Money Bag: Bonds Behaving Badly, Investing USD, and More

Welcome to the Money Bag, where I answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about any money topic that’s on your mind.

This edition of the Money Bag answers your questions about bonds behaving badly, investing USD cash in a TFSA, active management during a market crash, and how I’m managing my credit card rewards points.

First up is Wendy, who wants to know why her bond cushion didn’t do the job she expected it to do during the market crash. Take it away, Wendy:

Bond Cushion Not Working

Hi Robb,

I am in my early 60s and a regular reader and fan of your blog. I hold bond ETFs in my portfolio, along with some equity ETFs. The 30+% recent drop in portfolio value certainly made me flinch but I never once consider selling. I’m a firm believer in index investing and holding to my plan for the long-term.

However, the bonds have not done the job I’ve expected them to do. Even before the pandemic, my bond holdings have been in the “red”.

I hold ZCS in my RRIF, which has performed okay with only +/-5% difference, nothing to quibble about. But I also hold ZHY and ZEF in my TFSA. Today they are down -18.4% and -13.9% respectively, twice that a few weeks ago and more than ZLB at -13.28!

Why have the High Yield US and Emerging Market bonds done so poorly since I bought them in 2017?

Hi Wendy,

Corporate bonds can behave much differently than government bonds because they are much riskier assets. Especially ‘high yield’ bonds like ZHY – high yield typically means riskier debt has been issued by companies with not so stellar balance sheets. These bonds took a massive hit during the pandemic as investors flocked to the safety of government bonds.

A more diversified bond ETF like VAB (Canadian aggregate bonds) did much better throughout the crisis, with a return of 2.95% YTD. Here’s a better look at what has happened in the bond market during the coronavirus crisis:

During a crisis, investors look for safe-havens and the bonds issued by the U.S. Treasury Department are backed in full faith by the U.S. government and therefore free from any credit risk. That’s why long-and-medium-term U.S. treasury bonds performed so well, while high yield corporate bonds and emerging market bonds got hammered.

As for what to do, I find investors often get trapped in thinking they’ll just wait for their initial investment to “recover” before selling and switching strategies. But, I’d re-frame that thinking and consider if you had that money sitting in cash right now, would you invest it in the high yield bond funds or would you invest it in something else that had a higher expected rate of return and/or was better aligned with your investment strategy? 

Investing USD Cash in a TFSA

Next up is Martha, who wants some advice on how to invest the USD cash in her TFSA:

Hello Robb,

My TFSA contributions are maxed out and is comprised of CAD $52,000 (invested in the Canadian Portfolio Manager Ridiculous Portfolio of 80% stocks / 20% bonds) and USD $16,500 cash.

I don’t want to convert this USD to CAD just yet, but rather prefer to grow it somehow. Do you have any suggestions on specific Canadian listed USD ETFs, GICs or bonds that would be suitable to park my USD?

I put this into my TFSA because of the tax-free nature of the account and all the gains/interest coming back to me. I say Canadian listed because of the foreign withholding taxes eating away at my portfolio. I’m still a newbie to the DIY investing and have to move forward from analysis paralysis.

Hi Martha, thanks for your email. So, I think there are couple of points to clarify here:

1.) There is no such thing as a Canadian-listed USD ETF. There are U.S.-listed ETFs that you can buy with U.S. dollars – such as Vanguard’s VOO, which tracks the S&P 500. And there are also Canadian-listed ETFs that track U.S. or International indexes, such as Vanguard’s VFV, which also tracks the S&P 500. You buy these ETFs with Canadian dollars.

2.) There is no real advantage to investing in U.S.-listed ETFs inside your TFSA. They’re more advantageous, tax-wise, to use inside your RRSP. That’s because you cannot avoid foreign withholding taxes in your TFSA – they’re unrecoverable because the TFSA is not recognized as a retirement account by the U.S.

Since the exchange rate is quite favourable right now (1 USD = 1.41 CAD) why not convert that money to CAD and then just buy one or more of the Canadian-listed ETFs that Justin Bender outlined for TFSAs in his ridiculous model portfolio?

Finally, if you’re still new to this I’d highly recommend keeping things extremely simple with the one-ETF asset allocation ETF like I’ve outlined in my top ETFs and model portfolios.

I’ve seen a number of investors struggle with more complicated portfolios that look great on a spreadsheet but once put into practice become unwieldy to manage on their own. Heck, I consider myself an expert and I just invest in one ETF – VEQT.

Active Management in a Market Crash

Jason wants to know if there’s any merit to the argument that active management can perform better during a bear market:

Hi Robb,

I am a DIY ETF investor and recently had an investment advisor contact me about the value of professional advice. He said in markets like this, where there is a dichotomy between those companies / sectors doing well and those doing poorly, index ETF investors are missing out on active management. How do you respond to that argument? 

Hi Jason, thanks for your email. If the advisor is talking about adding value through active management and market timing then you should run the other way.

No one could have predicted with any degree of certainty which stocks would fall and which stocks would perform well. Anyone who claims they can is doing so with extreme hindsight bias (of course Clorox would be up 25%, who didn’t see that coming?)

As far as I’m concerned, investing has been solved. Low cost, broadly diversified index ETFs are the best choice for long-term investors. Gone are the days when advisors can claim to add value by picking winning stocks and timing the market.

Where an advisor can add value is in financial planning, tax management, estate and legacy planning, psychology, accountability, prioritizing short-and-long-term goals, etc. 

The bottom line is that investors shouldn’t change strategies based on market conditions. Period.

Have You Changed Your Approach To Credit Card Rewards?

Finally, Amit wants to know if I’ve changed my approach to credit card rewards during these stay-at-home times:

Hi Robb, you’ve written a lot about credit card rewards and travel rewards in particular. Now that we can’t travel for the foreseeable future are you doing anything different with your current credit cards and rewards points?

Hi Amit, it’s a tough time for credit card rewards junkies like myself. For one, we planned to do a heck of a lot of travel this year and take advantage of programs like Aeroplan, Marriott Bonvoy, American Express Membership Rewards, and WestJet Dollars. Not to mention all the perks that come with those programs, like free hotel nights and upgrades, airport lounge passes, and companion travel vouchers.

With our trip to Italy cancelled and our trip to the U.K. likely to cancel next, we’ve got an abundance of travel rewards points and nowhere to use them. 

• Aeroplan – 560,000 miles
• Marriott Bonvoy – 136,000 points + 3 free nights
• American Express Membership Rewards – 220,000 points
• WestJet Dollars – $637 + 2 companion travel vouchers

My typical advice is to use your points fairly quickly and not hoard them. Loyalty programs often get devalued and expiry policies can also change at any time. However, in These Times, I believe the major credit card rewards programs and loyalty programs will want to hold onto their members for when we can return to travelling again. Marriott, for example, extended its free night certificates to no longer expire within a year. 

Besides hanging onto my travel rewards points, I’ve made the switch to a cash back credit card and have been using the Scotia Momentum Visa Infinite card for everyday purchases like groceries (and MORE groceries). I figured cash back would be more useful in the short-term, and this card had a 10% cash back bonus for spending in the first 3 months. Not bad!

I also use instant-reward programs like PC Optimum and Air Miles Cash to get a quick $10 off a grocery purchase – which comes in handy during a pandemic.

Do you have a money-related question for me? Hit me up in the comments below or send me an email.