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bond unit investment trusts (UITs)
Old 03-11-2009, 02:58 PM   #1
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bond unit investment trusts (UITs)

It has been suggested to me by several people that bond funds have a weakness in that they can lose principle, among other things. If interest rates rise later (and I don't see how that won't happen--eventually), I will lose principle.

Purchasing individual bonds has been recommended, but I am not very comfortable with that right now.

What about bond UITs? The bonds in them are diversified and all mature at the same time, if I understand correctly. There is usually no trading--no turnover--in a UIT.n Unless a company disappears, but even then the successor may have to honor the bondholders.

So, how does one evaluate bond UITs? Where can you look up the average bond ratings, the companies in the portfolio, etc.? I have not found such a resource on the web yet but perhaps I am not asking Google the right questions.

I suppose I can call Vanguard's trading desk and ask them, but that will have to wait until I am back in the country.

Please educate me. I am sure we have income-oriented people here who have some knowledge of this critter.

Thanks,

Ed

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Old 03-12-2009, 06:02 PM   #2
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I just learned that Vanguard does not trade bond UITs. Hmmm. I wonder why?

A flyer from the Investment Company Institute on Unit Investment Trusts says that the buyer will pay a front-end sales charge and often a deferred sales charge and the UIT will pay an annual fee to the trust sponsor.

This is not sounding very good.

Anybody have any comments?
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Old 03-13-2009, 09:15 AM   #3
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Quote:
Originally Posted by Ed_The_Gypsy View Post
I just learned that Vanguard does not trade bond UITs. Hmmm. I wonder why?

A flyer from the Investment Company Institute on Unit Investment Trusts says that the buyer will pay a front-end sales charge and often a deferred sales charge and the UIT will pay an annual fee to the trust sponsor.

This is not sounding very good.

Anybody have any comments?
Stay away. Most UIT's are expensive, even more than mutual funds. There are a few big companies out there. The idea is to have analysts pick the best basket of bonds given a set of variables. The portfolio is unmanaged after that point unless a bond issue is called early then they replace it with another bond issue. The costs eat up a lot of the return .

Even a bond fund is better than a UIT. I personally use bond ladders............
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Old 03-13-2009, 09:40 AM   #4
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Thanks, FinanceDude.

It was beginning to look like not such a good idea. Upon inspection, there were more and more costs.

I will look more closely at individual bonds.

Do you have any warnings or suggestions?

For example, how many bonds should be on one rung of the ladder? Is one enough, or are four better? Ten?

How low is it reasonable to go on the rating? I read that the the default rate may triple this year. I suppose that would go from the oft-quoted default rate of 4% to about 12%. Wow!

Vanguard told me that they just use Bloomberg for their information. They won't give 'advice'. Where would you suggest I look for an education in buying--and holding--bonds? I am tackling it on my own, but it is always good to learn from those who are doing it already.

Thanks again.
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Old 03-13-2009, 10:03 AM   #5
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Quote:
Originally Posted by Ed_The_Gypsy View Post
Thanks, FinanceDude.

It was beginning to look like not such a good idea. Upon inspection, there were more and more costs.

I will look more closely at individual bonds.

Do you have any warnings or suggestions?

For example, how many bonds should be on one rung of the ladder? Is one enough, or are four better? Ten?

How low is it reasonable to go on the rating? I read that the the default rate may triple this year. I suppose that would go from the oft-quoted default rate of 4% to about 12%. Wow!

Vanguard told me that they just use Bloomberg for their information. They won't give 'advice'. Where would you suggest I look for an education in buying--and holding--bonds? I am tackling it on my own, but it is always good to learn from those who are doing it already.

Thanks again.
Bonds can be a little tricky. Are we talking municipal bonds or corporate bonds??
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Old 03-13-2009, 10:03 AM   #6
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Quote:
Originally Posted by Ed_The_Gypsy View Post
It has been suggested to me by several people that bond funds have a weakness in that they can lose principle, among other things. If interest rates rise later (and I don't see how that won't happen--eventually), I will lose principle.

Purchasing individual bonds has been recommended, but I am not very comfortable with that right now.

What about bond UITs? The bonds in them are diversified and all mature at the same time, if I understand correctly. There is usually no trading--no turnover--in a UIT.n Unless a company disappears, but even then the successor may have to honor the bondholders.

So, how does one evaluate bond UITs? Where can you look up the average bond ratings, the companies in the portfolio, etc.? I have not found such a resource on the web yet but perhaps I am not asking Google the right questions.

I suppose I can call Vanguard's trading desk and ask them, but that will have to wait until I am back in the country.

Please educate me. I am sure we have income-oriented people here who have some knowledge of this critter.
I can't educate about UITs because I was never interested enough to look into them carefully. So I would just be passing my poorly informed prejudices along to you. I do remember than after my Dad died 10 years or so ago, I made an appointment to see his broker just to tell him how abusively he had treated his client, and how I was thinking of endowing a special spot in hell for this broker. Much of that was based on my feeling about UITs, which littered Dad's portfolio. My parents' long pension-free retirement was made possible by one piece of advice, and it didn't come from a broker. During the early days of Paul Volcker my brother recommended treasury zeros to Dad. I think it was the only time he had ever listened to anything from any of us children, and possibly the only time he had ever listened to anything that made sense.

He started a zero buying program that really became Old Faithful. Those staggered maturities gushed cash for many years.

Anyway, the purpose of this trip down memory lane is to illustrate that one should keep his eye on the goal, and take into account the surrounding circumstances.

What is your goal with this bond idea? I think bonds are a really simple propostion. If what you want is money there when you need it, under today's conditions find some good insured CDs and make a ladder than fits your needs.

If want you want is to speculate on the credit crunch getting better, don't! But if you really really want to, find a managed mutual fund with a long history of good returns in corporate bonds. There have been bond gurus on this board at times. How successful they were I don't know.

Some on this board strongly recommended long term treasuries last fall up to around New Years. Gutsy call, based on the recent past and I guess of the recommendations of some deflation mongering gurus like Gary Shilling.

Shilling has been on the right side of the bond call for at least 20 years. But not right now, as treasuries have lost over a year's interest in the last few months.

I think it is simple. Unless treasury interest rates are very high, don't buy longer term nominal bonds. Buy TIPS if the real rate appeals to you. Don't stress about mutual fund vs. outright bond ownership. If this is to be a stable portfolio allocation, it really doesn't matter for reasons that will become clear as you think about it.

If what you want is a temporary parking spot for cash, fish only in the pool of CDs and 3-60 month treasuries. And if you think you might need the money quickly, use a savings account.

Ignore everything else. It will only get you in trouble.

Ha
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Old 03-13-2009, 10:51 AM   #7
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Quote:
Originally Posted by haha View Post
I can't educate about UITs because I was never interested enough to look into them carefully. So I would just be passing my poorly informed prejudices along to you. I do remember than after my Dad died 10 years or so ago, I made an appointment to see his broker just to tell him how abusively he had treated his client, and how I was thinking of endowing a special spot in hell for this broker. Much of that was based on my feeling about UITs, which littered Dad's portfolio. My parents' long pension-free retirement was made possible by one piece of advice, and it didn't come from a broker. During the early days of Paul Volcker my brother recommended treasury zeros to Dad. I think it was the only time he had ever listened to anything from any of us children, and possibly the only time he had ever listened to anything that made sense.

He started a zero buying program that really became Old Faithful. Those staggered maturities gushed cash for many years.

Anyway, the purpose of this trip down memory lane is to illustrate that one should keep his eye on the goal, and take into account the surrounding circumstances.

What is your goal with this bond idea? I think bonds are a really simple propostion. If what you want is money there when you need it, under today's conditions find some good insured CDs and make a ladder than fits your needs.

If want you want is to speculate on the credit crunch getting better, don't! But if you really really want to, find a managed mutual fund with a long history of good returns in corporate bonds. There have been bond gurus on this board at times. How successful they were I don't know.

Some on this board strongly recommended long term treasuries last fall up to around New Years. Gutsy call, based on the recent past and I guess of the recommendations of some deflation mongering gurus like Gary Shilling.

Shilling has been on the right side of the bond call for at least 20 years. But not right now, as treasuries have lost over a year's interest in the last few months.

I think it is simple. Unless treasury interest rates are very high, don't buy longer term nominal bonds. Buy TIPS if the real rate appeals to you. Don't stress about mutual fund vs. outright bond ownership. If this is to be a stable portfolio allocation, it really doesn't matter for reasons that will become clear as you think about it.

If what you want is a temporary parking spot for cash, fish only in the pool of CDs and 3-60 month treasuries. And if you think you might need the money quickly, use a savings account.

Ignore everything else. It will only get you in trouble.

Ha
Or, listen to Bill Gross. He seems to know what he's doing........

The corporate bond market is a dicey place these days. I have been sticking to high quality munis. CD rates are pretty low these days. Corporate bonds today ar riskier than in recent history......
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Old 03-13-2009, 01:36 PM   #8
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Clarifications:

All my assets are in my IRAs. Nothing outside of a tax-protected account at this time. Therefore, only interested in corporate or government bonds, not munis.

Not interested in speculation--no trading. Just buy-and-hold to maturity.

This would be a stable part of my asset allocation.

At this time, I have a couple of bond funds and a TIPS fund:
Vanguard Intermediate-Term Investment-Grade Fund Investor Shares: VFICX
SPDR SER TR LEHMAN INTL TRES BD ETF (BWX)
Vanguard Inflation-Protected Securities Fund Investor Shares: VIPSX

I was thinking about two different things:
1) Replacing the bond funds with individual bonds to avoid loss of capital if/when interest rates go up--perhaps way up.
2) Instead of a 5-year CD ladder, use a bond ladder. The advice seems to be, not worth the trouble.

Quote:
Don't stress about mutual fund vs. outright bond ownership. If this is to be a stable portfolio allocation, it really doesn't matter for reasons that will become clear as you think about it.
Quote:
...CDs and 3-60 month treasuries.... Ignore everything else. It will only get you in trouble.
I hear you.

With respect to the ladder, I am now thinking either stick with the CD ladder or maybe use a ladder of TIPS. How does that sound?

BTW, thanks.
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Old 03-13-2009, 02:02 PM   #9
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Quote:
Originally Posted by Ed_The_Gypsy View Post
With respect to the ladder, I am now thinking either stick with the CD ladder or maybe use a ladder of TIPS. How does that sound?
BTW, thanks.
David Swenson has a short interview in a Yale Alumni magazine that a friend showed me. He favors an unvarying asset allocation and strict re-balancing. He uses 30% fixed income, half of that in TIPS or TIPS funds, and half in treasuries.

If it were me, I would use the VIPSX for the TIPS portion. The reason is that TIPS are resistant to the main factor that causes big bond losses- inflation. TIPS respond to real interest rates, and to market dynamics and market psychology. If real interest rates should increase and TIPS prices suffer, your dividends and any additions to the fund will go in at better prices, even though your corpus will depreciate somewhat. I think that the effective duration of VIPSX is pretty short.

So if you are planning on allocating $200,000 or less to the TIPS segment, I would just go with VIPSX. More than $200,000 it might be worthwhile to buy the individual bonds.

As regards the straight bond portion, I would make a simple judgment- which pays best at the time I want to invest? A treasury ladder or a CD ladder? Keep 'em pretty short, and take your highest net yield.

You want your mind free to find a new job, not cluttered up with stuff that is unlikely to make any difference.

Ha
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Old 03-13-2009, 02:48 PM   #10
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I have researched some equity UIT's. The kind that roll over or mature every 15 months. The fees work out to about 3% per year. You get a small discount if you roll them over. No idea what advantages if any they have over standard mutual funds.
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Old 03-13-2009, 07:58 PM   #11
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I have researched some equity UIT's. The kind that roll over or mature every 15 months. The fees work out to about 3% per year. You get a small discount if you roll them over. No idea what advantages if any they have over standard mutual funds.
I have a couple of these, based on recommendations by my really nice guy FA who got me into other excellent (for him) investments, such as a private REIT, VLU, front end load funds, and don't bother to invest in bonds, they don't earn anything. One UIT made some money in the good times, the other one lost money. Both large cap funds. Both of course lost money recently. But at least I didn't have any of those damned bonds!

I'm harvesting the various investments from him and adding the pitiful remains to my Vanguard self managed money, at least when I can. Can't get my money out of the REIT or VLU right now, or the UITs either, although they'll be coming due soon.

If you want a UIT, just buy a bunch of stocks yourself and sell them at a pre-determined time. You'll save a ton in fees.
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Old 03-13-2009, 10:21 PM   #12
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You want your mind free to find a new job, not cluttered up with stuff that is unlikely to make any difference.
Good point.

Thanks, guys. It looks like UITs are better for the broker than for me.

Cheers!
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Old 03-24-2009, 04:50 PM   #13
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Unless you have a big wad of money to invest, it is hard to obtain
adequate diversification by buying individual bonds. The experience
of the past year has shown the wisdom of diversification.

Personally, even though I bought some inflation indexed bonds a few
years ago, I think it is best to stick with bond funds. You will sleep
better, believe me.

Cheers,

charlie
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Old 03-25-2009, 08:58 AM   #14
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Thanks, charlie.
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