Buying bonds with low fees

A bond mutual fund or ETF is a better way to go

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From the February/March 2015 issue of the magazine.

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(Peter Dazeley/Getty Images)

(Peter Dazeley/Getty Images)

Q: How much should I be paying in commission to buy a bond? I have heard that at some investment houses it should be no more than $1.

A: A buck for a bond? I’d check the fine print because there is usually a minimum charge of about $25. But your question brings up a great topic. Bond commissions are one of the least transparent fees in the business. What you pay depends on a number of factors: Where you buy the bond—say an online broker or a full service investment firm; what type it is—U.S., Canadian, corporate or government; and how much of it you want—the price can go down the more you buy, so institutional investors usually get a better price.

For example, at discount brokerage Qtrade, when you buy a Canadian bond with a face value under $25,000 you’ll pay $24.99. Add another $45 if it’s a U.S. bond. If you deal with a fee-based financial adviser, the commission is already included in their fee. And if you work with a full service broker, the commission may be accounted for in what’s called the “spread,” costing you around 1%, depending on what you can negotiate. New disclosure regulations beginning in July 2016 will require annual reporting of fixed-income commissions, which will hopefully make things clearer. But the bottom line is that for the average retail investor a bond mutual fund or ETF is a better way to go: You get diversification and easy execution at a cheap price.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal finance question? Write to us at ask@moneysense.ca

 

 

2 comments on “Buying bonds with low fees

  1. I have been buying strip bonds for years and am paying no more than one time 2% commissions and that is it. I lock in an interest rate in the past of 5%, 6%+.

    However, these days this is no longer possible but using TFSA’s, RRSP’s, RESP’s do help tax wise and I bought just one government strip bond lately, in June-2015 at 3.48% yield to maturity.

    My $10,000 RRSP contribution turns into $28,500 in 30 years. I don’t see interest rates going up much in the next few years. I can see though that 3.8% to 4.0% yields for longer term provincial strip bonds are possible but how long will it last. This is reoccurring theme in the last 6 years I have been tracking this.

    Reply

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