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Old 06-03-2013, 12:12 AM   #21
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Do you suppose that it might be a function of the calendar and the exact payment dates of the underlying bonds?

Ha
If that was the only reason behind the dispersion, I would expect to see some kind of pattern or periodicity but I don't see one.
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Old 06-03-2013, 06:36 AM   #22
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The advantage is a declining duration vs. the more-or-less constant duration of a regular bond fund. So, if you think that interest rates will increase going forward, you might buy these ETFs and just roll them over into new ones when they mature. In theory your principal would always be intact. You could also exit the entire position without principal risk whenever the fund matured. With a regular bond fund, by contrast, since it has a constant duration there is never a point at which you can exit without principal risk.

The current interest in these ETFs is probably fueled by the idea that since bond rates are at a generational low there is a possibility of a secular movement to increasing rates. If that were to happen the regular bond funds would never recover from the decline of NAV.

In other words, they work just like individual bonds, except they have the advantage of diversification and the disadvantage of a management fee.
Yes I can see the advantage of the ladder if you intend to sell, but if you only want the coupon and never intend to sell I don't see any advantage.
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Old 06-03-2013, 06:51 AM   #23
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Originally Posted by Khufu View Post
The advantage is a declining duration vs. the more-or-less constant duration of a regular bond fund. So, if you think that interest rates will increase going forward, you might buy these ETFs and just roll them over into new ones when they mature. In theory your principal would always be intact. You could also exit the entire position without principal risk whenever the fund matured. With a regular bond fund, by contrast, since it has a constant duration there is never a point at which you can exit without principal risk.

The current interest in these ETFs is probably fueled by the idea that since bond rates are at a generational low there is a possibility of a secular movement to increasing rates. If that were to happen the regular bond funds would never recover from the decline of NAV.

In other words, they work just like individual bonds, except they have the advantage of diversification and the disadvantage of a management fee.
Hits the nail on the head to me.

Now if you have a ladder of these (say equal amounts of every target date series) and continually reinvest them as they mature then there may not be much benefit compared to a bond fund with similar overall duration.

OTOH, I'm using these as an alternative to investing in 5 year brokerage CDs in my IRA since they yield more (albeit with credit risk I am willing to accept) and I don't want to move my IRA to one or more banks to get higher bank CD rates.

Since I'm not keen on how they manage the distribution year (holding cash as bonds mature until the end of the year), I'll probably look into selling them with a year or so left to go if they trade near NAV.
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Old 06-03-2013, 08:47 AM   #24
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Hits the nail on the head to me.

Now if you have a ladder of these (say equal amounts of every target date series) and continually reinvest them as they mature then there may not be much benefit compared to a bond fund with similar overall duration.

OTOH, I'm using these as an alternative to investing in 5 year brokerage CDs in my IRA since they yield more (albeit with credit risk I am willing to accept) and I don't want to move my IRA to one or more banks to get higher bank CD rates.

Since I'm not keen on how they manage the distribution year (holding cash as bonds mature until the end of the year), I'll probably look into selling them with a year or so left to go if they trade near NAV.
In the situation where you are looking to replace a CD ladder and have a plan to sell then the bond ladder is a good tool. But if you are still saving for retirement I don't think they have any advantages over a bond fund.
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Old 06-03-2013, 09:16 PM   #25
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If that was the only reason behind the dispersion, I would expect to see some kind of pattern or periodicity but I don't see one.
I see your point. The more I look at these, the more confused I get. For example, when I look at yield on my brokerage quote screen the yields are impossibly high. Then I looked at average coupon on a 2016 maturity. It was something like 3.xx%. Well, since these are overwhelmingly investment grade bonds, though few AA for sure, this would only be possible because the managers are buying bonds at a premium over face value to enhance cash flow. But it is going to take some digging to find and understand what we would need to know to calculate a return to maturity. So we'll be buying current yield, but looking at a capital loss on the bond. I don't know how this would be treated for taxes, and if I need to hire a CPA there goes any reason for using these things- why not just roll one year treasuries?

Maybe the marketers figure what we don't know won't kill a sale, and maybe the SEC hasn't yet figured out what they need to compel in the disclosures. I wish I knew more about this area. I am going to a seminar on ETFs at broker's soon, but my experience with these is that it is hard to get nitty-gritty questions answered, since these seminars are essentially sales meetings, and i will become persona non grata if I am not a good boy.

Maybe I'll throw up a lob or two in hopes of getting baseball tix.

Ha
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Old 06-03-2013, 10:43 PM   #26
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See annual report from their website.

Guggenheim Investments - Global Financial Services Firm | Guggenheim Investments

As would be expected, there are a lot of bonds at substantial premiums.
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Old 06-04-2013, 09:29 PM   #27
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I see your point. The more I look at these, the more confused I get. For example, when I look at yield on my brokerage quote screen the yields are impossibly high. Then I looked at average coupon on a 2016 maturity. It was something like 3.xx%. Well, since these are overwhelmingly investment grade bonds, though few AA for sure, this would only be possible because the managers are buying bonds at a premium over face value to enhance cash flow. But it is going to take some digging to find and understand what we would need to know to calculate a return to maturity. So we'll be buying current yield, but looking at a capital loss on the bond. I don't know how this would be treated for taxes, and if I need to hire a CPA there goes any reason for using these things- why not just roll one year treasuries?

Maybe the marketers figure what we don't know won't kill a sale, and maybe the SEC hasn't yet figured out what they need to compel in the disclosures. I wish I knew more about this area. I am going to a seminar on ETFs at broker's soon, but my experience with these is that it is hard to get nitty-gritty questions answered, since these seminars are essentially sales meetings, and i will become persona non grata if I am not a good boy.

Maybe I'll throw up a lob or two in hopes of getting baseball tix.

Ha
You all might be interested in this thread @ bogleheads.
Bogleheads • View topic - iShares target-dated muni ETFs for taxable account
They seem to be going over a similar etf.
one of the guys in this discussion is a well know mathematician. When he calculates I always listen .
Hope it helps,
Steve
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Old 06-04-2013, 09:46 PM   #28
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You all might be interested in this thread @ bogleheads.
Bogleheads • View topic - iShares target-dated muni ETFs for taxable account
They seem to be going over a similar etf.
one of the guys in this discussion is a well know mathematician. When he calculates I always listen .
Hope it helps,
Steve
Thanks Steve. I'm getting tired now, but I will read this tomorrow.

Ha
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Old 06-04-2013, 09:59 PM   #29
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I'm pretty tired too.
Got to meet with my tax accountant in the morning.
Hope to get everything filed and finished.
Had to do an extention this year due to a missing or slow arriving K1.
Later Steve
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Old 06-05-2013, 06:48 AM   #30
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Their concern about capital losses is valid in that if you purchase the ETF when the bonds are at a premium it would seem that you'll have dividend income from coupons and later a capital loss of the premium over par because of the structure of the product as a stock does not result in amortization of the premium, unlike if you held individual bonds.

In my case I hold them in a tax-deferred IRA so this "problem" is moot.
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Old 06-05-2013, 09:01 AM   #31
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I see your point. The more I look at these, the more confused I get. For example, when I look at yield on my brokerage quote screen the yields are impossibly high. Then I looked at average coupon on a 2016 maturity. It was something like 3.xx%. Well, since these are overwhelmingly investment grade bonds, though few AA for sure, this would only be possible because the managers are buying bonds at a premium over face value to enhance cash flow. But it is going to take some digging to find and understand what we would need to know to calculate a return to maturity. So we'll be buying current yield, but looking at a capital loss on the bond. I don't know how this would be treated for taxes, and if I need to hire a CPA there goes any reason for using these things- why not just roll one year treasuries?


Ha
I think the yields on most sites are showing current or 30-day SEC values. On the guggenheim site they show the YTM, which is higher than the distribution. I would have thought it would be lower.

ETFs | Guggenheim Investments

I wonder if they are doing something in the funds accounting to amortize the premium based on what you paid for the fund and what the termination value is.
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Old 06-05-2013, 09:27 AM   #32
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I think the yields on most sites are showing current or 30-day SEC values. On the guggenheim site they show the YTM, which is higher than the distribution. I would have thought it would be lower.

ETFs | Guggenheim Investments

I wonder if they are doing something in the funds accounting to amortize the premium based on what you paid for the fund and what the termination value is.
No, the YTM is of the underlying bond portfolio and would usually be higher than the distribution yield. The .24% ER would be a reduction of the YTM to get to the distribution yield so expenses are part of the difference. The remainder is a mystery to me - I suspect there may be a bit of seasonality implicit in the distributions and since the distribution yield is based on the most current month's distribution annualized that seasonality may be a factor.

Fund accounting should reflect the bonds at fair value. If purchased at a premium the fair value would eventually converge to par at maturity, so amortization of premium is sort-of built into the fair value and therefore reflected in the NAV.
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Old 06-05-2013, 09:48 AM   #33
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I would have expected more stable distributions with such ETFs:

BSCF Guggenheim BulletShares 2015 Corp Bond ETF BSCF Quote Price News

I wonder what drives the volatility.
Their site has a contact link to send questions in. I ask about the distribution fluctuation and they did reply ( within just a few minutes ). We might all just send our question in to them and post the replies here.

The fluctuation is due to bonds being added and/or replaced throughout the life of the Bulletshare. This creates changes in the overall coupon rate and therefore the distribution that is paid out to shareholders. The Bulletshare does not hold the same "basket" of bonds from inception to maturity.
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Old 06-05-2013, 10:00 AM   #34
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That explanation sounds a bit hokey to me. I would think that it would take a lot of difference in the coupon of the bonds being added/exchanged from the existing weighted average couppon to affect the weighted average coupon enough that the distribution yield would be effected. Admittedly it is a small fund, but still....

I have a question out to them on the difference between distribution yield and YTM difference in posts 31 and 32.
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Old 06-05-2013, 10:12 AM   #35
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That explanation sounds a bit hokey to me.
Agree. Most of the literature implies they are holding a basket of bonds that mature within a given year, which seem to be at odds if they doing that much swapping of the bonds in the portfolio. I can see the quoted yield fluctuating a bit due to changes in NAV but the actual $ payout should be reasonably stable.
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Old 06-05-2013, 10:16 AM   #36
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One more product that is about as transparent as a brick wall.

Ha
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Old 06-05-2013, 11:15 AM   #37
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That explanation sounds a bit hokey to me.
I agree. Even their ETFs with reported annual turnovers in the low single digit exhibit strange distribution patterns.
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Old 06-05-2013, 04:47 PM   #38
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I agree. Even their ETFs with reported annual turnovers in the low single digit exhibit strange distribution patterns.
I spoke to a very helpful woman named Becky at Guggenheim today. She said the fluctuation in Bullet Shares is because their mandate is to protect the YTWorst given on their website, for an investment at a particular NAV. Therefore, the monthly payouts do not necessarily reflect the inflow of that period. She also said that if you buy at an average bond premium, you will likely have a capital loss at the end, which will be reflected in the YTM. It seems to me that in a taxable account, this might be a disadvantage, relative to less ordinary income and no terminal capital loss.

Ha
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Old 06-05-2013, 05:12 PM   #39
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....It seems to me that in a taxable account, this might be a disadvantage, relative to less ordinary income and no terminal capital loss.

Ha
I guess it depends on the dimensions of your investment since up to $3,000 of capital loss can be taken against ordinary income annually it could be a wash in many circumstances.
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Old 06-05-2013, 08:12 PM   #40
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I guess it depends on the dimensions of your investment since up to $3,000 of capital loss can be taken against ordinary income annually it could be a wash in many circumstances.
True, but if you normally or often have net ltcg, it is not a wash. Anyway, this is something everyone can figure out for himself, I just noted that Becky did confirm this as possible.

Ha
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