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CDs instead of bond funds?
Old 06-24-2013, 06:56 AM   #1
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CDs instead of bond funds?

What are your opinions on using CDs in place of bond funds for the immediate future? I am 62 and I have IRA funds that hopefully don't need to be used for 8 years and have about half of that in bond funds. I am looking at this as strictly a way of saving principal and not a permanent move. If/when bond funds turn around I would switch back to them. However given the uncertainty and the possibility that this will take years, I am exploring the option. Thank you for any thoughts.
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Old 06-24-2013, 07:23 AM   #2
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I am doing the same thing but with a twist.

What I found was that broker CD yields were too low for my liking (~1.2%) and that the more attractive bank CDs (~1.8%) would have required me to transfer my bond allocation to 2 or more banks, set up IRA accounts, etc which I wasn't keen about doing since my IRA is currently all in one place at Vanguard.

I decided to use the 2019 and 2020 Guggenheim Bulletshare funds in lieu of a CD. There is credit risk and interest rate risk in terms of the daily fair value but the underlying bonds mature at par in their target year. Another alternative I considered was just buying individual bonds, but the Bulletshares seemed to be a convenient way to get the benefits of a diversified bond portfolio for 14 bps more than what I was paying for my bond mutual fund.

The yield-to-worst of the 2019 fund after expenses was 2.17% as of 6/14 and the 2020 fund was 2.83% based on NAV. I found that I had to pay a slight premium to execute buying them so realistically your yield may be a tad lower, and would be lower still if the underlying bond portfolio has any defaults.

I'm not keen on the way they hoard the par proceeds in the target year and make a terminal distribution at the end of the target year so I suspect my exit strategy will probably be to sell them in early 2019 and 2020.
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Old 06-24-2013, 08:07 AM   #3
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My overall plan is to maintain a CD ladder as part of my fixed income allocation along with a targeted allocation to some bond funds. When "experts" said interest rates reached their lows years ago, another market timing forecast that was very wrong, I stayed with my plan. I don't try to time markets because I have my doubts I'll be the first one to successfully do so. What is a "turned around" bond fund? 3% on the ten year? 5%? Personally I have no idea but if a CD comes due and interest rates are higher, I'll take full advantage of that. If they are lower, I'll enjoy the captial appreciation in my bond funds.
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Old 06-24-2013, 12:05 PM   #4
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I decided to use the 2019 and 2020 Guggenheim Bulletshare funds in lieu of a CD. There is credit risk and interest rate risk in terms of the daily fair value but the underlying bonds mature at par in their target year. Another alternative I considered was just buying individual bonds, but the Bulletshares seemed to be a convenient way to get the benefits of a diversified bond portfolio for 14 bps more than what I was paying for my bond mutual fund.
If you anticipate needing access principal as well as interest payments I can see how the Bulletshare funds would be attractive. But if you are just going to spend the bond interest I don't see the advantage of it over holding a bond mutual fund.
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Old 06-24-2013, 01:21 PM   #5
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Originally Posted by nun

If you anticipate needing access principal as well as interest payments I can see how the Bulletshare funds would be attractive. But if you are just going to spend the bond interest I don't see the advantage of it over holding a bond mutual fund.
He gets his principal back in 2020 which can be then reinvested at most likely a higher rate. Whereas a bond funds NAV will move inversely with rates locking you into a set return. Its a bet on interest rates for which he will get rewarded if correct.
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Old 06-24-2013, 01:49 PM   #6
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He gets his principal back in 2020 which can be then reinvested at most likely a higher rate. Whereas a bond funds NAV will move inversely with rates locking you into a set return. Its a bet on interest rates for which he will get rewarded if correct.
With a bond index fund the principal is continually being reinvested. If you don't cash in and just take the interest eventually all the bonds will have turned over and you'll be getting the current interest rate. I only see the ladder approach being better if you plan to take principal out of the bonds. If you just roll the laddered bonds over into more bonds when they mature you are doing the same as a bond index fund.
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Old 06-24-2013, 02:09 PM   #7
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I sold the majority of our long term TIPS and intermediate to long term bond funds earlier this year.

I have just been parking the money in short term bond funds, floating rate funds, I bonds and 1 year and under CDs for now. Our retirement plan works if we don't quite keep up with inflation some years, but it would be harder to recover from a 30% or more drop.

We have access to 3 different stable value funds from past employer 401Ks we left in place, so we have been upping our allocations to those this year.

I think the Bulletshares are probably a great idea I just have not had time to research them more to make sure I fully understand what I'd be buying.
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Old 06-24-2013, 02:12 PM   #8
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Does someone happen to know of a link that would explain the difference between Bulletshare and the typical bond fund or ETF? I did not see an entry in investopedia. I just wonder if there is a hotel California aspect (where you've got to wait until maturity to get your money out). Because to me, bond funds are not attractive because a buy and hold investor takes a bath when markets get the jitters and "everyone" flees to cash. I am in a stable value fund while rates are held low, and would go to individual bonds to avoid the problem above with bond funds. But if Bulletshares place the pain only on the guys who get spooked out of the market and not on me as a fellow fund owner, I might consider them.
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Old 06-24-2013, 02:17 PM   #9
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I think the Bulletshares are a great idea for Guggenheim and for people who intend to spend down their bond allocation and will take principal at regular intervals rather than reinvesting it bonds.

Many holders of bond index funds are worried that interest rates will go up and the NAV of their bond fund will fall so they look for the safety of guaranteed principal on a bond investment that is held to maturity when in fact if you intent to reinvest interest and principal at maturity the bond fund is a far better option. A bond index fund is similar to a rolling bond ladder. But hats off to Guggenheim for seeing an opportunity to develop a fixed term EFT investment that will woo some investors away from bond index funds....even if it might not be the best product for them.
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Old 06-24-2013, 02:28 PM   #10
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Originally Posted by nun

With a bond index fund the principal is continually being reinvested. If you don't cash in and just take the interest eventually all the bonds will have turned over and you'll be getting the current interest rate. I only see the ladder approach being better if you plan to take principal out of the bonds. If you just roll the laddered bonds over into more bonds when they mature you are doing the same as a bond index fund.
Yes, you will get the current yield but based on the lower NAV. The only way to recoup the loss of NAV would be to reinvest the interest.
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Old 06-24-2013, 02:33 PM   #11
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Because to me, bond funds are not attractive because a buy and hold investor takes a bath when markets get the jitters and "everyone" flees to cash. I am in a stable value fund while rates are held low, and would go to individual bonds to avoid the problem above with bond funds.
If you're a buy and hold investor increasing interest rates and a falling NAV shouldn't hold any fears. You get the extra income from a higher interest rate that will compensate for the falling NAV over a number of years. You also get that better interest rate immediately and can reinvest income at the lower NAV and hopefully make a nice gain in the next market cycle. If you are old enough to be fairly sure of not seeing another cycle and want to spend you bond portfolio a ladder would be appropriate, but I'm sticking to intermediate term bond indexes, income reinvestment and rebalancing.
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Old 06-24-2013, 02:46 PM   #12
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If you anticipate needing access principal as well as interest payments I can see how the Bulletshare funds would be attractive. But if you are just going to spend the bond interest I don't see the advantage of it over holding a bond mutual fund.
You stated here that you were spending the bond interest. That was the basis for my argument. If one is reinvesting or in the accumulation phase and buying more shares then you will recoup your losses and may be better off in the long run.
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Old 06-24-2013, 03:03 PM   #13
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He gets his principal back in 2020 which can be then reinvested at most likely a higher rate. Whereas a bond funds NAV will move inversely with rates locking you into a set return. Its a bet on interest rates for which he will get rewarded if correct.
+1 I'm really thinking of it more as a substitute for a CD rather than a substitute for a bond fund. Absent any defaults, I'll get a ~2%+ return and avoid the hassles of separate IRA accounts that would be needed with bank CDs. I recognize that there are some different risks than CDs and am willing to accept those different risks.

If 5-7 year broker CDs paid more than the meager 1.2% or so that they pay I would have gone that route.
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Old 06-25-2013, 04:36 AM   #14
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We have access to 3 different stable value funds from past employer 401Ks we left in place, so we have been upping our allocations to those this year.
I didn't think you were allowed to contribute to 401Ks after retiring.
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Old 06-25-2013, 08:27 AM   #15
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I didn't think you were allowed to contribute to 401Ks after retiring.
You can't contribute any more but if kept your old 401k you can rearrange what the investments are in.
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