Bond Funds | Tax Free Savings Accounts | Discussion forum

Looking at short term bond etfs.. A few reits.. for 2012 tfsa contribution.. Maxed out in 2011..

Kujibo said:

My credit union (Coast Capital) didn't charge me any fees for the bond fund. Not sure if they are getting a kick back from the fund or if they really are just looking out for my best interest. Supposedly they are on salary. In theory I think they might be there to just keep members with money to invest from taking their banking elsewhere and possibly their other banking with them.

Previously my financial plan was to only directly buy long term government and some corporate bonds, and hold them to maturity. I started collecting these in my RRSP via ITrade about 10 years ago, usually locking in over 6% return on each bond. However, it's been several years since you can find good quality bonds that give a 6% yield, so I haven't been buying anything. I won't go 20 to 30 years on a bond that only pays 4% or whatever as it isn't worth the risks against inflation or rising interest rates. As a result about 1/3 of my RRSP is sitting in cash earning 0%. It sucks that you can never get any kind of savings account type of return on cash in an RRSP, they have you by the you know whats at that point. I tried to look into money market funds to park it until returns get better (not sure they ever will), but that got frustrating. I think I will look at some of the ETFs you list or something similar and start investing the rest of the cash there, though in the RRSP the funds don't have to be tax efficient so maybe I should be finding ones that aren't tax efficient if they return slightly better.

For myself, I've avoided equities like the plague as I think they are overbought. I used to do a lot of equity trading but that was 10 years ago when things were more reasonable. I wouldn't go back into them unless they lost 2/3 of their value or I saw some obvious value. So for now I stick with Bonds, GICs, and HISAs, anything without much risk for downside. So I am always looking for a better return in these areas.

Anyway I'm no no pro either but it's also interesting to see what other people are doing or thinking.

Cheers.

So I take it you live in BC? I too have RRSP non-cash-able GIC's through my investment adviser at Coast Capital. The rate my adviser obtains is a tad higher than at the branch level (but I can get higher rates in the Winnipeg CU's). I am currently moving most of my day to day banking to Coast Capital, once again, as their High Interest is better than what I currently have at BMO (.01%). I can do an online transfer to the chequeing account just in case I have to write the rare cheque. I had put the wheels in motion months ago and it is one of those tedious tasks to change my CPP payments and pension payments to another bank account along with Hydro and Terasen auto debits to the account. Although I must admit during my last visit a few days ago at BMO they brought to my attention if I moved my money to a higher interest account I would make 1.25% VS my move to CC at 1.20%. A bit further to drive to CC but the BMO in Maple Ridge (224th) just does not have good service and for my rare visit to the branch I expect to be treated like an appreciated customer. As I do as much as possible on line, I feel that when only 10% of my transactions are at the branch level...customer service is far superior at CC than at BMO. So I will keep the wheels in motion!! But I will miss the online option of transferring CA$ to my US$ account.

I do know that some CU's in BC it appears mutual fund sales are from the CU but some like Envision have like a sub-contracted arrangement and the manager of that arrangement does in fact make commissions. Of course the CU will recommend what funds they would like to see that contractor sell. There are politics no matter what business you are in. Best for the customer...not necessarily. If CC is not that way I am sure CC as a CU will receive a commission and the people selling them are focused to only sell specific funds. But I could be wrong....just my assumption in regards to CC. My previous adviser was only selling specific funds of which I found odd. He used to make house visits and when I saw his leather file folder, in the back seat of his Jaguar, stamped with the mutual fund companies name on it.....I thought hmmmm....double ending on me and probably better kick backs from this company and maybe I am not getting the best return for my dollar. I don't put all my eggs in one basket and stayed away from an adviser that my employer used to bring in when some one retired or had their employment severed. Although he was very conversant with our pension plan. I later found that a few of my close friends at work were using his services and I went to visit him and have been with him ever since. I moved all of my funds to his company at no charge and he re-organized them and improved the revenue for me. I also had him figure out something for me too, in regards to cashing in RRSP's and moving the dollars to a TFSA. Why would you do that? Seniors in government subsidized rest homes basically turn over the majority of their pensions, RRSP payments, interest, and RIF payments BUT not the principal investment and now TFSA interest is protected from taxation, claw backs and income tested benefits. My adviser was surprised to see that a withdrawal from the RRSP including the income tax you would have to pay would recoup in a TFSA investment in about 5 years. So you lose the 5 years of growth but if you wind up in a position of being in an income tested arrangement the principal and interest is protected. Since we are only allowed 5000 a year I am strongly thinking about the process. So for any one investing.....put your first 5000 in a TFSA and the balance in a RRSP if you like the idea of the tax deduction and being taxed at a lower rate when you withdraw, or if you don't like RRSP's find your other best option that you are happy with. But still invest in a TFSA no matter what. If I did this process I still have to fight with the idea of moving my dollars away from a GIC TFSA investment with my adviser and working with one of the Winnipeg CU's to get the best interest rate possible. The latter makes sense as it is no longer RRSP money that I would have to move to a RIF nor is there an age limit on a TFSA.

So if you have 1/3 RRSP in cash...consider laddering in GIC's??? And if you were not charged a fee for the bond fund...make sure there is no back end fee on them too. I am retired and my backbone of income is our pensions. RRSP and severance money is all invested and untouched. That is why interest rates are important to me. I have looked at either doing all GICS in either 3 year or 5 year ladders......20 year bonds are out for me young fella!! For an RRSP in a high interest account ... look here ... http://www.outlookfinancial.co.....ducts/rrsp . If you want to know my advisers name, let me know. All of my dealings with him are at N/C.

paj said:

No one should have all their money in cash/GICs. If you want to diversify from GICs but want/need high security and liquidity (therfore not the stock market) then for over 10,000 dollars bond etfs are a good option and are cheaper than bond funds.

Vanguard now sells the cheapest bond etf's in canada which can be bought through any discount brokerage.For example, VSB has a annualized MER or .15% or 15 dollar fee for 10,000 dollars prorated over a year. It can be bought on the Toronto exchange for 10 to 30 dollars through your disc brokerage or maybe free through Scotia Trade that allow you to buy some etfs for free.?

(If you buy company bonds offered by your disc brokerage the commission is built in and I would say it is too much, unless or are buying a big amount AND many bonds, as they lower their percentage commission, like they do for large US Dollar currency purchases)

Another option which is secure and liquid is to buy utility etf's and collect the dividends which are taxed lower than interest outside your registered accounts.

Really? Vanguard start selling ETF in Canada? I was waiting this for long time but haven't heard news yet.

Although it took a while, VSB,VAB,VCE,VEF,Vee,VUS can now be bought on my BMO discount brokerage account on the Toronto exchange, in of course Canadian Dollars. I think they are also on other discount brokerage accounts too.

VSB is a short Cdn bond fund like XSB but with 10 basis points less mer, VAB is more like XBB but with 10 basis points less mer. I think it is now worth switching to Vanguard as the spreads are now much tighter.

Canadian Capitalist wrote on December 6th, the first day of trading Vanguards new etfs:
ETF Ticker Bid Ask
Vanguard MSCI Canada ETF VCE 24.65 24.70 20.2
Vanguard Can Aggregate Bond ETF VAB 25.02 25.07 19.9
Vanguard Can Short-Term Bond ETFVSB 24.95 25.02 28.0
Vanguard MSCI US Broad Mkt ETF VUS 25.16 25.19 11.9
Vanguard MSCI EAFE ETF VEF 25.03 25.07 16.0
Vanguard MSCI Emerging ETF VEE 24.68 24.71 12.1
iShares S&P/TSX 60 ETF XIU 17.21 17.22 5.8
iShares DEX Universe Bond ETF XBB 31.17 31.18 3.2
iShares DEX Short-Term Bond ETF XSB 29.21 29.22 3.4

December 6
In the table above, you’ll find bid-ask spreads for Vanguard and comparable iShares ETFs I pulled up at 10:45 EST on December 6, 2011. As you can tell from the table, Vanguard’s new ETFs currently have a much higher spread than equivalent iShares ETFs. If you recall, VCE is about 6 basis points cheaper than XIU. But if you decide to switch today from XIU to VCE, you’ll incur a cost of 13 basis points (3 basis points in selling XIU and 10 basis points in buying VCE), which likely means it is not worth your while. I was interested in replacing XSB with VSB but the steep spread of 16 basis points means that I’m inclined to wait and watch on the sidelines.

Update (December 7, 2011, 10:10 AM EST): Checking the quotes now shows spreads ranging from 1 cent for VSB to 4 cents for VCE. Since the VSB spread is so narrow, it would cost an investor just 4 basis points to switch from XSB to VSB. Obviously, a reasonable spread such as this makes switching to Vanguard worthwhile. However, note that you should consider the tax impact of any switch in a non-registered account.

Bmo Bond ETF ZHY has a rather high mer (.55%)for a bond ETF
I am not familiar with the US Bond returns but I expect they are lower than Canadian, all other things equal, just like their GIC's are less.
Although I believe Canadians should diversify into US stocks, I dont see the reason for Bonds. For reasons above I wouldn't look at BMO's specialty etfs, or anyone's specialty etfs.

I like to keep things simple and so I dont buy US etfs in my RRSP or TFSA and I dont know what I would do with the US dollar interest payout from these etfs, it would be too little and too expensive to reinvest or withdraw. So it is just dead money sitting in one's RRSP,TFSA.

In a TFSA, all US equity etfs whether bought in Canada or US exchanges (CAD$ or US$) would be subjected to 15% with holding tax.
In a RRSP, IF i were to purchase a US equity ETF for my RRSP, I would buy vanguards US equity US etf, like vti RATHER THAN VANGUARDS US-equity Canadian etf, VUS OR ISHARES XSP, since the mer for the US equity US etfs is less than the US-equity Canadian etf, and the IRS does not with hold taxes on dividends that are held in RRSP ( a tax treaty) like they do for TFSA or Regular accounts. (and I think i will use US dollars when retiring/withdrawing)

But I would advise people to first fill your RRSP and TFSA with interest bearing securities like HISA, GIC, Canadian Bonds and when you reached your total portfolio allocation limit, then buy just one broad Canadian equity etf, like VCE in your RRSP/TFSA if you still have room, otherwise in a regular account. As for US equity etfs, if you still have plenty of room in your RRSP, then you could buy it there, but if you have a larger investment portfolio and thus have maxed out your TFSA and RRSP with your interest bearing securities, or will be in the future, then buy your US equity outside your registered accounts too and keep things simple.

Final note, I have been saying RRSP a lot above but I believe many people are best not to contribute to their RRSP once it gets too big, maybe over 75000, as it is likely you will pay more taxes/fees/clawbacks getting it out than the taxes you saved when putting it in.