US Treasury Bills - where can we buy in Canada | Page 3 | GIC discussions | Discussion forum

zgic said

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.  

I use ZAG and SCHP in registered accounts. I wouldn’t use GICs in registered accounts because they lack liquidity and are a pain. I want FI to be sellable if needed for rebalancing. My lower tax bracket spouse has some non-reg GICs. ISAs are for big bank brokerage accounts which we don’t tend to use if we can avoid them. SCHP is TIPS, it is not directly comparable to ISAs. I started using SCHP around Covid time as I got scared that money supply could trigger inflation. SCHP is showing 20% total gain, uniquely for FI over that period, but some of it is due to CAD falling.

In taxable accounts I have HBB and ZST. I also use Preferred Shares, which is a mixed asset class paying lots of eligible dividends (but requires caution). HBB is particularly tax efficient and I am comfortable with how it is structured. Worth a little extra risk in a taxable account. And, of course, cash moving around in promo accounts. Everyone needs some.

am just trying to understand the net gains and not question your other asset allocation considerations or other requirements you might have. Thank you.

To me, its ALWAYS about asset allocation. Everything I have makes up a portfolio and is managed as such. I expect net losses in real terms on some of the assets. Thats OK. As long as the portfolio keeps churning out multi-year 8% money weighted rate of return and I can stomach volatility, I am happy.

But you are right to focus on taxes; far more important in a taxable account than the 9bp MER.

Good table. Unless one trade 7 figure bond position, the incremental gain is just a rounding error. Spend the time and effort on the big picture is far important and where the focus should be.

zgic said

Thank you savemoresaveoften. I will have to learn the inner workings of a Bond ETF. I invest in Stock Index ETFs.
I looked at the chart of ZAG over a 5 year period on yahoo and it is -15.04%. Am I looking at it correctly, what am I missing here.
All time chart shows -11.84% on yahoo is this correct?
wow  

I don’t know what you are looking at but total return over 5 years is -0.04%. It’s positive if you take a longer period of time. You might be ignoring the interest. Bonds have been struggling lately.

If you could sell your GIC from 3 years ago, you would have incurred a loss. The fact you have an illiquid product masks this loss and (perhaps) makes you feel better. In fact, liquidity is an advantage even if it hurts feelings. Bonds can be sold, if you look at the price of one bought a few years ago, you’d see the same thing as ZAG showed.

This should not be a surprise. Fixed income products suffer during periods of unexpected inflation. Thats why one needs a portfolio with different asset classes. A good portfolio mitigates volatility of individual assets. You would struggle to find a negative 5-year period for a balanced portfolio.

If all you learn from this discussion is that “bonds are worse than GICs”, or that “one needs to buy junk bonds” then it will hurt your financial future in the long term. You need to read a couple of good books, eg Bernstein’s “investing for adults” series.

Apart from understanding asset classes, you need to set a clear objective for fixed income elements within your portfolio. That will help you pick the right investment vehicle.

zgic said

Thank you savemoresaveoften. I will have to learn the inner workings of a Bond ETF. I invest in Stock Index ETFs.
I looked at the chart of ZAG over a 5 year period on yahoo and it is -15.04%. Am I looking at it correctly, what am I missing here.
All time chart shows -11.84% on yahoo is this correct?

I'd stay away from ZAG and other such bond ETF's. The 5-year return with interest reinvested of the underlying FTSE Canada Universe Bond Index is a scant 0.27% per annum.

Returns on GIC's may not have been great. But, one could have easily achieved more than 0.27% per annum with 1- to 5-year GIC's these past five years. Same with the 10-year 2.00% per annum return.

Is this really what one wants for the GIC's and bonds in the portfolio?

Such bond index ETF's are good for speculating on interest rates and lousy otherwise. There's no certainty of income or value on maturity dates as one would have with GIC's. There's also bonds in such ETF's that one would not normally consider putting money into, like Ford Credit Canada 5.67% bonds maturing 20-Feb-2030.

Was one really looking to place over 55% of the money into GIC's and bonds maturing in 5 to 30 years? This is what that underlying bond index and such ETF's have:

43.40% 1-5 Years
28.80% 5-10 Years
27.80% 10-30 Years

Average weighted maturity is currently 9.68 Years!

That's real advice. What you've been writing is garbage based on a lack of understanding of what has been driving those bond ETF performance numbers.

One does not start off with a lower yielding bonds and somehow end up with higher returns than GIC's without there being a catch. The catch is that those bond ETF performance numbers have been juiced for many years by falling interest rates. Interest rates cannot fall forever. The performance numbers have also been temporarily skewered recently by rising interest rates.

The long term returns will eventually converge to what the yield to maturity of the bonds were at the time one buys the bonds. Any extra gains or losses along the way will evapourate as the bonds approach maturity.

If one wasn't thinking of lock in around 4.30% for about 10 years, then don't put money in ZAG that has that yield to maturity and that average maturity.

As savemoresaveoften pointed out, if one is counting on selling before maturity then one is going get something different and is hoping/speculating that interest rates won't be higher at that time.

Norman1 said
If one wasn't thinking of lock in around 4.30% for about 10 years, then don't put money in ZAG that has that yield to maturity and that average maturity.

That one sentence summarized all one needs to know about ZAG at its current price.
4.3% yield is rougly 70bps over the GC 10y. One can decide if its worth it or not.

mordko said

Not in any way shape or form. Missing out on a whole lot of obvious issues.

Like that routine portfolio management and maintaining a consistent level of risk involves rebalancing and that buying and selling ZAG (or VAB, etc) would cost you A LOT less than buying and selling bonds via a bank brokerage while GICs are completely useless in that respect.

Its also missing out on understanding what objectives for fixed income are for a given portfolio, which may vary depending on circumstances and individual.

Its core principles of investing, big picture. Suggesting that the only purpose for bond funds is 70 bps over GOC bonds is just plain wrong.  

Everything you said is just simple basic portfolio management and not relevant to ZAG. You praise it so much makes me wonder if you are the PM running it and feel the need to defend it.

And speaking of portfolio managment and trading bonds, would love to see your credentials or u just read a bunch of books or watched some webcast..

mordko said

Its not relevant to ZAG. Its relevant to picking a bond ETF vs individual bonds vs GIC. A particular tool for each of the options is a secondary question. ZAG is a solid option (among several) for a bond ETF. A solid solution for most peoples needs, although these days even simpler options like VBAL might be good enough.

I am a mere nuclear physicist. Nothing to do with fund management, except for my own portfolio. Then again, its a chat room and you can call yourself Warren Buffett but its irrelevant. Yes, I did read books. You should try it.  

I read enough books and got my CFA and worked in the industry. So while I dont know much about nuclear physics, I do know portfolio management, how bonds work, what ETFs are. I know enough that if one has a portfolio big enough, choosing single bonds for their fixed income portion is likely better than paying a PM fee every year to "manage" their bond potfolios.
Already said bond etfs exist for covenience, not for best return. You think ZAG is better and so be it.