Clients should consider bond ETFs, say experts

It’s an exciting time to be a bond ETF investor, according to an expert panel that presented at yesterday’s 6^th annual Exchange Traded Forum in Toronto.

That panel, which outlined how to rethink bond investment strategies, included Scott Boniferro, product manager at Invesco Canada; Barry Gordon, president and CEO of First Asset; Alfred Lee, vice president and portfolio manager at BMO ETFs; and Daniel Straus of National Bank Financial, as moderator.

For more on why and how to incorporate bond ETFs in clients’ portfolios, check out deputy editor Melissa Shin’s live tweets below. Also, check out the rest of the tweets here.

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Live tweets from 6th Annual Exchange Traded Forum

It’s an exciting time to be a bond ETF investor. There are 100 such ETFs in Canada, and there have been $3 billion in flows over the last few years ‪@radiusfe ‪@advisorca

Do real opportunities still exist in bonds? Boniferro says it’s time to diversify, and to think of interest rates and credit risk. ‪@advisorca ‪@RadiusFE

The high-yield, senior-secured and preferred-share markets all offer better yield, says Boniferro ‪@advisorca ‪@RadiusFE

Gordon says to look at tax efficiency of products and consider asset location ‪@advisorca ‪@RadiusFE

Having both floating-rate and longer-duration strategies in one product is good, says Gordon. That allows for diversification. Also consider active management.

Lee: The Canadian universe has limited opportunities: average duration of bond ETFs is 7.5, and average yield 2%. ETFs allow investors to get in and out of the market as needed ‪@advisorca

Lee: manage risk. Choose short duration bonds, not because interest rates will rise — in fact, he says, rates will be low for awhile. But uncertainty in interest rates means it’s good to have short durations. To make up for short durations, overweight credit to make up yield.

Policy divergence globally is going to help bond markets, adds Lee ‪@advisorca ‪@RadiusFE

Bonds are tax-inefficient. If a bond has a premium, and YTM lower, the yield is lower than tax rate.

You have a lot of premium bonds with negative after-tax yields. By choosing short durations, you’ll choose a limited number of premium bonds ‪@advisorca ‪@RadiusFE

Floating-rate bonds can be tax-efficient, says Boniferro. Their tax liability matches their value. High-yield and floating-rate bonds are also more tax-efficient.

Gordon: use a laddered approach with strip bonds. They accrete to par. Their YTM = current yield, so they’re more tax-efficient. They’re usually low duration, too

Lee: Can buy bonds that trade at discount, so the YTM is higher than coupon. That’s more tax-efficient.

Bond ETFs can be more liquid than securities themselves in times of panic, during which people use ETFs for price discovery, says Boniferro ‪@advisorca Gordon: mismatch in crisis when ETF more liquid than underlying is concerning.

Gordon: People think the secondary market is reflective of liquidity, but it can dry up in a crisis. You could be stuck with primary market liquidity only.

Boniferro: ETF helps you spread your risk due to diversity. Market makers will provide liquidity in a no-bid situation. You may have higher spreads and not get best execution, but the ETF market maker will come up with a price, says Boniferro.

Q: In the past four months, I’ve heard to stay out of floating-rate bonds. Why do you like them, Scott? A: There’s not a lot of opportunity to make outsized gains in senior loans, but if you need yield for long-term, then have a small allocation. Plus, $15 billion has flowed into senior debt and it’s now a more liquid market, says Boniferro.