The link makes the argument that what the above paragraph states is a myth.
The ETF or fund also gets a yield boost from diversification to lower-rated bonds that the small investor could not purchase efficiently.I would assume that an ETF company would get much better pricing that Joe Investor as well as access to a deeper pool of bonds. I'd like to know if that pricing advantage overcomes the management fee paid?
Peculiar_Investor wrote: I'd like to know if that pricing advantage overcomes the management fee paid?
scomac wrote:Peculiar_Investor wrote: I'd like to know if that pricing advantage overcomes the management fee paid?
I'm of the view that an individual investor can overcome the frictional costs of the bid/ask spread. For starters, the commission is a one time expense and the rate doesn't vary by maturity, therefore the longer maturing the bond is the lower the commission will be on an annual basis. This is an often overlooked benefit of the 10 year ladder versus a 5 year ladder. Secondly, ETFs by nature of design, will hold a significant component in Canadas. The individual investor doesn't need to do this. You can take advantage of the yield premiums offered on provincials, municipals, agency debt and investment grade corporate bonds; liquidity isn't a concern because you're not trading. Whether the above is adequate to overcome the MER hurdle, IOW your costs of direct ownership are lower than the ongoing fund fees, will depend in large part on the size of the portfolio. Even at $10K/wrung in the ladder, you can DIY for <= an ETF MER if you are judicious with your purchasing.
As far as the numbers go, I think it's more or less a bit of a wash in deciding between a ladder or an ETF (AFAIC MF shouldn't even enter into the discussion because they're too expensive) and as such the decision would be swayed by other factors and the weighting placed by the individual investor. As an example, I really favour the certainty of return with a ladder; where as, I can appreciate the simplicity of the ETF when it comes to accumulating assets.
I am with Scomac. For someone who is retired, maintaining a ladder is a small effort when compared to paying an MER and having uncertain principle.
the average retail investor should not be buying individual corporate bonds and should buy corporate bond ETFs instead.
Pickering wrote:...Am having trouble getting my head around paying a premium( at some point taking a capital loss ) and not achieving comparable yields. all the while, I do know what the endgame is.
Perhaps, is this not the time to be forming a ladder.
Any advice/comments appreciated.
Doug wrote: Is the iShares index fund the equivalent of a bond ladder?
If one ignores expenses and the heterogeneity of the ETF, will the return of the iShares ETF be similar to that of a ladder?
kcowan wrote:So long term returns should be evened out with the drag from the MER being offset by the preferred buying rates from the bond desks.
To me, a ladder is best used to get a regular supply of funds to live on through their maturity cycles.
scomac wrote:On a equal credit quality basis, yes. However, if an investor is willing to construct his/her own ladder of investment grade bonds, they can often pick up a significant yield boost by ignoring the ETFs need to hold federal gov't bonds and building a ladder of provincial and corporate bonds. You are taking on some additional credit risk, but with spreads where they are today, you are being adequately compensated. This isn't always the case though, so this current advantage can disappear. Analysis is required.kcowan wrote:So long term returns should be evened out with the drag from the MER being offset by the preferred buying rates from the bond desks.
kcowan wrote:Have you seen any work on that?
scomac wrote:kcowan wrote:Have you seen any work on that?
Not specifically although there is plenty of anecdotal evidence in support of that. Hank Cunningham mentions this in his book as one of the chief advantages to constructing ladders versus using funds.
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