The iShares 1-5 Year Laddered Government Bond Index Fund (CLF) posted a 1.38% annual pre-tax return in 2012. Some taxable investors may be surprised to find out that their after-tax return on the fund was actually negative over the same period.
We have been cautioning investors and advisors alike from holding bond ETFs or bond mutual funds in their taxable accounts, when the underlying basket of bonds are trading at a premium to par (for more detailed explanations of this topic, please read Dan Bortolotti’s blog, or John Heinzl’s post).
In the example below, I’ve shown the 2012 after-tax returns of a $100,000 initial investment in CLF for various marginal tax rates.
The results speak for themselves; just more proof that it is currently more tax-efficient to hold GICs, strip bonds, and high-interest savings accounts in your taxable accounts (relative to holding bonds that are trading at a premium to par).