A Comment -- General Comments From an Expert (A Commentary)

Bonds versus Bond ETFs? Most people are not buying bonds because there is a certain lack of transparency. If you are a bond investor and have $100,000 you want to put in bonds, and that $15,000-$16,000 per bond you are going to be paying 25 to 50 basis points to buy that. You can buy a bond ETF for 15 basis points and it is professionally managed. He would be much more inclined to use ETFs.

ETF to play the market in India? There are several including iShares (XID-T). You have to decide whether you want large or mid-caps.

Keeps a significant amount of US$ and Cdn$ in cash because he writes naked puts. Have used iShares 1-5 YR Ladder Corp Bond (CBO-T) & iShares S&P/TSX Preferred (CPD-T) in the past but now concerned about rising interest rates. The laddered bond portfolio has premium bonds embedded in it. It only has 5 bonds in each of 5 years giving it 25 bonds in total. To get the kind of yield they are getting off it, it is really showing 3%-4% and the only reason they’re getting these kinds of yields is because they have some bonds that they paid a premium price for and there is a capital loss built in. He got rid of almost all of his and switched into the iShares DEX Short Term Bond (XSB-T).

Where do you find the yield that ETFs pay? Go on to the website of the ETF providers. They are pretty up front with what the yields are. It’s just a matter of teaching yourself where to look.

Favourite REIT ETF that pays increasing dividends for the long-term? There is iShares S&P/TSX Capped REIT (XRE-T), BMO Equal Weight REITs Index (ZRE-T) and the Vanguard FTSE Cdn Capped REIT (VRE-T), which probably has lower fees. Really what you have to look at is how much you like RioCan (REI.UN-T) and how much of it you want.

Gold ETFs? It would not surprise him to see gold down around $800-$900.

Markets. Good news on the US on the jobs front, but the 10 year bond says we are spooked. The market has been spooked for a while. The Ukraine, Europe (debt to GDP ratio). And today, for some reason no one is buying. The Euro is an issue but not a major one. 10 year treasuries being flat is more a case the Fed taking money out of the system. Interest rates in the short term will be pretty well contained. The fed wants a controlled, sustained recovery with steady interest rates. Credit quality becomes an issue as you move down the credit quality spectrum. Triple ‘C’ credit spreads have traded from 500 to 3500 and are at 550 so are as tight as they have ever been. You can see how expensive they have been and how expensive they are now. They are not cheap. Thinks we are at risk of an interest rate spike. You should be selling triple ‘C’ for something with a better risk adjusted return such as triple ‘B’. This is the spot where you can earn a reasonable return with a reasonable risk. This should be comfortable for 12 months.

Preferred Shares vs. Bonds in Rising Interest Rates: Both have interest rate exposure. Use inflation protected funds that protect against rising interest rates. Preferreds are equities, but sold to investors like they are bonds. If they go into default you don’t get any money back. Bonds give you most of your money back. Preferreds have call features that are to the advantage of the corporation. If preferred and common have the same yield, then go with the equity. Perpetual fixed for life have the most impact from interest rates.

REITs. Are pretty well valued. REIT companies are very sensitive to interest rates (negatively). Valuations are really high. However, in Canada, REITs are not bad. Prefers office or commercial properties.

Sweet Spot in Duration of Corporate Bonds: The cross over is a function of investor’s tolerance for losses. If you can earn 5% over 10 years then that is fine. But if you can’t handle -15% then you need to focus on shorter duration.

Fidelity American High Yield Currency Mutual Fund. Fund has performed well over the last two to three years. He doesn’t recommend Canadians getting into US$ bonds and funds. Find yourself a fund that hedges out interest rate exposure and move up to double ‘B’ credits.

Markets. There are 2 markets he is staying away from. Japanese, which he thinks is just a financial engineering trade and at some point the Japanese government will think about it appropriately and restructure the economy and you will have the mother of all trades. Right now they’re just engineering the currency laws. Latin America is still slowing down. Commodities are hitting lower levels. This is affecting across the economy and causing inflation, etc. However, he is seeing some signs that Latin America is starting to heal, or at least hit the bottom. Likes emerging markets and developed Asia. Last year money ran very aggressively into the large developed regions such as the US. US bank stocks were up 77% last year. They are only grinding out 1% gain year-over-year in growth.

Bond Fund Recommendation. It is possible bonds go lower in the very short term. You make more money if you use a longer duration. Look for an ETF holding longer bonds.

Markets. Q1 was sluggish. The weather was particularly bad in quite a bit of North America. When there is a blizzard outside, you don’t rush out to buy a car or a new house. Feels that a lot of spending has been deferred from Q1 to Q2. Expects a very strong Q2, which will put the year back on track where the optimists thought it would be, as opposed to the pessimists.

Energy. So many of the stocks are seemingly at very lofty levels, but feels this is still a good entry point. There is a couple hundred billion dollars of investments going into energy infrastructure. A lot of these companies have bigger CapX programs ahead of them than they have ever had. If we are in an inning, it is probably more like the 3^rd inning in the story of western infrastructure spend.