hold people down.?

As a result of NIRP, more investment capital has moved from the bond market to relatively stable stocks. These tend to be companies that operate gas pipelines, railways, utilities, telecommunication services, and other infrastructure that are recession resistant. Last year I wrote about how to easily make $75 of annual income without using any of my own savings by using leverage to buy shares of TransCanada Corp (TRP.)

16-08-financial-advice-dog-bonds-tennis-balls

I purchased TRP stocks for $42 per share. I mentioned at the time that analysts had an average price target of $57.50 per share. This doesn’t always happen, but sure enough TRP is trading at roughly $60 per share today. 😀 So not only am I making $75 a year in dividends, but I’ve also made $1,800 in unclaimed capital gains so far. 😉

In normal circumstances this kind of price movement in a large cap, blue-chip company wouldn’t happen. But due to a lack of viable investment alternatives, an influx of additional buyers has pushed up TRP and many other relatively safe stocks.

Increasing Valuations and Risk

Unfortunately, NIRP produces asset bubbles and may cause the markets to behave precariously. The chief executive of DoubleLine Capital, who oversees more than $100 billion in assets, recently said that many asset classes look frothy and his firm continues to hold gold, which has also climbed due to NIRP.  At the end of July gold reached $1,350 per ounce, the highest monthly close in years! Stock investors have entered a “world of uber complacency,” said Jeffrey to the media. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong. Continue reading »

Mar 102016
 

Investing in Air Canada Bonds

Don’t expect to eat anything fancy when you’re flying because you’ll just be getting plane food. In last week’s blog post it showed that I had over $7,000 of cash saved up. I usually don’t like to have idle money doing nothing. But it’s hard to decide what to buy when everything appears to be overbought lately. However as I was browsing the fixed income tables on my discount broker site I noticed that Air Canada had issued high yield bonds with a 7.625% coupon, maturing in 2019. This looked like a great opportunity to park some money for the next few years and earn some interest. 🙂 My decision to buy Air Canada bonds at this point was still up in the air. I had to do some research to determine if this was the right investment for me or not.

16-03-buying-air-canada-bonds

The first thing I did was calculate my potential return on this bond by looking at the bond description as of early March.

Coupon: 7.625%
Maturity: 10/1/2019
Worst Call Date: 10/1/2016
Ask Price: 105
Yield to Worst: 3.3%
Yield to Maturity: 5.5%

If someone were to buy these bonds then their expected annual return would be 3.3% to 5.5% depending on when the bonds expire. This range of return is better than leaving money in a savings account. So the next thing I did was research the company’s credit risk, which involves analyzing its financials and common shares in the stock market. 🙂

Air Canada’s Credit Analysis

Standard & Poor’s rates the bond a BB, which makes it slightly below investment grade BBB. From a valuation perspective, Air Canada’s stock (AC) is trading rather cheaply. At around $8 per share today, its P/E ratio is just 8.4 times compared to the broad TSX index which is more than 18 times. Out of 14 analysts covering the stock, the majority agrees that AC will become quite a lot higher one year from now.

16-03-air-canada-stock-price-target

In terms of historical profitability Air Canada has been somewhat of a mixed bag. The credit crisis of 2008 and high oil prices (fuel cost) made it difficult for AC to operate its way out of the recession. It suffered 4 consecutive years of losses from 2008 to 2011. But when the airline became profitable again in 2012 things were looking up. 😉16-03-air-canada-historical-finances

It appears that in 2013 Air Canada’s stock really took off.

16-03-air-canada-stock-chart

It’s hard to predict how profitable Air Canada will be almost 4 years later when the bond matures, but TD Securities has conducted some estimates of Air Canada’s financials up to 2018. When dissecting tables like this one the most telling figures for me are net income – which describes profitability, and ROIC – which stands for Return on Investment Capital and gives a sense of how well a company is using its money to generate returns. Both metrics are outlined in red below.

Continue reading »

Oct 062015
 

I might lose my entire bond

Bonds are usually safer than stocks. But it’s also possible to lose a lot of money in bonds if we’re not careful. Last year I blogged about buying $5,000 of Sherritt’s high yield bonds. I made this decision based on the attractive 8% annual yield! 😀 Sherritt International Corporation is a mining and energy company that operates in Canada, Cuba and Madagascar. Sherritt’s primary business is mining and refining nickel ore and similar base metals.  I expected the bonds would mature in November 2018 and I’d get back my principal. However, a lot of things have changed since 2014.

Sherritt bonds plummet in value

As with all mining companies, the value of Sherritt’s business depends heavily on the price of the underlying commodity it sells, in this case, nickel. When I bought the bond last summer the spot price of nickel was roughly $9 per pound. And it appeared to have stabilized. However, 15 months later, the price has now dropped in half to just $4.5 a pound. 😕 Below is a 5 year chart of the price of nickel.

15-10-sherrit-bonds-nickel-price-chart-5-year

Obviously this had a devastating impact on resource and mining stocks. Teck Resources and Freeport-McMoRan are both down about 50% year to date. And Sherritt is down 70%. I guess you can say these mining companies have hit rock bottom. ? Even though I don’t own any Sherritt stocks, I’m still a little concerned as a bond holder. With the common share price dropping this low, there’s a real chance that Sherritt could file for bankruptcy protection in the foreseeable future. And if the company’s board of directors choose to do that before my 2018 bonds are due then I may not get my $5,000 principal back. 😐

Continue reading »