Bond Ladder ETF's

[pb4uski]

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.

 

[Stevewc]

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

 

[haha]

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

 

[Stevewc]

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

 

[pb4uski]

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.

 

[rbmrtn]

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.

 

[pb4uski]

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.

 

[rbmrtn]

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.

 

[pb4uski]

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.

 

[rbmrtn]

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.

 

[haha]

One more product that is about as transparent as a brick wall.

Ha

 

[FIREd]

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.

 

[haha]

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

 

[pb4uski]

....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.

 

[haha]

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

 

[kaneohe]

What is the proper way to compare the yields of these with CDs? The websites list
SEC 30day yield, AVG YTM, Distribution rate, 12mo. Yield. Guggenheim even has an estimated net acquisition yield calculator where you input price and get the yield.
For some reason I don't understand that number came out closer to distribution rate than any of the other yields and they subtracted the ER to get that result. I would have thought that they subtracted the ER before quoting the yields.

 

[pb4uski]

Both Guggenheim and Ishare products calculate your net acquisition yield (your expected return) as portfolio yield - ER +/- yield adjustment for price/NAV difference. Guggenheim uses yield to worst and Ishares uses yield to maturity.

The yields that are quoted are the yield of the underlying bond portfolio.

 

[kaneohe]

Both Guggenheim and Ishare products calculate your net acquisition yield (your expected return) as portfolio yield - ER +/- yield adjustment for price/NAV difference. Guggenheim uses yield to worst and Ishares uses yield to maturity.

The yields that are quoted are the yield of the underlying bond portfolio.

pb4ski, thanks for the info..........didn't realize that the YTM, worst was a
"gross" yield...........mostly have had individual bonds so no ER......kind of
like equity funds quoting returns before ER..........I don't think they do that,
or do they?

Could you pls show me how to get the ishares net acquisition yield calculator.
Saw it for guggenheim but not for ishares.

 

[pb4uski]

pb4ski, thanks for the info..........didn't realize that the YTM, worst was a
"gross" yield...........mostly have had individual bonds so no ER......kind of
like equity funds quoting returns before ER..........I don't think they do that,
or do they?

Could you pls show me how to get the ishares net acquisition yield calculator.
Saw it for guggenheim but not for ishares.

Lower left corner of this link.

IIRC SEC yields (for bond funds) and equity returns are both calculated after expenses, but most bond funds disclose the YTM of the underlying portfolio.

 

[kaneohe]

Lower left corner of this link.

IIRC SEC yields (for bond funds) and equity returns are both calculated after expenses, but most bond funds disclose the YTM of the underlying portfolio.

hah........hiding in plain sight! I would have had a chance to see that on a
piece of paper but on a computer screen that you have to scroll down all the way...never in a million yrs. Thanks for the education.