Why I like my Bond ETFs
Maybe it’s because the market is up and down all over the place and I’m thinking about them more.
Maybe it’s because bonds are one of the first things I learned about when I opened my RRSP account almost 12 years ago.
Maybe it’s because they saved my hide, like my friend ”Bond, James Bond” does with his girl in the movies. Bonds saved my behind when the TSX plummeted to the mid-7000′s and equities were on fire (as in, burning down to you know where) in 2008-2009.
I like my bond ETFs.
Here are some of my favourite reasons why I like my bond ETFs, why and where I own them, in particular my Canadian bond ETFs.
- Government bonds, are pretty much risk-free; the government can raise taxes or create additional currency in order to redeem the bond at maturity and cover its IOU. Sure, there are some examples where a government has defaulted on its debt (Russia, 1998) but this is rare. Don’t worry folks, I don’t think the U.S. is going to default on its debt – the U.S. just has a heckuva lot of debt to pay back and needs to get going on it! Here is nifty little gadget that shows how fast the U.S. debt is growing. Look at the top left of all the calculators you see to find ”US National Debt”. Kinda cool, then again, kinda scary. Alas, we are talking about Canadian government debt - almost as risk-free as it gets.
- Government bonds have a similar yield to big bank GICs. Personally, I’m a fan of CLF, CBO, XBB and XSB, which are all exchange traded funds (ETFs). You can find CLF and CBO at Claymore’s site and XBB and XSB at iShares site. I’ll have a post in the coming weeks to explain why these bond ETFs in particular are my favourites, but for this post and this bullet point, you should know you get a dependable yield from any of these ETFs. I do. XBB, for example, is yielding about 2.5% if all the coupons that XBB holds are held to maturity. Last month, for my account in particular, I got paid $0.09 for every share owned of XBB. After accumulating a bunch of XBB shares over the years, I’m now getting enough income from XBB distributions every month to buy one more XBB share – commission free. That’s right, just like John Heinzl’s dividend-paying stocks (and my own for that matter), now my bond compounding machine is running full steam ahead. Click here to learn more about XBB, its holding, distributions and more.
- Government bonds, particularly bond ETFs like all the ones I mentioned above are very easy to buy. I can buy my CLF which is my favourite Claymore bond ETF (or any other bond ETF) directly through my discount brokerage account. I do have to be careful though, I don’t want to be buying bonds all the time since it costs me transaction fees. Fees and the impacts they have on your portfolio are forever. Also, and more importantly, I don’t want to be buying bonds when markets are falling. That just wouldn’t make sense. You buy stocks and bonds when they are low(er) in price – right?
- My bond ETFs are very transparent. I know exactly what each bond ETF holds. Don’t believe me? Click any of the links above to CLF or XBB. They have nothing to hide.
- Taxes can get a bit tricky if you buy bonds individually. That’s why, I don’t even bother with individual bonds. I use bond ETFs instead (which have low management fees by the way) and I put them in my RRSP. This way, I don’t have to worry about the tax-math in a non-registered account. I suppose you could put your bond ETFs in your TFSA. The coupons (meaning interest) is provided tax-free and the shares can compound over time, like I wrote above. Furthermore, I don’t have to worry about a capital gain or a loss.
- I like dull and boring investments. Bonds have a deserved reputation for this, which is fine by me because frankly, I’d rather have some security in my portfolio than fret about what Mr. Market is doing any given day. It really doesn’t matter to me with my bond ETFs. Like my friend Dividend Ninja recently said on his blog: “One thing I do know for sure is I have a nice income generating and balanced portfolio which is priceless when stock prices go down. I could have easily gone with a 100% dividend portfolio in 2009, but I didn’t, I saw how bonds gave me a cushion and income through the decade.” Ninja – I couldn’t have written this better myself.
I think 98% of investors should have bonds in their portfolio. Canadian Couch Potato thinks it’s a good idea, my friend who is a Millionaire Teacher in Sinapore owns them, another friend who is a Wealthy Canadian who invests mainly with dividend-paying stocks is considering some for his portfolio and countless other bloggers listed on my Blogroll who are very savvy DIY investors own them. The other 2%? Well, those investors are either VERY diversified via stocks (I’m talking 50+ here at least) or they have plenty of income from other means to simply not need the capital protection and fixed income that bonds offer. I’m definitely not in that camp and I’m betting you’re not either if you’re reading this blog.
The closing message here is blunt: bonds should be part of almost anyone’s portfolio. They’re a part of mine and they’re not going anywhere soon. They help me sleep through anything Mr. Market serves up.
Give them some notice and respect, just like James Bond.
What about you? Do you own bond ETFs in your portfolio? What do you own and why do you own them?