Bond ETFs VS. GIC Ladders

[@JustinBenderCPM]

100% of KZbin revenues received by the Canadian Portfolio Manager channel have been donated to SickKids Foundation. If this video has helped save you a few dollars on fees or taxes, please consider donating a portion of your savings to SickKids Foundation: www.sickkidsfoundation.com/

[@ib516]

EQ Bank has a 1 year GIC that's 4.65% , and if it's under the TFSA/RRSP umbrella, it's 4.7% (Oct 2022).

[@scottshafer9813]

Best description and example of a GIC ladder I've seen! Thanks Justin :)

[@JustinBenderCPM]

@Scott Shafer - You're very welcome - thanks for watching! :)

[@julientousignant9652]

Thank you Justin for this video. It may very well be the first video on boring bonds and GICs that I've watched in the past couple of years and I have watched a lot of videos on the topic of finance. It's so refreshing and on point. There's too much focus/attention on stocks everywhere. I'll probably put some money in high interest savings account once the rates on these climb. I love the idea of getting interest+cdic insurance+access to my funds at all time.

[@bettyangwenyi1797]

Dude, how DO you make a boring topic interesting? Big up to you. And thanks.

[@JustinBenderCPM]

@Betty Angwenyi - Haha - I'm glad I didn't make you nod off during the video ;) Thanks for watching!

[@shaunriome6273]

Another advantage of GIC that you can take advantage of if that they don't change their rates all that often. I have found that when bond prices rise quickly / bond yields fall quickly, it can take the GIC providers several weeks to change their rates. At these times the difference in forward looking yields between GIC and bond funds can exceed 1%/ year which is a lot. Those are good times to buy GICs.

[@caitlin5392]

This is exactly what I have been looking for! I have been planning to do this but not a lot of validation on GIC ladders in the financial world for individual investors. I am specifically looking at this for my RESP account as I want to be more conservative. Still keeping 70-75% in XEQT but carving out 25-30% into a GIC ladder and then adding to that ladder each year with new contributions. Thanks for the great content!

[@JustinBenderCPM]

@Cait Lin - I'm so glad it was helpful - thanks for watching! :)

[@playbak]

Sensible and dependable weren't terms my teachers ever gave me... Really appreciate this "boring" video as it reinforced what i did for the parents RIF's, although laddering only 1-2 year GIC's as I expect several substantial rate hikes still to come. I encourage everyone if buying GIC's to do your homework and negotiate with your financial institutions to get the best rates. The big 5 may be tough to move the needle, but others will match or offer a better rate than posted. It's worked for me every time.

[@ryan33262]

How should someone go about doing that and how much should you expect to get when negotiating the rates of a GIC?

[@stephenspenler6029]

I don't understand why anyone would want to compare the return of a GIC or a GIC ladder to a bond index -- instead of comparing it to the risk-free rate. To me the choice is between GICs held to maturity, and strip bonds held to maturity, with the best choice being the one guaranteeing the highest dollar value at maturity. The stock portion of a portfolio is where I'd expect risk/volatility, and expect to be compensated by an appropriate risk premium. By contrast, the non-stock portion of a portfolio is best kept not only boring but simple (buy then hold to maturity, with no need for diversification to reduce risk because there is no risk).

[@rycarse]

Thanks for the video, Justin. Your series is very informative. I've had a GIC ladder for 9 years. Renewed quarterly, so yeah -- that means 20 rolling 5-year GICs, but it really isn't difficult to manage. 5-year rates over that time have ranged from 1.6% to 4.1%. I'm 61, retired, 60/40 portfolio. Of the 40, the ladder and bond ETFs are each 7.5%, preferred shares 18%, gold ~4%, and true cash the remainder. Here's a tip on the GICs: I hold mine at a Manitoba Credit Union where deposits are protected *_without limit_* by the Deposit Guarantee Corporation of MB. So if you have confidence in the provincial DGCM as much as the federal CDIC, then the former is superior to the latter's $100k/account limit. Plus, the CUs have among the highest GIC rates in the country, and everything can be done on-line, of course (I don't live in MB).

[@JustinBenderCPM]

@rycarse - Thanks for sharing your strategy (and for the credit union tip)!

[@Andrew21882]

GIS rates at EQ Bank as of now are: 1 year-3.75%, 2-4.35%, 3, 4, 5 - 4.4%.

[@jmc8076]

@@Andrew21882 Prob not the same without limit protection as CUs.

[@DellHell1]

Since retirement I’ve gone with the 60/40 strategy with the 40 mostly in GICs. I can’t say it’s worked particularly well since the GICs have paid inflation rate percentages at best. Plus the GIC gains are taxed as straight income. I’ve always counted the poor feelings about GIC returns with the stellar stock returns. I have to admit that now we are in a high inflation environment I wish I just had a federal government employee pension and had no need of stocks, bonds or GICs.

[@JustinBenderCPM]

@Derek Hillard - Don't we all ;) Thanks for sharing your experience with managing GICs in your portfolio.

[@littleal14]

Would you do a video on the smith maneuver? thanks love your content.

[@JustinBenderCPM]

@Al - I'm glad you've been enjoying the content! I'll certainly put the topic on my list :)

[@littleal14]

@@JustinBenderCPM Thank you! I'm seriously considering it at the moment and would love to hear your thoughts.

[@Reza-S1340]

Thanks for the video. What about those of us who have invested in VBAL (for example)? If I want to build a GIC ladder as the fixed income portion of my portfolio, should I sell everything and build a new portfolio?

[@JustinBenderCPM]

@Reza Salehi - I touched on this in the video as a disadvantage to including GICs in your portfolio. There is a HUGE behavioural advantage to investing in a single one-ticket asset allocation ETF. For this reason, most investors should just stick with their one-fund ETF solution (and not include a GIC ladder - at least until the decumulation stage of their life).

[@mattbenz99]

Question: Wouldn't the value of the yield for GIC ladder, on average, increase over the first 5 years as the 1 year GICs all become 5 years? After 5 years, all 5 years of maturity are just 5 year GICs with varying dates of maturity.

[@JustinBenderCPM]

@mattbenz99 [Canadian Gambit] - It depends on where interest rates are at when each GIC matures. If interest rates decreased, the 1-year GIC may be reinvested at a lower 5-year rate.

[@mattbenz99]

@@JustinBenderCPM True, but if you were to take the returns of 5 year GICs vs 1 year GICs over a 20 year period, wouldn't the likelihood be that the 5 year GICs would average higher?

[@lindaanderson3025]

Hi, Thank You for the video. I struggle to fully understanding bonds. I am buying 1 yr GIC's following BOC interest hike announcements. I am holding of buying equities in these crazy times. I am hoping this is not the lost decade .. Credit unions insure up to $250 000. My credit union insurance on registered accounts is unlimited! Another good thing about credit unions is that their interest rates usually beat the crappy rates from the big banks, savings 1.25%and GIC 4%-June 13. Thanks for your video and sharing your knowledge.

[@JustinBenderCPM]

@Linda Anderson - Thanks for sharing! Have you considered working with a fee-only planner to create a financial plan for you (that you could stick to, even in crazy times)? It could be very beneficial.

[@lindaanderson3025]

@@JustinBenderCPM , Thank You! I have had a plan made. Things changed in the markets as most people know since my plan late 2021. I inquired about investing with your firm earlier in the year or late 2021. This is because i appreciate your values and the education you provide to investors. I was advised that the firm's associates were not able to take new clients because of work load. I went with a Robo for some money. I am down about 10% since Oct 2021. I am in mainly equities. I don't feel this is a good time for index etf's or putting more money into the market. Markets will fall further and it will take my investment that much longer to climb out. This is why I am sitting on the sidelines in Gic's and cash. I may consider value companies or quality dividend payers when the market settles. I am open to a private conversation.

[@Crusader370]

So what would be the most efficient portfolio (assume that you don't need it all to be liquid, just enough to rebalance if the market falls

[@JustinBenderCPM]

@Ivan Bilicki - There's no way to know what the most efficient portfolio would be in advance. Unlike bond ETFs, GICs don't increase in price when stocks take a nose dive, so including them in your portfolio could potentially increase the standard deviation (volatility) of a portfolio over certain time periods.

[@Crusader370]

@@JustinBenderCPM I didn't know bond ETFs increase in price when stocks go down. I don't quite know why that is the case, but if it is, then I would be inclined to leave them in to decrease volatility. Is it that people buy bond ETFs more when stocks plunge or is there a more fundamental reason?

[@JustinBenderCPM]

@@Crusader370 - Bond prices generally (but not always) increase when stocks drop due to a combination of factors (investor demand is one, decreasing bond yields is another).

[@jeffreycheung7452]

thanks a lot Justin for the great information, what is the ETFs you shown the allocation between GIC, Bond and Stock with the percentage between Stock vs Bond/GIC?. Another question is if I buy 200K investment in GIC or Bond or stock, if the financial institute goes Bankrupted. I can only have 100K 100% insured. How about the other 100K?

[@JustinBenderCPM]

@Jeffrey Cheung - The ETFs could be whatever you want them to be. If you want to use similar ETFs to the Vanguard asset allocation ETFs (for example), you could choose VEQT for the stocks and VAB+VGAB for the bonds. If you buy a $200K GIC in a single insured account and the issuer of the GIC goes bankrupt, CDIC will reimburse you for up to $100,000 of principal and interest. Depending on how the bankruptcy proceedings go, you may receive a portion of the remaining $100,000 back (but you could also receive nothing). Bond or stock ETFs are not CDIC insured.

[@jeffreycheung7452]

@@JustinBenderCPM thanks Justin, if I have large amount of retirement fund i.e. 1M, should I divided into 10X 100K GIC and put in different financial institute. And not but Bond or ETF stock because they are not insured?

[@JustinBenderCPM]

@@jeffreycheung7452 - Most Canadian discount brokerages allow you to purchase GICs from multiple issues within their platforms, so you don't need to open separate accounts at each institution.

[@davemccullough4628]

What are your thoughts on short term bond etf’s.? The yield to maturity is only slightly less than a total market bond fund and the duration is similar to a GIC ladder.

[@JustinBenderCPM]

@Dave McCullough - Short-term bond ETFs currently have YTMs that are only around 0.2-0.3% less than a broad-market bond ETF, but with much less duration/term risk (so it seems like a reasonable choice for an investor that wants less fluctuations in their bond holdings). A 1-5 year GIC ladder would also be comparable to a short-term bond ETF (although with less liquidity).

[@IsaiahMutex]

Excellent thumbnail choice

[@WallyZie]

Thanks for another great video, Justin. I have thought about putting some of my portfolio into a GIC since interest rates are making them more attractive, but I'm leaning towards just leaving them in VRIF. I've noticed Vanguard has changed their allocation of VRIF to a heavy 64/36 bond heavy situation. This being said, would they be selling off long term bonds and are purchasing short term?

[@JustinBenderCPM]

@Wally Z - You're very welcome - thanks for watching! :) Based on VRIF's holdings as of April 30, 2022, they don't hold any bond ETFs targeting shorter-term maturities (but keep in mind that Canadian broad market bond ETFs already have a substantial portion allocated to shorter-term bonds...~40%).

[@WallyZie]

@@JustinBenderCPM Yes, VCB is the one VRIF has used the extra 10% on (which are geared more towards short term), giving them a higher 1-5 year bond weighting. Does this make sense to you?

[@JustinBenderCPM]

@@WallyZie - I'm not really a big fan of the active management going on under the hood of VRIF. I'd much prefer to control a specific portfolio asset mix myself, based on an investor's personal circumstances.

[@WallyZie]

@@JustinBenderCPM Unfortunately, my assets aren't at a million and I need income, so I'll have to rely on VRIF for now. Thank you for the insight.

[@carkarlaw]

Thank you for this comparison. It would be good if you can also talk about gold.

[@JustinBenderCPM]

@Kar Law - I've already talked about gold here: kzbin.info/www/bejne/mqPEp56dbs9mos0

[@Andrew21882]

Thanks Justin for a very informative video. As a recent retiree I hold most of my portfolio in XBAL, but now, after watching your video I may be rethinking the strategy and selling XBAL, allocating 60% in XEQT and 40% in GIC ladder. Also, what are your thoughts on investing in blue chip stocks yielding 4% - 6% as buy and hold strategy in retirement and using dividends for income instead of selling some shares.

[@JustinBenderCPM]

@Andrew D. - If you're thinking of making a switch, consider still keeping a portion of your fixed income holdings in bond ETFs or cash equivalents for rebalancing or unexpected expenses (my video provides some suggested minimum allocations for bond ETFs). I prefer a total return strategy (over a high dividend strategy) that places diversification above annual dividend income.

[@Andrew21882]

@@JustinBenderCPM Thanks very much Justin for the suggestions.

[@fluffyscruffy]

Would a reverse GIC ladder be a good strategy for the FHSA? Let's say I want to use the five year of contributing and buy a property in 2028. First year of contribution buy a five year GIC, 2nd year buy a four year, 3rd year buy a three year, 4th year buy a two year, last year buy a 1 year. All GICs would then come to maturity in 2028.

[@JustinBenderCPM]

@Frederick Soucy - That sounds fine, as long as you're certain about the 5-year investment horizon.

[@hermanvandenberg]

With interest rates predicted to increase, perhaps an even shorter duration fixed income product is called for. Something like ZST, although the yield is somewhat lower.

[@JustinBenderCPM]

@Herman van den Berg - Interest rate predictions are worth as much as stock market predictions...which is nothing. I wouldn't bet the farm on timing the bond markets.

[@mjd2k]

Im with a financial advisor. Part of my fixed income side is an etf that seems to historically over 10 years return around 3% or even less. If I pay my advisor 1.75%, does that mean my return is only 1.25% I asked him and he said his 1.75% is covered by the etf. I dont get how that can be if the etf has an expense of .5%. So how do financial advisors get paid on etf returns? Thank you.

[@JustinBenderCPM]

@Mitch Drackett: I don't have all the details, but if your ETF returned 3% over the past 10 years, and you paid your advisor 1.75% in additional fees, your net return would be 1.25%.

[@wuziwu8148]

I disagree. GIC ladders are inferior to lump-sum investment from a return perspective. If I have $10,000 and buy a GIC now for $10,000 for 4% (assuming interest rates do not change), then in 1 year my ROI is 4%. If I buy the same GIC with a ladder and buy $1000 then I still get a 4% return on that $1000, but the other $9,000 is getting slightly over 1% in a high interest savings account. The only advantage of GIC ladders is more regular income at the cost of lower ROI. Time in the market beats timing the market. I’d like to hear your guys’ thoughts on this.

[@BB-wc1qs]

What are your thoughts about TIPS for Canadian investor like ZTIP or alike at these times? ( short term inflation protected treasuries instead)

[@JustinBenderCPM]

@B B - I unfortunately haven't researched ZTIP for Canadian investors, so I don't have much to add at this time.

[@jackcarter4958]

Thank you for the video! Maybe you could explain me one thing here regarding the bonds... Everybody's telling that having bonds in your portfolio is great because when the market goes down they don't and you can rebalance your portfolio and have less negatives in it. I reality though my ZAG bonds dropped down during this last market drop so much that all other ETFs I have look much better than ZAG. So if when the market goes up they basically don't as much at all, and when the market goes down they go down even more than stock ETFs - what's the point having it in the portfolio at all?! Even gold ETF or REITs ETF looks better now...

[@JustinBenderCPM]

@Jack Carter - There can unfortunately be times when both stocks and bonds go down at the same time. However, a 10% drop in bonds is nothing compared to the potential for a 50% or more drop in stocks. And even if bonds don't recover some of their price drop, the annual interest will be expected to offset the losses in ~3 years (stocks can go down and stay down for more than a decade).

[@zeckul]

Stocks and bonds went down on interest rate raises (just giving up the gains they made because of pandemic-time interest rate decreases). If the economy actually tanks, which is what causes prolonged bear markets, you'll see bonds exhibit their usual inverse correlation. Already every time their are bad news in the job market you see bonds go up a bit.

[@mrslcom]

Bonds value is sensitive to interest rate and liquidity. While stock market is sensitive to economic outlook and corporate earnings. They are independent from each other although often their short term movements could be similar by coincidence.

[@Reza-S1340]

Maybe even “everybody” doesn’t know exactly what happens. Stock market is so random that no one words should be considered the 100% correct advice. I learned it during the last few months.

[@HamiltonRb]

Would you consider DFN.PR.A at 5.64% a better choice than GIC's or bonds for fixed income?

[@JustinBenderCPM]

@HamiltonRB - DFN.PR.A would not be directly comparable to a GIC ladder or a bond ETF.

[@HamiltonRb]

@@JustinBenderCPM So you would not consider it as safe an instrument as a bond ladder, with a better return? After looking at it's long term record of stability & payouts, I was considering buying it.

[@WhiteWulfe]

Given that the workplace retirement fund (through Sunlife, with good rates, but not much for selection for non-actively managed options) seems to have gone up and is offering decent 3 and 5 year rates (although oof, at only 2.7% for a five year compared to 3.5% or higher through banks), I have been tempted to split my 20% bonds contribution to a 10% GIC 10% bond. I had originally planned to do manual GIC purchases over time in some of my accounts, but I'm not going to lie - there's something rather tempting about doing such in an account where it's just automatically done, ~and~ there's no minimum contribution. Okay, Tangerine will let you put in pretty much whatever and many ask for "only" $100 but to build a full ladder is $500. That and my whole "I'm going to purchase GIC's 1-2 times a year" thing hasn't seen any motion for three years, so clearly doing it manually isn't as appealing to me (or as easy to commit to). In all honesty, I've been bouncing the idea around of switching to 10% GIC's 10% bonds in my workplace plan for a while because it's automated so it definitely has that convenience factor ~and~ I don't have to worry about it since it's automatic contributions off of each cheque. I do wonder though what running what would effectively be a 130 rung GIC ladder would do though, or whether it would be more efficient to just transfer money over to their GIC's once a year... Although manually doing it also means it removes the perk of automation, which is why outside of the work plan it's purchase VGRO and leave it be for me.

[@JustinBenderCPM]

@WhiteWulfe - It does sound like a bit of a nuisance. Perhaps sticking with a bond index fund for your group plan would be the simplest option?

[@WhiteWulfe]

@@JustinBenderCPM That's pretty much the path I'm going to go. After a bit of thinking, I've figured out the easiest way to do things is stick to the main plan I went with for the group benefits, and be a bit more proactive about adding in the occasional GIC. Adding one in every year when we get the tax return (or a bonus at work) seems doable, and makes it a scheduled kind of occurrence. Seems lazy in a way, but it's more a case for me that it gets the chance to grow if I just let it do it's thing, and it's a lot easier to ignore any major dips or general noise in the grand scheme of things if you only look twice a year (aka when Sunlife sends the halfway through and end of year reports). That and if I don't regularly see it, there's no temptation to try and do something with that "spare" cash - this is why almost all of my savings are in a bank that isn't my regular bank, it's just easier to leave it be that way.

[@tylerpeterson4241]

what would you recommend for someone who already holds their fixed income in a bond index fund (ZAG) that doesn't super care about the big drop in value YTD? worth switching to a GIC ladder?

[@JustinBenderCPM]

@Tyler Peterson - As the yields on bond ETFs vs. a 1-5 year GIC ladder are similar at this time, I don't see any reason for investors to make a switch if the fluctuations in their bond ETFs aren't causing them any anxiety.

[@PercyY-ib2vx]

long term Bonds etf already took a hit some down over 20 % so the bottom is in. Yield is up to 3 % comparable to GIC. Also it is liquid as you can sell any time. It also moves aginst the market. In a bear market long term bonds go up. So bond is the answer now.

[@jasonwu9356]

Seems GIC is not tax friendly. The return is interest incoming

[@mrslcom]

Are there any laddered GIC ETFs available?

[@JustinBenderCPM]

@Tanah Merah - Not that I know of. They likely wouldn't be CDIC insured if they existed.