Canadian BOND ETFs - with options
Canadian bond ETFs - with options
With rising inflation and interest rates, keeping cash in the accounts for dry powder hurts. Looking for better places to park cash while we wait for it to get deployed.
A simple solution is GICs but they lock the money for the said term. Buying bonds and notes/t-bills is slightly better from flexibility perspective - but a pain in the neck to manage since you now got to decide which bond to buy with what maturity, what the yeild to maturity is, whether there are coupons attached or not and how it all works. And taking a quick scan on IB as of today, Canadian gov bonds and bills are not paying a lot more than like 2-3% - actually it's not obvious looking at them because they are not trading at par. Either at a discount or at a premium - all said and done they probably will yield around 3-4% maybe.
Point is, its all a bit too complex for retail traders. And even if we could clearly tell what is what, to diversify we are better off spreading across muncipal, corporate, provincial and federal bonds anyways - and ladder them and all the shebang. A full time job.
Bond ETFs to the rescue.
Some of them charge very little giving instant diversification. Case in point, ZAG (Canadian aggregate bond index etf), has a management expense ratio of 0.09% giving instant diversification to hundreds of bonds with coupons ranging from 1 to 2% all the way up to 8-9% and spread all over the fixed income world.
And ZAG sitting at lows for what seems to be over a decade - not a bad time to nibble.
If you are trading bond ETFs thought, do know that price can go down as well - not like a GIC. So there sure are risks.
Looking at the rest of the bond eft universe for Canada, ZAG sits right at the top with 6.6b under management with XBB, ZBB, VAB tailing right behind.
It would now be nice if they had liquid option markets backing them so you could maybe collect some theta while you sit with these - and sure enough ZAG and VAB do have options - not very liquid though.
Granted I am looking at it now on a weekend, but during weekdays also they are wide spreads - super wide. Note the open interest in 30DTE options for ZAG. Almost non-existent.
Wish Canadian options were at least as liquid as the US ones. Then again, US ones are not that much better either - very little open interest; but atleast the spreads are bearable. Note AGG open interest below.
Listing of US based Bond & Treasury etfs by size:
https://etfdb.com/etfs/bond/treasuries/
https://etfdb.com/etfs/bond/total-bond-market/
That's all for now.
Good luck trading!
-gariki