Bond ETFs vs Individual Bonds in PP performance?

[bluedog]

I understand that a HB would advise to hold only individual treasury long and short bonds in a PP.

Has there been any review of the returns in PP portfolios holding short and long term treasury bond ETFs vs individual short and long term treasury bonds?

I do not know if there is that kind of data out there, but I would be especially interested in the Canadian aspect as I am in the process of moving to a CA PP.

Thank you for all your wisdom and support.

[craigr]

I have not looked at the issue with hard numbers. But my experience of owning bonds directly is that they are better than a fund for the main reason that you can control sales of the assets and thereby control capital gains. A fund is going to do yearly distributions whether you want them, need them or not.

So from that point, I believe owning the LT bonds especially is more tax efficient. I can't control the interest payments, but I get to choose when and where I will take the capital gains and that is better for overall performance.

[MediumTex]

What is the longest duration bond available in Canada?

[stone]

A bit off topic but that link yiugn put up has something in the appendix saying that Canadian treasuries performed extremely well over the last decade or so:
http://www.macquarieprivatewealth.ca/da ... rected.pdf

[stone]

As I guess you were getting at, holding the bonds directly bypasses the risk that an ETF will blow up due to not being able to recover bonds that the ETF has lent out to short sellers etc.

[AdamA]

Has there been any review of the returns in PP portfolios holding short and long term treasury bond ETFs vs individual short and long term treasury bonds?

I have not looked at the numbers either, but I believe that, performance-wise, TLT approximates LTT's very closely. 

The issues Craig brought up, about controlling capital gains, are important if you hold the fund in a taxable account.

The other issue, is, of course, the coutnerparty risk issue (that has been discussed ad nauseum elsewhere on this site). 

[CA PP]

Well, for a CA PP, holding bonds directly in 2011 meant your bond portion returned about 26.1% (CA135087YQ12  4.0% 01.06.2041) vs holding an long bond ETF (ZFL): 19.7%.  That is about 1.5% extra on your PP.

As of mid-2011, there is CA125087ZS68 3.5% 01.12.2045 available. 

These bonds are more volatile than ZFL... cuts both ways (up and down).

For those interested in a CA PP, have a look at the content of ZFL: it does nt make sense to me to buy that if you can buy CA125087ZS68 3.5% 01.12.2045 directly.  My humble opinion.

[CA PP]

Longest bond in Canada is: CA125087ZS68 3.5% 01.12.2045 and its duration is about 21.5.

[bluedog]

How does one go about buying the Canada LT bonds when say 25%CA PP = $75000?

I am w/CIBC Investor's Edge and the $ is in an RRSP, so nil tax implications, but I am limited to their Canada Bond offerings.

I can buy the 2041 bond directly on their web site.

The new issue 2045 is not listed, so I will have to call and ask them if I am able to buy the 2045.

If not, am I right in assuming the 2041 would be still  preferred to ZLF?

So, to the nitty, gritty...

If so, how many bonds do I buy w/what face value?

What is a reasonable fee for such a transaction?

What is magical about selling at 20 years?

I'm sorry, I have never bought bonds individually before, so thank you for your patience.

[CA PP]

bluedog,
I am pretty sure if you call CIBC they will make CA 2045 available.  Otherwise CA 2041 would still be preferred to ZFL.

ZFL has a duration of about 14.4 (at 31DEC2011), compared to CA 2045 of some 21.5 and CA2041 some 19.0-19.5 (today).  The higher volatility of CA 2045 and 2041 are preferred for a PP. 

Basically, ZFL has some CA2045, CA2041 and CA2037 which are fine, but also has others with shorter maturity, and that does nt fit well in a CA PP.

There is also the counter party risk issue and the saved fees (75K*.2%=150 per year).

On 17JAN2012, CA2045 was 122.42% so for 75,000CAD you could buy 75k/122.42%= about 61,250 CA 2045 Face value.

I quickly looked at CIBC and .1% fee seems very fine.  Check the spread though.

The 20 years reselling is just that your bonds will  have a decreased duration (volatility) over time. I personally prefer sell at around 30years for a CA PP since bonds longer that 30 years are available, and I like to volatility it provides.

[bluedog]

Thanks everyone once again for your help and knowledge.

So I would buy  61,500K face value for 75,000K of Long Term Bonds, hopefully the 2045.

What is the "spread" and what do I need to know about it to buy these bonds?

Does the price change on a daily basis? Where do I get that info?

What affects the price change?

It's a chunk of change, so I'd like to do the best I can on the buy.

How is the interest paid? Yearly?

Thanks a bunch.

[CA PP]

Hi Bluedog,

At last Friday s price (119.25% of face value) you could now buy 62,900 face value for 75K.  A bit of a dip in the past days.

You can check an indicative price at : http://www.pfin.ca/canadianfixedincome/Default.aspx (last box, scroll until 2045).

The spread between buy-sell should be checked to make sure your broker is offering an adequate deal. You should probably expect 0.35% to 0.5% spread for CAN bonds on the over the counter market (secondary market for already issued bonds).

Price change throughout the day as stocks do.  Price of bonds is based on the current yield for a certain maturity. 2.64% for CAN 2045 last Friday. You can google bond price calculator for more info.

For interests, in the case of CAN 2045, you would receive (62,900 * 3.5% = 2,201.50 annually, paid in two installments: 1,100.75 on 01 jun and 1,100.75 on 01 dec.).

[CA PP]

I should also add that you will have to pay the accrued interest since last interest payment on 01 DEC 2011.  That will be paid back to you in full on 01 JUN 2012.

[bluedog]

Thank you CA PP.

It's being to make some sense to me now how bonds work.

I'm still having a bit of a time wrapping my head around buying 30 yr bonds, esp since I need $75K.

How does one re-balance when necessary if all one holds are individual bonds?

Or should I have a % of ZFL to rebalance?

Thanks again for all the help.

[MachineGhost]

Thank you CA PP.

It's being to make some sense to me now how bonds work.

I'm still having a bit of a time wrapping my head around buying 30 yr bonds, esp since I need $75K.

How does one re-balance when necessary if all one holds are individual bonds?

Or should I have a % of ZFL to rebalance?

Thanks again for all the help.

I would encourage you to buy as small as denominations as practical.  It would be pretty hard to rebalance if all you had was one $100K bond.

MG

[CA PP]

Hi Bluedog,

Check with your broker what is the smallest dealling amount for that bond.  Probably 100CAD. In such case no problem with re balancing. Frankly, once you buy bonds directly you ll certainly appreciate it is not much different than buying stocks. There is no use for ZFL.