Wednesday, 10 May 2017

Now is the time for Bonds

With the stock market at all-time highs, its time to be contrarian and not simply follow the crowd. While I still buy equities every month, I don't spend all my available cash. Instead the amount of my reserve cash continues to build up. I've already redeemed my car loan in full and fortunately the redemption amount was not as large as I thought it would be.

Rather than keeping large amounts of cash, it would be good to put some into bonds. 

Local Bonds
Despite the promising start, retail bond issues seem to have fizzled out. I already have quite large positions in FCL 3.65% and Perennial 4.65% so I am wary of adding more. I was hoping that there would be other new issues of FCL's quality but so far there hasn't been any. 

Bondexpress from Fundsupermart has a number of interesting bonds on sale for a minimum lot size of $5,000, but only 2 'quality' issuers:

  • DBS 3.6% perp  (Ask yield 3.72%)
  • Manulife 2026 3.85% (Ask yield 2.9%)
I avoid perps so the DBS is not for me. The yield on the Manulife is low but fair given the issuer's quality, so the only issue is that after FSM subtracts its various charges, there is not that much left for the buyer.

Foreign Bonds
I am vested in a number of bond ETFs listed on LSE (SLXX, IS15, LQDE, SDIG). There is virtually no withholding tax on Irish-domiciled ETFs holding US Corporate bonds so you should definitely go for LSE ETFs and not those listed in the US as those are subject to withholding tax of the full 30%.

Looking at bond ETFs again, I find that Vanguard UK launched a US Corporate Bond ETF (VDCP)with a very competitive 0.12% expense ratio compared to iShares 0.20%. For bonds, every % counts. The slightly odd thing about VDCP is that it distributes dividends every month which must incur more administrative costs but somehow it still has a lower expense ratio.

I will be adding VDCP to my portfolio.

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