Bond ETFs?

[pb4uski]

Yes, thanks. I would just add that my orientation is toward very low risk bonds. If I want risk, I have equities. I see no reason to take risk on the "safe" side of my portfolio. So I tend to gloss over credit risk....

Just curious where you draw the line on what is "safe"? I'm more than willing to accept the corporate credit spread in exchange for the credit risk of investment grade corporates. OTOH, some people vew what I do as risky and it is only full "faith and credit" for them.

 

[RockDoctor]

Newbie here, but thought I'd mention something I came across earlier today - building a TIPS ladder. Risk-free in terms of credit, and inflation-protected (if you believe the CPI to be an accurate gauge of inflation). Exempt from state and local income taxes, but both interest and any increase in principal are taxable at the Federal level in the year in which they occur. I have to admit, I haven't given the idea any thought.

 

[FrugalLady]

FrugalLady - Several choices exist for bond ETFs. I will list them below.

1. Stick with an index bond ETF -- Investment Grade Aggregate US Bond ETFs -- BND or AGG for example, and/or Investment Grade International Bond ETFs -- BNDX.


2. Buy some active bond ETFs - like BOND and GTO which still focus on investment grade bonds.

3. Venture into Multi-Sector Bonds where you buy a basket of bond ETFs that focus on different sectors.

4. (not an ETF) but a mutual fund PIMIX [PIMCO Income fund] is available in most brokerage houses for $25,000 minimum investment. It is perhaps the best managed active bond fund since its inception.

Let me know if any of these options interest you and I can share more details.

Pn3069, I am considering AGG or BND for my core bond holding. I do currently hold PIMCO in my Roth, and have enjoyed nice returns this year. I might need to consider this in my IRA.

I have really enjoyed hearing everyone's differing perspectives. You have all provided much food for thought.

 

[43210]

Why ETFs rather than mutual funds for bonds?

 

[pn3069]

Please explain that in terms of total return, fund duration, etc. If you simply mean that the bond fund yield % will increase when the fund value gets whacked by rising rates that's just arithmetic; it certainly cannot make a total return calculation attractive. If you mean that somehow total return vs an individual bond goes up for a fund investor in a rising rate environment I would like to see that calculation. It sounds like a free lunch to me.

Bond funds would be replacing maturing bonds with newer bonds that pay higher coupon rates (in a rising rate environment). So, it is better to be holding a bond fund than individual bonds.

In general, I see no reason to hold individual bonds (unless you are a bond expert).

 

[pn3069]

Why ETFs rather than mutual funds for bonds?

To me, ETFs provide more portability from one brokerage to another and mutual funds might not. Also, you know what you are paying for a share when you buy them.

There are many more pros/cons of ETFs versus mutual funds. So, this is more a preference of the individual investor.

 

[pn3069]

Pn3069, I am considering AGG or BND for my core bond holding. I do currently hold PIMCO in my Roth, and have enjoyed nice returns this year. I might need to consider this in my IRA.

I have really enjoyed hearing everyone's differing perspectives. You have all provided much food for thought.

FrugalLady, I would like to offer Betterment for your consideration which recently introduced Blackrock Bond ETF portfolios which offers a group of multi-sector bond ETFs that get "adjusted" for allocation every 3 months. In other words, it is an active portfolio using index bond ETFs that is adjusted every 3 months based on what Backrock thinks the bond market will likely be.

There are 3 portfolios for Conservative, Moderate and Aggressive Income objectives. All use Blackrock/iShares Bond ETFs.

I am using them.

 

[OldShooter]

Just curious where you draw the line on what is "safe"? I'm more than willing to accept the corporate credit spread in exchange for the credit risk of investment grade corporates. OTOH, some people vew what I do as risky and it is only full "faith and credit" for them.

Oh, I'd have to admit that it is a little fuzzy. I have been thinking about this quite a bit lately because our AA at 50/50 is far more biased to the safety side than it has ever been in the past; see my thread: http://www.early-retirement.org/forums/f44/why-do-we-do-this-89012.html

Specifically we have six figures each, roughly equal in: TIPS/2% of 26 bought about 10 years ago, T-bills bought as recently as last week's auction, and SAMBX floating rate fund bought about four years ago. I consider the TIPS to be insurance against 1970s & early 80s inflation more than considering them as an investment. The other positions are liquid and short term because I don't like, don't trust, this interest rate environment. They are also "dry powder" that I will use opportunistically in the event of a big correction. If the correction doesn't come, that is fine too. We have long since won the game and really don't need to be playing any more anyway.

So that's a long-winded answer. In the future I would consider high grade corporates out maybe 5-10 years if the rate premium was attractive and I wasn't in "dry powder" mode. But my equities are where my main risk is and IMO should be. I see absolutely no reason to take the "safe" money and seek risk, volatility, and yield in stuff like junk or emerging market debt. I am absolutely flabbergasted by Argentina's success with their 100 year bond. I guess that the greater fool theory is alive and well. Or maybe the fools are all public pension managers.