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:

Bond returns

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

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10 Comments

  1. Dustin on May 14, 2020 at 12:24 pm

    I recently learned about the new reg regarding rif’s and being able to use some type of formula to increase or decrease withdrawal. Not to sure what to make of it. I really don’t need the money and take the minimum out each Sept. I also have the max in TFSA accounts. Is it worthwhile taking advantage of the governments new position?

    • Robb Engen on May 14, 2020 at 12:29 pm

      Hi Dustin, thanks for your question. The federal government recently gave RRIF owners the option to withdraw 25% less than the mandated annual minimums in 2020. For RRIF-holders who don’t need the income, it makes a lot of sense to take advantage of this provision and leave that money in a tax-sheltered account.

      A couple of advisors are quoted in this MoneySense article about whether retirees should reduce RRIF payments this year. It’s worth a read: https://www.moneysense.ca/save/retirement/retirees-reduce-rrif-payments-during-covid-19/

  2. Gail Bebee on May 14, 2020 at 2:03 pm

    There is a Canadian listed US dollar ETF available from Horizons-HORIZONS
    US DOLLAR CURRENCY ETF, DLR.U. It’s mandate:
    The Horizons US Dollar Currency ETF (Priced in US$) seeks to reflect the price in Canadian dollars of the U.S. dollar, net of expenses by investing primarily in cash and cash equivalents that are denominated in the U.S. dollar

    • Robb Engen on May 14, 2020 at 2:10 pm

      Hi Gail, yes I am aware of DLR – used primarily for Norbert’s Gambit – but that clearly was not what this reader was asking about and explaining that would only serve to confuse the situation.

  3. Potato on May 14, 2020 at 2:09 pm

    Hi Robb, there actually are Canadian-listed ETFs (and individual securities) that trade in USD. They usually have a .U appendage to designate the currency. The most famous example is Horizon’s DLR and DLR.U pair used for converting currency (Norbert’s gambit). Several US equity market indexes are available to trade in USD on the TSX, such as iShares’ XUU.U, which tracks the US total market.

    However, there isn’t usually a good reason to seek these out — if you have USD, it’s just as easy to buy an American-listed ETF, and in an RRSP that would be preferable. So if you have USD, why look for XUU.U to buy over the TSX when VTI is right there on the American exchange?

    The one exception is when you have USD and want to end up owning the fund in question, and want to save a step on currency conversion. If you want to own XUU in the end (or may buy more in the future with CAD), and have USD at the moment, you can buy XUU.U, then journal the shares to XUU and save a few steps and not wait to get your money invested in the final product.

    • Robb Engen on May 14, 2020 at 2:15 pm

      Hi John, see my answer to Gail above. The reader said, “I’m still a newbie to the DIY investing and have to move forward from analysis paralysis,” so I figured there’s little point explaining what you just said and expecting that to sink in.

      • Russell J. Sawatsky on May 16, 2020 at 7:14 am

        If you have over US$60,000 “situs” assets your executor has to file a US estate tax return, even if you ultimately do not have to pay any tax to the IRS. This is more of an estate planning issue, but US-domiciled ETFs do count as “situs” assets. It may therefore be worthwhile to consider buying a Canadian-domiciled USD ETF once your US-domiciled ETFs approach USD$60K. In addition to XUU.U, another one that comes to mind for me is ZSP.U, BMO’s S&P 500 Index ETF in USD.

  4. Tom on May 14, 2020 at 4:50 pm

    Re: Rewards Cards
    We’ve been accumulating RBC Visa Rewards points for several years now and we’ve been looking forward to using them for at least one overseas flight.
    But, if one chooses, one perk is we could also use our points (dollars) to pay a Visa bill or apply to a Line of Credit.
    We also use a couple of Cash Back cards—the Capital One Costco Card and, for the last year or so, the Home Trust Preferred VISA which has no foreign exchange fees and also gives cash back on any purchase regardless of where it’s made.
    And, of course, we use the PC MasterCard at Loblaws/No Frills and also at Shoppers on Thursdays (Seniors Day) where we stock up on basics like milk, eggs, and butter, and also the large can of PC Coffee for $6.99

  5. Rick on May 19, 2020 at 3:50 pm

    Hi Rob, your a true inspiration and I’ve been following your financial journey the last couple years while applying a page or two from your experiences to my family finances.

    I am invested through Wealthsimple Invest for my RRSPs and plan to move all mine and my spouse’s holdings to Wealthsimple Trade and invest into VBAL. I spoke to a WS advisor this morning and she pointed me to how WS Invest recently made changes to their portfolio that apparently has helped their clients better weather the recent lows in the markets. Here’s a link to their recent blogpost tooting their horn on this “move” of theirs: shorturl.at/bipZ7

    I am very apprehensive of such claims from FIs and my basis of skepticism is that their comparative “benchmarks” are certainly not the same composition/geographic allocations of what WS might hold within their portfolios. End of day, I feel this may only be a coincidental blip otherwise the world would have been filled with financial rainbows and unicorns of smart people!

    What are your thoughts on this?

    Best regards!

    Rick

    • Robb Engen on May 19, 2020 at 4:25 pm

      Hi Rick, thanks so much for the kind words. Like you, I’m dubious of Wealthsimple’s claim of outperformance. I’ll give them a pass because the critics argued that robo-advisors wouldn’t hold up in a down market and they’ve proven them wrong, at least in the short term.

      But they achieved that outcome based on some active decisions to pursue low volatility stocks and long-term government bonds – they’re ‘resulting’ or judging that decision based on the results instead of on whether that was a good or bad decision for the long term. I hope all of this crowing over one quarter doesn’t come back to bite them.

      I shared my thoughts about this on Twitter as well: https://twitter.com/BoomerandEcho/status/1261344824524861442

      Bottom line: Don’t question your decision to switch to VBAL based on Wealthsimple’s surprising Q1 2020 performance.

      PS – I should add that while low volatility and long-term bonds helped WS portfolios perform well in a downturn, it should also in theory lower the potential upside in a strong market. So will WS make another active decision to change their portfolios at that time?

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