Bond Ladder ETF's

[RockyMtn]

Read this interesting article on Bond Ladder ETF's in WSJ. Interesting concept which I plan to research a bit more. Really like the idea of muni ladder ETF's.

Voices: Matthew Forester, on Bond Ladder ETFs - WSJ.com

Any of you using these ETF's at this point? If so what are your thoughts?

 

[haha]

I didn't know about these ETFs. If the expenses are good, and the trading spreads small, this might be a good vehicle. One might have to be careful that the brokerage which is putting them together doesn't stuff them with hard to sell goods at a high markup.

Thanks for posting this.

Ha

 

[pb4uski]

I've been transitioning a portion of my fixed income allocation to the Guggenheim Bulletshares recently. I see them as a nice middle ground between building a portfolio of individual bonds and bond mutual funds albeit at a .14% cost (.24% ER less .10% ER for my alternative). I'm viewing them as an alternative to 5 year CDs that have more credit and liquidity risk than CDs but also more yield to maturity than CDs and more convenience.

 

[RockyMtn]

I didn't know about these ETFs. If the expenses are good, and the trading spreads small, this might be a good vehicle. One might have to be careful that the brokerage which is putting them together doesn't stuff them with hard to sell goods at a high markup.

Thanks for posting this.

Ha

Expense ratios seem to be .24 to .40. Guggenheim and Ishares seem to be the primary entities. Guggenheim Bulletshares trade commission free on Schwab.

 

[nun]

i looked at these recently. Am I right in thinking these wouldn't be of any value in the accumulation phase and building a ladder with then is only useful when you intend to sell your bonds at regular intervals.

 

[haha]

i looked at these recently. Am I right in thinking these wouldn't be of any value in the accumulation phase and building a ladder with then is only useful when you intend to sell your bonds at regular intervals.

It wouldn't appear that way to me. There will be more brokerage expense, or buy/sell differential with these than with a standard mutual fund or ETF, since you will have to be buying a new year regularly.

These look pretty good to me, though if rates were more normal I think I would just go with treasury bonds and notes to make the ladder. As it is, I think I will use some of these to make a 3-4 year ladder.

Ha

 

[nun]

It wouldn't appear that way to me. There will be more brokerage expense, or buy/sell differential with these than with a standard mutual fund or ETF, since you will have to be buying a new year regularly.

These look pretty good to me, though if rates were more normal I think I would just go with treasury bonds and notes to make the ladder. As it is, I think I will use some of these to make a 3-4 year ladder.

Ha

What advantage does the ladder have over just owning a bond fund if you don't intend to sell? If you are in the accumulation phase or just taking the interest income a bond fund seems to be the way to go. If you want to sell the bond then I can see the ladder being better as you can wait until it matures and be assured you get your principal back.

 

[rbmrtn]

They have been mentioned in a few threads here. An article from zacks investments has info Target Date Bond ETFs: Best or Worst Fixed Income Funds? - January 15, 2013 - Zacks.com

Another doc from guggenheim on how they work http://guggenheiminvestments.com/Gu...th_Look_at_Defined-Maturity_ETFs.pdf?ext=.pdf

One thing I haven't figure out is how the termination value works in the case where you buy when the NAV as gone up and then rates go up causing a decline in NAV. How do you get your money back. I think you have to look at each funds yield to maturity to see that.

 

[haha]

One thing I haven't figure out is how the termination value works in the case where you buy when the NAV as gone up and then rates go up causing a decline in NAV. How do you get your money back. I think you have to look at each funds yield to maturity to see that.

Guggenheim's documents point out that you won't necessarily get your money back. But the same is true when you buy a seasoned bond at other than its face value.

They have been mentioned in a few threads here. An article from zacks investments has info Target Date Bond ETFs: Best or Worst Fixed Income Funds? - January 15, 2013 - Zacks.com

This is a very helpful article. It answers something I was wondering-aren't these things basically dead in the water in their terminal year, since during this year they will eventually be holding only cash?

Also, where do you find exactly what date a particular issue pays out- for example, when does the 2014 target fund, BSCE, pay out?

Ha

 

[haha]

What advantage does the ladder have over just owning a bond fund if you don't intend to sell? If you are in the accumulation phase or just taking the interest income a bond fund seems to be the way to go. If you want to sell the bond then I can see the ladder being better as you can wait until it matures and be assured you get your principal back.

It seems like it should have whatever advantages are perceived for individual bonds in this same, non-liquidating situation.

Ha

 

[bmcgonig]

Guggenheim's documents point out that you won't necessarily get your money back. But the same is true when you buy a seasoned bond at other than its face value.

This is a very helpful article. It answers something I was wondering-aren't these things basically dead in the water in their terminal year, since during this year they will eventually be holding only cash?

Also, where do you find exactly what date a particular issue pays out- for example, when does the 2014 target fund, BSCE, pay out?

Ha

I don't understand how the termination value is calculated. The Guggenheim PDF states that it could be more or less than what u invested depending on interest rates. However the zacks article states:

Investors have the option to either a) hold the ETFs until maturity, in which case the principal amount invested will be returned on the date of maturity plus regular coupon payments or, b) liquidate their positions before the maturity date if the need for cash arises, in which case they will be subject to receive payments equal to the current market price of the shares (which is subject to interest rate risk) times the number of shares bought plus any coupon due.

Can anyone shed light on how these work?

Thanks

 

[haha]

I don't understand how the termination value is calculated. The Guggenheim PDF states that it could be more or less than what u invested depending on interest rates. However the zacks article states:

Investors have the option to either a) hold the ETFs until maturity, in which case the principal amount invested will be returned on the date of maturity plus regular coupon payments or ...

Can anyone shed light on how these work?

Thanks

I am a nuts and bolts guy, and I don't have this clear yet either. But, when the Zacks article says "in which (maturity) case the principal amount invested will be returned on the date of maturity", I believe this is not the same as the amount you paid for the ETF shares, but rather the amount that the ETF invested in the underlying bonds themselves.

Ha

 

[pb4uski]

I don't understand how the termination value is calculated. The Guggenheim PDF states that it could be more or less than what u invested depending on interest rates. However the zacks article states:

Investors have the option to either a) hold the ETFs until maturity, in which case the principal amount invested will be returned on the date of maturity plus regular coupon payments or, b) liquidate their positions before the maturity date if the need for cash arises, in which case they will be subject to receive payments equal to the current market price of the shares (which is subject to interest rate risk) times the number of shares bought plus any coupon due.

Can anyone shed light on how these work?

Thanks

I look at it as a simple percentage ownership interest in a portfolio of bonds with the portfolio manager skimming off .24% for their fee. If I own x% of the pool, then I will receive x% of the interest coupon payments and x% of the par at maturity and x% of any credit losses. I realize that it is a bit more complex than what I describe, but at the end of the day what I describe is the essence of it.

What I don't understand is the concern on them hoarding cash in the terminal year. I would think that they would just make distributions of par as the bonds mature so during the target year you would get outsixe distributions each month that would be a combination of interest and maturity cash flow.

In any event, it that is an issue, I can always just sell.

 

[haha]

I would think that they would just make distributions of par as the bonds mature so during the target year you would get outsixe distributions each month that would be a combination of interest and maturity cash flow.

Do you find that explicitly stated in the company documents?

Ha

 

[nun]

It seems like it should have whatever advantages are perceived for individual bonds in this same, non-liquidating situation.

Ha

I can see the advantage of the bond ETF ladder in a rising rate world where you have a set date to sell, but if you are in the accumulation phase of just spending the coupon I'd go with a regular bond fund.

 

[pb4uski]

Do you find that explicitly stated in the company documents?

Ha

No. I fact looking at the distributions of the 2011 and 2012 target date funds, it looks like they "hoarded" the maturity proceeds and then paid them out at the end of they year because you can see the distributions decaying over the course of the final year from what they were a year earlier and then a big return of capital at the end of the year.

I just wonder why they do that rather than just distribute the maturity proceeds over the course of the final year. Perhaps they don't want to see the decline in the ETF value as the partial distributions are made.

 

[haha]

No. I fact looking at the distributions of the 2011 and 2012 target date funds, it looks like they "hoarded" the maturity proceeds and then paid them out at the end of they year because you can see the distributions decaying over the course of the final year from what they were a year earlier and then a big return of capital at the end of the year.

I just wonder why they do that rather than just distribute the maturity proceeds over the course of the final year. Perhaps they don't want to see the decline in the ETF value as the partial distributions are made.

Thanks. Also, money paid out is no longer money that they get to charge management fees on. Overall, these things look useful to me.

Ha

 

[FIREd]

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.

 

[Khufu]

What advantage does the ladder have over just owning a bond fund if you don't intend to sell? If you are in the accumulation phase or just taking the interest income a bond fund seems to be the way to go. If you want to sell the bond then I can see the ladder being better as you can wait until it matures and be assured you get your principal back.

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.

 

[haha]

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.

Do you suppose that it might be a function of the calendar and the exact payment dates of the underlying bonds?

Ha

 

[FIREd]

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.

 

[nun]

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.

 

[pb4uski]

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.

 

[nun]

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.

 

[haha]

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