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Email this3:50 pm
October 27, 2018
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mordko said
Like Zdic says, if you are buying discount bonds (which many are right now) then a lot of your income will come in the form of capital gains rather than interest. Which is more tax efficient than GICs. That will always be true if you hold a discount bond to maturity but could also be true for bond funds, although less certain.
From Canada.ca
"When a T-bill or stripped bond is issued at a discount, and you keep it until it matures, the difference between the issue price and the amount you cash it in for is considered to be interest that accrued to you."
5:24 pm
March 30, 2017
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mordko said
I would definitely “fret” over the kind of commissions and spreads charged by brokers for bonds. Particularly so that they charge it on the way in and out. Unless you are planning to hold this bond for decades, its likely to be a large chunk of change. If I could buy new issues direct from the government, like they can in the states, it would be another matter. In Canada its hard to make an argument for straight bonds when you can buy bond ETFs for next to nothing.
A bond ETF charge u MER + management fee EVERY YEAR, and you pay brokerage commission to buy too.
Say MER plus whatever = 30bps a year, $10k holding = $30 and thats EVERY YEAR you own it. I rather pay my broker once for the bid/offer on the bonds I want and that's it.
It's almost like why u buy a dividend ETFs and pay away fee every year, when a lot of it can be easily replicated by the underlying. If you don't have enough capital but still want diversification, that's another story and reason, not for cost reason.
7:44 pm
April 27, 2017
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savemoresaveoften said
A bond ETF charge u MER + management fee EVERY YEAR, and you pay brokerage commission to buy too.
Say MER plus whatever = 30bps a year, $10k holding = $30 and thats EVERY YEAR you own it. I rather pay my broker once for the bid/offer on the bonds I want and that's it.
It's almost like why u buy a dividend ETFs and pay away fee every year, when a lot of it can be easily replicated by the underlying. If you don't have enough capital but still want diversification, that's another story and reason, not for cost reason.
Ok, but here is a real world example. I have 126K of ZAG. I do not pay brokerage commission to buy and sell. BMO gets a much, much better price than I ever could. I do not even pay for the spread (1 cent) as its liquid and I don’t bid the asking price. MER is 9bp. Thats $113 per year total on 126K. And I can sell it when I need to rebalance during the bear market.
Then I have around $150K in SCHP (US TIPS). 6 basis points.
HBB, 9 bp. Taxable portfolio. No interest, its all capital gain.
ZST MER is an outrageous 17bp but this is an ultrashort duration ETF with a very specific purpose to cover next years corporate tax liability. I have to keep buying small batches monthly as my liability grows. Can’t really do this with bonds without way too much pain.
I would not touch anything with 30bp because there is no need.
Last time I counted, my 30% fixed income portfolio would not have benefited from buying second hand bonds via brokers. Maybe if it gets passed 8 figures… but even then I am not sure.
I would buy government bonds direct if I could but thats for rare extreme emergency scenarios when ETFs start failing. In our conditions I just use cash and assets in other jurisdictions.
Dividend ETFs are not really relevant. Its another asset class. I think its an inefficient way to buy value. And buying individual stocks is far, far, far cheaper than bonds so the point is moot.
7:55 pm
April 6, 2013
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Patch002 said
From Canada.ca
"When a T-bill or stripped bond is issued at a discount, and you keep it until it matures, the difference between the issue price and the amount you cash it in for is considered to be interest that accrued to you."
Doesn't apply when one purchases a bond that pays interest semi-annually at a discount to the bond's face value. Such bonds are not a discount note or a stripped bond.
8:00 pm
April 27, 2017
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Patch002 said
From Canada.ca
"When a T-bill or stripped bond is issued at a discount, and you keep it until it matures, the difference between the issue price and the amount you cash it in for is considered to be interest that accrued to you."
Don’t know about stripped bonds but discount bonds purchased in a secondary market have a clear tax advantage over GICs as detailed here:
• A bond with two years to maturity is purchased in the secondary market at a price of $96.17 and a coupon rate of 3.224%
After two years:
• $3.83 will be realized as a capital gain ($100 – $96.17)
• $6.45 is received as interest income
• The total pre-tax return is $10.28 ($6.45 + $3.83)
• Of the total return, $8.365 will be taxed as regular income:
• $3.83 x 50% (inclusion rate for capital gains) + $6.45 interest income
• If the investor’s tax rate is 53%, the after-tax return is $5.846:
• $8.365 x 47% + $1.915 (non-taxable portion of the capital gain from the 50% inclusion)
• The cumulative two-year after-tax return would be 6.08% ($5.846 / $0.9617)
• The annualized after-tax return would be 2.99%: ((1+.0608)^(1/2 years)-1)
To earn the same after-tax return on a GIC, the GIC rate would have to be 6.36%, more than twice the return of the bond: 6.36% x (1 - 53% tax rate) = 2.99% after-tax return.
8:15 pm
April 6, 2013
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zgic said
…
Wow this is all greek to me. Looks like my Bonds' knowledge is 0.
I have to learn and understand a lot before I even think of these bonds like BAIL-IN what is it? Available Qty?
The BAIL-IN indicator means that the bond is from a Canadian bank and the bond has fine print that allows Canadian regulators to convert the bond to common shares of the bank under certain conditions. See Bail ins for a previous discussion about this.
Available Quantity is the quantity of the bond BMO InvestorLine has in its bond inventory to sell.
…
Today, If I go to CNBC I can see a US Treasuries chart with yields: Can I buy these today at these rates in Canada? If yes can you give me a link to a US 6-Month?
Unfortunately, no. Those are indicative wholesale yields, no commissions included.
In reality, BMO InvestorLine offers US Treasury bills maturing 03-OCT-2024 (in 177 days) at 97.647 (including commissions) for a yield to maturity of 4.9%. That is less than the 5.33% quoted by CNBC for six-month US Treasury bills.
10:07 pm
April 6, 2013
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mordko said
…
• A bond with two years to maturity is purchased in the secondary market at a price of $96.17 and a coupon rate of 3.224%
…
To earn the same after-tax return on a GIC, the GIC rate would have to be 6.36%, more than twice the return of the bond: 6.36% x (1 - 53% tax rate) = 2.99% after-tax return.
That's twice the coupon of the bond, but not twice the return of the bond. In practice, I don't see an advantage as much as 2X of the return of the bond.
Two-year bond, 3.224% coupon, and 96.17 price has a yield to maturity of 5.27%. It should be easy to find a 2-year GIC with a rate of 5.5% to 6% when 2-year bonds are trading with yield of maturity around 5.25%.
Most people are not in the 53% tax backet. Someone in the 35% bracket will only need to find a two-year GIC with a rate of 2.99% / (1 - 0.35) = 4.6% to match the bond.
4:50 am
April 27, 2017
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Norman1 said
mordko said
…
• A bond with two years to maturity is purchased in the secondary market at a price of $96.17 and a coupon rate of 3.224%
…
To earn the same after-tax return on a GIC, the GIC rate would have to be 6.36%, more than twice the return of the bond: 6.36% x (1 - 53% tax rate) = 2.99% after-tax return.That's twice the coupon of the bond, but not twice the return of the bond. In practice, I don't see an advantage as much as 2X of the return of the bond.
Two-year bond, 3.224% coupon, and 96.17 price has a yield to maturity of 5.27%. It should be easy to find a 2-year GIC with a rate of 5.5% to 6% when 2-year bonds are trading with yield of maturity around 5.25%.
Most people are not in the 53% tax backet. Someone in the 35% bracket will only need to find a two-year GIC with a rate of 2.99% / (1 - 0.35) = 4.6% to match the bond.
Yes, thanks. Good point. We should tell BMO to adjust their wording.
Right now boring ZAG is yielding 3.55% with the effective duration of over 7 years. Most, if not all, of the bonds within ZAG will be discounted. The exact maths is too complicated for me without figuring out each component and thinking about it. They probably won’t be holding bonds to maturity either which could juice the return a bit.
Either way, I am prepared to bet on ZAG, if purchased today, ending up more tax effective than a GIC in a taxable account, particularly for a top rate taxpayer. And it’s liquid. But a bit more risky. Average credit rating is AA-. Overall, looks attractive against today’s GICs.
5:10 am
March 30, 2017
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mordko said
Ok, but here is a real world example. I have 126K of ZAG. I do not pay brokerage commission to buy and sell. BMO gets a much, much better price than I ever could. I do not even pay for the spread (1 cent) as its liquid and I don’t bid the asking price. MER is 9bp. Thats $113 per year total on 126K. And I can sell it when I need to rebalance during the bear market.
Then I have around $150K in SCHP (US TIPS). 6 basis points.
HBB, 9 bp. Taxable portfolio. No interest, its all capital gain.
ZST MER is an outrageous 17bp but this is an ultrashort duration ETF with a very specific purpose to cover next years corporate tax liability. I have to keep buying small batches monthly as my liability grows. Can’t really do this with bonds without way too much pain.
I would not touch anything with 30bp because there is no need.
Last time I counted, my 30% fixed income portfolio would not have benefited from buying second hand bonds via brokers. Maybe if it gets passed 8 figures… but even then I am not sure.
I would buy government bonds direct if I could but thats for rare extreme emergency scenarios when ETFs start failing. In our conditions I just use cash and assets in other jurisdictions.
Dividend ETFs are not really relevant. Its another asset class. I think its an inefficient way to buy value. And buying individual stocks is far, far, far cheaper than bonds so the point is moot.
you are mistaken ETFs are not just MER. This is straight from the BMO ZAG info page:
Maximum Annual Management Fee
0.08%
Management Expense Ratio
0.09%
You pay both every year, may not add upto 30bps, which is just a quick example.
Most "cheap fee" bond ETF, one will be look at close to 20bps.
Seems like you are paing double of what you think you pay each year. Yes it provides liquidity if you need to access your funds (In my case, I dont need my fixed income to be liquid at all.)
You dont pay bid/offer only because you wait for the bid to get hit, not that they give you 'choice' market, same goes when you need to sell.
Every other ETF out there, you pay both MER + management fee each year. The fund manager is not working for free.
For fixed income investments one intends to hold to maturity and at least 2-3y and longer in terms, chances are it is cheaper to buy individual bonds and pay bid/offer spread once vs pay MER+management fee each year for a ETF.
I would also never buy a GC bond, only buy corporate which are much higher yield in general. If one wants 'zero' risk, buy a longer term GIC from a CDIC insured FI. And there are really very little reason to buy any bonds beyond 5y horizon give economic cycle roughly 4-5 years.
5:24 am
April 27, 2017
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savemoresaveoften said
you are mistaken ETFs are not just MER. This is straight from the BMO ZAG info page:
Maximum Annual Management Fee
0.08%
Management Expense Ratio
0.09%You pay both every year, may not add upto 30bps, which is just a quick example. .
No. You are mistaken. MER includes management fee (as well as operating costs and taxes charged to the fund).
Sorry, didn’t read passed the “you pay both” assertion.
7:37 am
March 30, 2017
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mordko said
No. You are mistaken. MER includes management fee (as well as operating costs and taxes charged to the fund).
Sorry, didn’t read passed the “you pay both” assertion.
You are right, I was thinking expense ratio, which most funds do not include management fee in it.
So for a $10k purchase on a 5y expected hold, you will be paying $45+$6.96 (CIBC IE commission as an example). Thats a $52 total fee, vs if I buy a single name 5y bond and paying bid/offer once.
AND you make a very strong assumption that the BMO bond traders are NOT charging the ZAG fund manager bid/offer on the purchase, which is never disclosed, but I assure you there is a bid/offer there.
8:00 am
April 27, 2017
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savemoresaveoften said
You are right, I was thinking expense ratio, which most funds do not include management fee in it.
So for a $10k purchase on a 5y expected hold, you will be paying $45+$6.96 (CIBC IE commission as an example). Thats a $52 total fee, vs if I buy a single name 5y bond and paying bid/offer once.AND you make a very strong assumption that the BMO bond traders are NOT charging the ZAG fund manager bid/offer on the purchase, which is never disclosed, but I assure you there is a bid/offer there.
- Fact: I am not paying $6.96 because I am not with CIBC and never will be and the brokers I use let me buy and sell ETFs without commission.
- Fact: BMO bond traders are incurring a tiny fraction of the cost I would if I were to buy the same bond directly. Thats the difference between wholesale and retail.
- Fact: all trading costs associated with buying and selling bonds by the fund are also covered within ZAG’s MER.
A little tired of hypotheticals. Sorry. The point is that in the real world I am much better off buying bonds in an ETF wrapper. That was based on the actual dollar value last time I counted and nothing has changed since except ETF costs went down. Brokerage costs for bonds are an absolute killer, once you account for spreads, and you have to pay them twice.
I would be interested in government bonds if I could buy them direct without brokerage costs. For one thing, they are even safer than anything protected by CDIC and there is no limit. US lets yanks do it, eg one can buy individual TIPS directly from the U.S. government at TreasuryDirect.gov. Canada lets our banking oligopoly take a massive cut instead, which makes it a really bad option for just about everyone. Anyway, it’s another hypothetical.
8:20 am
January 10, 2017
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Is there a bond fund or ETF that only deals in strip bonds such that all distributions and gains are considered capital gains for tax purposes?
8:54 am
April 27, 2017
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Lodown said
Is there a bond fund or ETF that only deals in strip bonds such that all distributions and gains are considered capital gains for tax purposes?
Doubt it. Big time. CRA would count it as interest.
You would have to look at swap ETFs, like the one I mentioned above.
1:34 pm
August 6, 2018
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Lodown said
Is there a bond fund or ETF that only deals in strip bonds such that all distributions and gains are considered capital gains for tax purposes?
BXF, but I don't guarantee that the tax implications are accurate. Here a Canadian Couch Potato article about it.
1:35 pm
March 30, 2017
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mordko said
- Fact: BMO bond traders are incurring a tiny fraction of the cost I would if I were to buy the same bond directly. Thats the difference between wholesale and retail.
- Fact: all trading costs associated with buying and selling bonds by the fund are also covered within ZAG’s MER.
ZAG fund managerr called bond desk and want to buy a 5y ABC 5% coupon bond, bond desk quotes a price. ZAG trader bought the bonds and include it in the ZAG portfolio. That spread that the the bond desk charge is NOT included in the MER, as bond desk does not disclose how much bid/offer they are charging, the fund manager knows roughly what price to expect, but its not set in stone. Thats the fact. If you actually run a fund and what I describe is wrong, I stand corrected.
I will agree that the ZAG fund manager will get a better price than regular Joe, but thats mostly because the fund manger is trading $millions and not $tens of thousands. Not sure if label it as wholesale is correct. The fund manager being a corporate account vs a retail account is more appropriate.
4:18 pm
April 27, 2017
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co said
BXF, but I don't guarantee that the tax implications are accurate. Here a Canadian Couch Potato article about it.
You’ll definitely pay tax on BXF interest at your top marginal rate. Will likely be more tax efficient than a GIC but it won’t be just the capital gains
5:04 pm
January 10, 2017
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mordko said
You’ll definitely pay tax on BXF interest at your top marginal rate. Will likely be more tax efficient than a GIC but it won’t be just the capital gains
Couch potato ends with the following:
To sum up, BXF is designed for non-registered accounts where the investor wants a fixed-income product combining the tax-efficiency of GICs and the liquidity and security of government bonds.
So distributions are indeed considered Interest. Seems the only benefit is liquidity vs GICs. Looks like there is no way to get low risk capital gains.
9:12 pm
April 6, 2013
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One can have low risk capital gains by buying low-coupon bonds like this one from BMO InvestorLine:
GOVT OF CDA 0.25% 01MAR26
Price: 93.644
Yield to maturity: 3.804%
6.356 Capital gains at maturity
0.222 Interest: 2024-Apr-11 - 2025-Mar-01 (324 days)
0.250 Interest: 2025-Mar-01 - 2026-Mar-01
6.828 Total gain
Challenge is that it is really not much better after taxes than a 5.05% two-year term deposit from Hubert which would produce 10.100 of interest over the two years.
Really only compelling to those who have net capital losses to apply against the capital gains.
4:16 am
August 30, 2023
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Norman1 said
One can have low risk capital gains by buying low-coupon bonds like this one from BMO InvestorLine:GOVT OF CDA 0.25% 01MAR26
Price: 93.644
Yield to maturity: 3.804%6.356 Capital gains at maturity
0.222 Interest: 2024-Apr-11 - 2025-Mar-01 (324 days)
0.250 Interest: 2025-Mar-01 - 2026-Mar-01
6.828 Total gainChallenge is that it is really not much better after taxes than a 5.05% two-year term deposit from Hubert which would produce 10.100 of interest over the two years.
Really only compelling to those who have net capital losses to apply against the capital gains.
That is a very good example Norman1.
So my question to mordko is: If we assume a steady ISA or GIC rate of 5% for 1 or 2 years. Why would you buy SCHP and ZAG and not ISA or GIC.
Does ZAG and SCHP (considering everything - commissions, fees, trading etc) have better returns because of tax gains than 5% ?(are there more capital gains there?)
I am just trying to understand the net gains and not question your other asset allocation considerations or other requirements you might have. Thank you.
I will put Liquidity of ISA as a top consideration.
Please write your comments in the forum.