T-Rex Score of 28%?? WTF?!
(Just to be clear, WTF? stands for What’s The Fee?)
Short term changes in the value of bond mutual funds and ETFs are driven by day to day interest rate moves. But for long term bond fund investors, short term changes in market values don’t mean much. Two factors really count:
Yields on bonds held in Canadian bond mutual funds and ETFs currently average around 2% to 2.5%. It’s not much, but these yields are relatively stable. But how much of that yield will you get to keep after fees?
Let’s look at the $2 billion National Bank Bond Fund. The average bond yield to maturity in this fund is 2.22% while fees are 1.59%. Assuming yields and fees remain static, investors in this fund will receive an annual net return of only 0.63% (2.22%-1.59%). Your T-Rex Score in this case is only 28%. In other words, only 28% of the benefit is yours to keep while 72% evaporates in fees! Most Canadian bond mutual funds produce similarly shocking T-Rex Scores.
Madness? What do you think?
If Canadian bonds make sense as part of your portfolio, what are some of the alternatives?
- Buy low fee Canadian bond index funds (from providers such as Blackrock, Vanguard and BMO) which provide similar yields but with T-Rex Scores of 85-95%
- Buy high-quality government bonds and keep 100% of the return……my online broker is offering an 8 year Ontario bond at a yield of 2.3%
- Buy a 5 year GIC with a yield of 1.80% (only if you are sure you won’t need the money sooner)
- Buy a cashable GIC with a yield of 1.30%
To learn more about bonds check out this site sponsored by the Ontario Securities Commission.
Every investor has a T-Rex Score. What’s yours?