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 »

Aug 242015
 

How to make money in oil regardless of market conditions

Drilling for oil can be such a boring job. ? At least it provides a good income, though. But it’s becoming harder these days to find work in the oilfields. A year ago oil was trading at $90/barrel. Today, WTI has fallen below $40/barrel. Canadian crude is selling for even less, at around $30/barrel. Ouch!

15-08-crude-oil-price2015-1-year

Many oil producers are currently operating at a loss because $40/barrel is below their break-even point. It can take many years for oil prices to turn around. The problem is we don’t know exactly when the recovery will happen. If we did, we would probably all be retired right now. 🙂

15-08-break-even-price-oil-profitable-business

Oil stocks are not doing so hot these days. However, there are other ways to still make money from the oil industry, despite the bleak market conditions. 🙂 One way is to write covered calls. But today I’d like to discuss a different approach.

Since the start of this year, Western Energy Services Corp (WRG), has lost about 23% of its value. It could be worse, considering the price of crude oil has fallen about 27% over the same period. But who knows how much lower WRG shares can fall if the price of oil drops further? Fortunately, this company also issues bonds.

When Stocks Underperform, Look Towards Bonds

So last week I bought $5,000 face value of Western Energy Services bonds, with a 7.875% coupon interest rate, maturing in January 2019. I was able to buy it pretty much at par value, which is nice. 🙂 Even though the company is barely making a profit, it’s still obligated to pay me 7.875% every year. Interest is paid to bond holders before dividends are paid to shareholders. ?

15-08-western-energy-services-bond-buy

Related Post: What is a bond?

Thanks to the new bond investment my passive income is now $393.75 a year higher. Woohoo! ?  The yield to maturity for this high yield bond is about 8% a year. This rate of return is safe 🙂 as long as the company doesn’t file for bankruptcy protection before January, 2019. Here are some benefits of buying the bond of this company rather than its stock.

  • The bond pays 8% annual return. The stock only pays a 6.5% annual dividend.
  • Bonds are inherently less risky than stocks.
  • The stock dividend might get cut if the price of oil remains at these low levels. But the bond interest rate does not change.
  • If the company goes bankrupt the stock holders will lose all their money. But the bond holders can liquidate the company’s assets to recoup some of their losses.

Continue reading »

Aug 042014
 

July was a decent month. So far in 2014 my wealth has grown by $100,000! Most of that came from investment gains. Awesome possum! 😀 My asset column is growing steadily. If I hypothetically buy a one bedroom, shoebox condo tomorrow for $200,000 then BOOM! I’d technically be a millionaire by gross assets! Just thinking about that gets me all kinds of excited 😀 But I have to be careful not to over extend myself with leverage.

It’s an interesting realization that my current $303,600 net worth is about 36% of my total assets. This means a 36% correction of my overall investments right now would WIPE OUT my entire net worth. POOF! All my wealth would just disappear before my eyes 😥  Hopefully that won’t happen but who knows what the future holds 😕 That’s what I love about finance, it’s like a box of chocolates; I never know what surprise will await me 😉

Anyway it’s getting harder to find undervalued investments these days with the equities market being so darn high. So I took a slightly different direction with my investments recently. Rather than picking stocks, I spent over $10,000 instead on a huge shopping spree in July to purchase fixed income assets like bonds and MICs. Most of this spending had to come from new borrowed money but that’s okay. I’m not too worried right now because I emphatically feel like my debt will somehow take care of itself later 😉 #fingerscrossed

*Side Income:

  • Part-Time Work = $800
  • Dividends = $500
*Discretionary Spending:
  • Eating Out = $100
  • Others = $200

*Net Worth: (MoM)chart_14july

  • Assets: = $838,300 total (+13,100)
  • Cash = $2000 (+1200)
  • Stocks CDN =$92,600 (-300)
  • Stocks US = $52,700 (+600)
  • RRSP = $49,000 (+6600)
  • MICs = $15,000 (+5000)
  • Home = $254,000 (same)
  • Farms = $373,000 (same)
  • Debts: = $534,700 total (+6,800)
  • Mortgage = $197,700 (-400)
  • Farm Loans = $205,600 (-500)
  • Margin Loan CDN = $30,400 (-400)
  • Margin Loan US = $23,900 (-1000)
  • TD Line of Credit = $32,200  (-400)
  • CIBC Line of Credit = $12,700 (-400)
  • HELOC = $18,700 (-1000)
  • RRSP Loans = $13,500 (+10,900)

*Total Net Worth = $303,600 (+2.12%)
All numbers above are in $CDN. Conversion rate used: 1.00 USD = 1.09 CAD

On the asset side, thanks to the inclusion of the new bonds, my RRSP is now almost at $50K 🙂 I decided to add my $5K of new MICs to the “MICs” asset category (and did not include the value in my “RRSP” category) even though they’re held in my RRSP account. This is for more descriptive bookkeeping purpose only. On the debt side my “RRSP loans” went up big time, but I plan to pay it down at least $1K a month. For the time being I want to just hold onto my current assets. Today I have about 75% of my assets in hard wealth, and 25% in paper wealth. That seems to be a good balance for me 🙂

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Random Useless Fact:

The Hawaiian pizza was invented in Ontario, Canada.  And the California Roll (sushi) was invented in Vancouver, BC Canada.

Jul 292014
 

[Edit] The following post was written in July 2014. I’ve posted an update in October about my purchased Sherritt Bonds. It’s not doing so well. [/edit]

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Investing in High Yield Bonds

Last year I blogged about wanting to invest in bonds as one of my goals because I’ve heard smart people invest in stocks, but smarter people invest in bonds 😉 Then earlier this month I wrote about taking out a loan and have dedicated some money to buy bonds with.

Well I have finally taken the plunge into bonds. Yesterday morning I purchased $5,000 face value of the Sherritt International Corporation 8% bonds, maturing on Nov 15, 2018, for the price of $104.475. I will explain the jargon in a moment, but essentially what this means is I have made an investment of roughly $5,200. And by the end of 2018 that investment will turn into $6,800. That represents a 6.8% annual return 😀 It’s not the best investment ever, but it sure beats the low returns on 5-year CDs and GICs.

14-07-sherritt-bond1

Bonds are generally safer investments than stocks because if a business goes bankrupt bond holders have priority over shareholders 😛 muahaha. I’m not 100% sure on this so maybe Chuck the bond trader can weigh in, but I assume this means my 6.8% bond return is pretty much guaranteed as long as Sherritt stays in business until my bonds mature. Considering how the company’s stock is part of the S&P/TSX Composite index and it hasn’t missed a quarterly dividend payment in almost a decade, I think my 6.8% return is pretty safe 🙂

I will discuss three topics in today’s post: Why I’ve decided to buy these bonds. How to buy bonds. And what are the risks and expected returns of my new bonds.

Continue reading »