Still holding a grudge against bond ETFs?
They certainly disappointed last year – declines of about 11 per cent for exchange-traded funds tracking the broad Canadian market of government and investment-grade corporate bonds. That includes interest, by the way. We’re talking here about total returns that were totally awful.
Money flows into bond ETFs have been higher than equity funds in the past five months, which makes sense because bonds offer a chance to buy at marked down prices. Still, a lot of individual investors have migrated away from bond ETFs to guaranteed investment certificates and high interest savings account ETFs, which keep assets in accounts at big banks and offer after-fee yields of about 4.85 per cent right now. Why consider a bond ETF, even after last year’s result? The ETF team at TD Securities recently offered some thoughts:
- Diversification: A single bond ETF can provide access to hundreds of bonds from various issues with varying credit quality. AAA-rated federal government bonds to BBB-rated corporates.
- Accessibility: Bonds typically have a par value of $1,000, and digital brokers may put a $5,000 floor on an order. By contrast, one of the biggest broad market bond ETFs, the BMO Aggregate Bond Index ETF (ZAG-T), has traded lately around $13.75 per unit.
- Cost: The average management fee for bond ETFs is 0.39 per cent, which TD described as moderate. Index-tracking broad market ETFs have an average MER of 0.24 per cent, with the likes of ZAG at about 0.09 per cent.
- Tradeability: Bond ETFs are much more liquid than bonds, and prices are more transparent. When buying or selling an individual bond, you must take or leave the prices offered by your broker. With bond ETFs, you have the same control over the price you pay as you do when buying or selling a stock. TD says the average bid-ask spread on a bond ETF is in some cases tighter than on the underlying bonds tracked by the bond.
The most notable downside of bond ETFs is that they don’t mature like an individual bond. No matter how much a government or investment-grade corporate bond falls in price, you can be confident you’ll get your money back at the end. Bond ETFs are meant to be ridden for the long term - through rising rate periods that depress their prices and falling rate periods where prices rise. The betting in bonds right now seems to be that we are headed into one of those periods of falling rates.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Payfare Inc. (PAY-T) This fintech stock has climbed 66 per cent year-to-date, and analysts believe the share price may continue to charge higher. The average one-year target price implies a potential price return of 83 per cent. The company’s technology allows gig workers to receive nearly immediate payment for their services. As Jennifer Dowty tells us, the small-stock features rapid revenue growth, a healthy balance sheet and a return turn to profitability.
The Rundown
A baseball lover’s guide to the stock market
Ian McGugan thought it would be interesting to celebrate the start of a new baseball season by compiling a scouting report on how the stock market is shaping up for the summer. The hope is that it helps to frame the key question: Are investors headed for a new winning streak? Or steering toward a faltering finish?
Also see:
What can investors learn from March Madness?
Resilient U.S. stocks failing to factor in recession, investors fear
Betting on the Rogers-Shaw deal was a no-brainer, right? Not so fast
The ruling from Ottawa that it will allow Rogers Communications Inc. to complete its $20-billion takeover of Shaw Communications Inc. rewarded investors who bet on the deal’s completion – and no doubt will encourage similar bets on other takeovers. Is that a good idea, though? David Berman urges caution.
2023 Globe and Mail ETF Buyer’s Guide Part Four: International equity ETFs
Shorter-term performance numbers show clearly that stocks from outside North America are worth having. The diversification they supply is real, not just investing theory. For help in picking an international equity fund, check out this fourth installment of the 2023 Globe and Mail ETF Buyer’s Guide from Rob Carrick.
Others (for subscribers)
Gordon Pape: It’s time to adjust my High-Yield Portfolio in response to the damage from rising rates
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: C-suite executives are buying this lumber stock on price weakness
Globe Advisor
Advisor Weekly Lookahead: What jobs data mean for interest rates
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Ask Globe Investor
Question: The cost of buying a mutual fund from a company is not clear. I understand the MER a fund company such as Fidelity charges but what do the company and advisor that sells the funds charge? This piles up over a 20-year period. It costs a lot more than just buying individual stocks, would you agree? –-Dallas W., Reston, MB
Answer: The MER includes all charges from the company including management fees, trading costs, etc. It’s an annual charge and, yes, it can add up to a lot over time.
The advisor may be compensated in one of several ways. These include salary and commissions. Or, if you have a fee-based account, a small percentage of your total assets (typically 1-2 per cent) is paid annually for the advisor’s services. Ask the advisor how he/she is compensated and what the cost would be to you.
Are mutual funds more expensive than individual stocks? It depends. If you have a fee-based account with a broker, you’re paying an annual cost for it. This covers all trading activities and enables you to purchase less costly F-series funds.
If you don’t have a fee-based account and you trade a lot, commissions will add up, even if you use a discount broker. That could make the cost of investing in stocks more expensive than mutual funds, but it all depends on your level of activity. If you just buy and hold, stocks are cheaper.
You need to look closely at your investment activities and decide which approach is most cost-effective in your case.
--Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question in the subject line.)
What’s up in the days ahead
Ian McGugan takes a closer look at the considerable risks right now in the commercial real estate sector.
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Compiled by Globe Investor Staff
Rob Carrick