For some time now, I’ve been thinking about bonds in my portfolio. For me, given the financial environment we seem to be trending towards, I think making my bonds shorter is the right thing to do. I’ll tell you why.
Over the last year, I’ve only had the iShares DEX Universe Bond Index Fund (XBB) in my RRSP which constituted about 30% of my portfolio. (I follow a bond allocation close to your age approach.) That’s not a bad thing. I believe in XBB. It’s a great product. I know I sound biased but I think these facts speak for themselves:
- XBB tracks the widely followed DEX Universe Bond Index.
- XBB has excellent diversity.
- XBB has almost 500 holdings.
- It holds mostly AAA bonds.
- Almost 50% of XBB holdings are short-term (1-5 years) and the weighted
average maturity is just over 6 years.
- XBB Management Expense Ratio (MER) is low, just over 0.3%.
- XBB yield is just under 4% (yield to maturity is about 3%).
- XBB pays about $0.09/unit per month.
For most investors, including me, I think XBB offers a lot so I’m not totally giving up on it. I have however recently sold some XBB near $30/unit to get a few units of my newest bond friend, CLF, Claymore’s 1-5 Year Govt. Laddered Bond ETF. Why? CLF keeps Mr. Craig, rather its bonds on a much, much shorter leash. Short bonds are better in higher interest rate environments. Since interest rates are expected to rise later year, the next year and beyond (rates cannot get much lower folks; they have only one direction to go…), I’m thinking some short bonds in my RRSP are a prudent move.
CLF tracks the DEX 1-5 year Laddered Government Bond Index. It has a dirt-cheap MER of about 0.17%. The average duration of CLF bond holdings is about 2.5 years. CLF holds 28 securities, not many, but certainly enough federal and provincial government debt to keep things safe. This ETF also has a cash yield of over 4.5% (yield to maturity is about 1.8%) issuing over $0.07/unit per month. This is a laddered product, my first one, meaning the money has been divided into equal portions that go into terms, in this case, 1-5 years. Each year, a maturing bond rolls into a new five-year term.
This ensures I’m getting continuous rebalancing, mitigating loses on my principle when interest rates rise (which they will) and I’m not overexposed (like a Bond Girl) in tough-to-figure-out financial climates. In fact, I don’t see loses coming my way, even in a higher interest rate environment. Like my XBB investment, I now own enough CLF in my RRSP to have it DRIP synthetically. This means I’m earning at least one full share of CLF every month. New CLF units will pay more distributions every month and over time, more distributions will buy more CLF units. My CLF passive income machine is full of fuel and ready to go.
If you want more reading about CLF, short-bonds vs. long-bonds and other bloggers who believe in this approach as well, check out just a few of the links below on this subject:
Claymore ETFs – product list.
iShares – fixed income product list.
Canadian Capitalist – XBB and XSB.
Canadian Couch Potato – chosing a Canadian bond index fund.
Canadian Couch Potato - the cheapstakes portfolio.
The Dividend Ninja – think short term when buying bonds.
What do you think of my move? Are you a fan of bond ETFs? Short-bonds or long-bonds or just Bond Girls?