Author Topic: Canadian who wants more bonds in RRSP. VAB vs VBG  (Read 857 times)

K-ice

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Canadian who wants more bonds in RRSP. VAB vs VBG
« on: February 22, 2018, 09:50:14 AM »
I am just wondering why VAB is the most mentioned Vanguard Bond ETF.

Isnít it kind of foolish to only have Canadian bonds in your asset allocation?

Iím planning on adding VBG to my bond mix while rebalancing.

Any thoughts?

Beard N Bones

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Re: Canadian who wants more bonds in RRSP. VAB vs VBG
« Reply #1 on: February 22, 2018, 09:57:40 AM »
I am just wondering why VAB is the most mentioned Vanguard Bond ETF.

Isnít it kind of foolish to only have Canadian bonds in your asset allocation?

Iím planning on adding VBG to my bond mix while rebalancing.

Any thoughts?

Here is a good article on Canadian Couch Potato that addresses that question:
http://canadiancouchpotato.com/2014/08/29/ask-the-spud-should-i-use-global-bonds/

K-ice

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Re: Canadian who wants more bonds in RRSP. VAB vs VBG
« Reply #2 on: February 26, 2018, 10:26:32 AM »
Thanks for the article.

The MER of VBG is also higher.

Here is a quick breakdown:

VBG mer  0.37% return 1.82%
VAB mer  0.13% return  1.65%
VLB mer  0.17% return 6.06%

Even though my portfolio is on the smaller side, I still have this desire to diversify the bond portion.

Maybe VLB is the way to go. 6.06% seams too good to be true and that you can just jump on and off the long term bond train with ETFs. Note: whatever I buy I plan to buy and hold for many years. 

Currently 100% of my bonds are VAB. This new purchase would make the split 75% VAB and 25% other.

If anyone has personal experience with bonds I would appreciate hearing from you as well.

RichMoose

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Re: Canadian who wants more bonds in RRSP. VAB vs VBG
« Reply #3 on: February 28, 2018, 11:03:53 AM »
I am just wondering why VAB is the most mentioned Vanguard Bond ETF.
I believe many people on this forum (and the passive world in general) are way too stuck on Vanguard. Vanguard might be the best in the U.S. where you can use them as a brokerage and access their Admiral-class funds with no-fee transactions. However, in Canada we need to use ETFs to get low-fee products. In that realm, iShares and BMO (and to a lesser extent Horizons) are just as good as Vanguard.

If you're looking for a low-cost, aggregate bond ETF with Canadian holdings, I believe that ZAG.TO, ZDB.TO, HBB.TO, VAB.TO, and XBB.TO are all solid choices. There are some considerations for tax efficiency in a NR account where HBB.TO and ZDB.TO win hands down.

Comparing with other Vanguard Bond ETFs, VAB.TO is just a simple bond solution if you want to run a simple portfolio with few components. It should perform better than VSB.TO over a long time frame because of the longer average duration. That said, VSB.TO is likely to be more stable with lower draw-downs. If you hold corporates (VCB.TO), you are going to get more equity-like returns, so why not just buy more equities and fewer bonds.

Isnít it kind of foolish to only have Canadian bonds in your asset allocation?
Not really. The Canadian bond market is pretty good overall. Our governments have their debt under control compared with many other jurisdictions. Bonds are not in your portfolio to propel growth, they're there for stability and/or re-balancing use.

You can go global, but then currency issues come into play as well. VBG is currency-hedged, but that adds some cost. It also has a higher MER as noted above. VBG holds a lot of Japanese and European bonds which bring down the yield substantially. I'm not saying this because I dislike global bonds, but more because the benefits are questionable at this point.

In my view, why hold a global bond fund with a 1.0% YTM when you can hold a liquid local bond fund with a 2.6% YTM? And, why add a different bond holding if the benefits for doing so are very minimal?

Full disclosure: I only hold short-term bonds. I might use HBB.TO in my NR account when my strategy calls for a bond holding. That choice is driven by tax, not because I prefer aggregate bonds.

anisotropy

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Re: Canadian who wants more bonds in RRSP. VAB vs VBG
« Reply #4 on: February 28, 2018, 01:17:36 PM »
I agree with Moose, in a RRSP ZAG, VAB, VSB are all valid choices.

We have HBB and ZDB in NR accounts. We started out with VAB and VSB but changed to HBB and ZDB once we learned about the tax benefits.
VLB's "large" return might persist, even as the rates go up a few more times. The reason is that when BoC raises rates, the very long ones (which VLB primarily holds) don't move up as much relative to the short ones due to the market's bearish views.

I don't think it's foolish to only have Canadian bonds, bond allocation to me is meant for a smoother ride, not higher returns.

daverobev

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Re: Canadian who wants more bonds in RRSP. VAB vs VBG
« Reply #5 on: February 28, 2018, 06:58:57 PM »
One reason to like Vanguard is because they are investor focussed rather than 'nasty evil capitalist bank' led. I mean, do you think there would be these low cost ETFs if organisations like Vanguard hadn't started making them? (I don't know a detailed history but I do know MERs have been dropping lately, and I know that the goal of Vanguard is to get stuff to investors cheaply).

But yeah, foreign bonds = fluctuates with currency. Domestic bonds are supposed to be a counterweight to all that 'nasty' volatility. (I'm mostly of the belief that bonds are more 'risky' than a diverse equity ETF portfolio, especially at the moment. Stocks will fluctuate; once you accept that as fact, there is not much reason for bonds - it is 'dead money'. Time may prove me a coward.)