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Bond investing (ETFs vs Mutual funds)
Old 10-02-2008, 03:51 PM   #1
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Bond investing (ETFs vs Mutual funds)

I can think of 3 choices for bond investing:

1) mutual funds
2) ETFs
3) buy individual bonds

Someone pointed me to
ETFConnect - Fund Quick Facts - SPDR Barclays Capital TIPS ETF - IPE

which shows an inflation indexed ETF with an 8% yield. I did not think a yield like that is common for inflation indexed bonds, so feel free to tell me things I don't know about ETFs and why that yield could be so high.

Some questions-
I am not familiar with investing in ETFs, could someone compare/contrast searching for ETFs vs searching for mutual funds?

The only ETFs I know are the ones others point me to. I can find mutual funds by going to T Rowe Price web site, Vanguard web site or similar and find the asset classes I want and pick the fund or funds.

If you think individual bond investing is better than ETF or mutual fund alternatives, feel free to explain.


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Old 10-03-2008, 01:09 PM   #2
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Use whatever is indexed and lowest cost, be it ETF or fund. Picking individual stocks or bonds is for suckers. Picking individual TIPS may be of benefit if you are trying to match income streams with future obligations. Since my crystal ball is cloudy and I have no idea what financial obligations I'll have 20+ years down the road I use a TIPS mutual fund.

I maintain a slice n dice portfolio and like ETFs because they give me access to sectors I cannot get in an indexed mutual fund easily (international small value, for example). I pay zero commission so costwise it is a wash.

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Old 10-03-2008, 01:22 PM   #3
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individual bonds - scratch that one off the list unless you have particular ones in mind. too much hassle for the individual investor.

ETFs - i only own one, VTI. it's a total stock market index ETF.

mutual funds - use M* fund screener using your criteria. if this is not available to the public, please PM me and i can run a quick screen or two for you based on some simple criteria.
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Old 10-04-2008, 06:48 AM   #4
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While I am a big fan of ETFs, I use them only for equities. I like regular mutual funds for fixed income. I am probably irrational about this.

The main irrational argument I use to myself has to do with the monthly dividends of bond funds. I want them re-invested in the fund itself. This is trivial to get done with a fund. With an ETF you have to sign up for dividend reinvestment at your broker. And you end up with fractional shares. I like not only integer numbers, but nice round numbers divisible by 100 or 1000 for my ETF shares. I would not get that with a bond ETF. (I take the dividends paid by the ETFs in my taxable accounts in cash; this simplifies the cost basis accounting of them.)

I have read complaints of the re-investing of dividends of ETFs because you get nailed by the broker on the bid/ask spread or they do it a day or two after the mutual fund would do it. With a regular mutual fund you would always get reinvested at the NAV without delay.

I also hold my fixed income funds only in IRAs, 401(k) and 403(b) accounts. This way I don't have to worry about tracking the cost basis of all the little 3.411 shares, 0.419 shares that get re-invested every month. While the 401(k), 403(b) do not have a brokerage option, I do have that option in the IRAs, but still only hold funds there.

Presently in my IRAs, I use only Vanguard bond funds. These are held directly at Vanguard or at WellsFargo. I think I benefit from the low expense ratio of these funds. I am not trading the bond funds nor am I doing any tax-loss-harvesting with them (not possible in tax-advantaged accounts), so I am not bothered by the trading restrictions imposed by Vanguard. I do not even need to sell to rebalance these Vanguard funds. They are truly in a set-it-and-forget-it state because I can use my 401(k) to rebalance between equities and fixed income when needed.

So in summary, of my fixed income assets, 100% are in regular mutual funds. Of my equity assets, more than 80% are in ETFs.
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Old 10-04-2008, 06:52 AM   #5
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Two more links on ETFs vs mutual funds from Eric Haas's AltruistFA web site:
DFA vs. Vanguard (click on the "here" links in the Analysis column to get beyond the DFA vs Vanguard stuff). And
ETFs vs. Index Mutual Funds
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