Two types of bond ladders; When to replace a bond fund/ETF

Growing the lower value in a bond fund or ETF at today’s higher rates will get to the same place as holding bonds to maturity in a rolling bond ladder.
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This is a quote from the article and is patently false. Bond funds typically hold an average maturity and duration that is quite different than an individual holding a ladder made of equal rungs of maturity. Most classify themselves as either long, short or intermediate type bond funds or a total bond fund, which represents itself based on the makeup of the market, not an individual portfolio.

Typically, bond issuers try to take advantage of bond market ETF's by issuing at the most advantageous interest rate, like the Austrian negative yield bond which the Vanguard Total World Bond Market then were forced into purchasing. And as the Central Banks pushed the yield more negative longer term negative yielding bonds became a gold mine for countries to issue.

Therefore when a bond ladder gets back to purchase price that can be lower or higher than the bond ETF depending on the investment strategy and reinvestment. If everyone in the bond fund sold but you would you really expect to be holding the ladder of bonds that you would hold otherwise?

Bond ETF's do not exist for investors. They exist for issuers.
 
Running_Man said:
This is a quote from the article and is patently false. Bond funds typically hold an average maturity and duration that is quite different than an individual holding a ladder made of equal rungs of maturity.
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+1. The data is in the past performance stats. Ladders are made up of rungs, and you can compare the stats on individual rungs to a comparable investment in individual bonds and see how that would have worked out once interest rates were ratcheted up this year. To use a more extreme example to make a point, the idea that you make an equal investment in individual bonds or an open ended bond fund, one rung of the ladder, and then the results all come out the same at a future point, whether interest rates go up or drop 50% during that time, is pretty obviously not true. This would only work if the bond fund had a set maturity date.

"Keep in mind that while duration may provide a good estimate of the potential price impact of small and sudden changes in interest rates, it may be less effective for assessing the impact of large changes in rates." - https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/duration

Fidelity on bonds vs. bond funds - "Bonds: If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk.

Bond funds: Market conditions constantly affect the fund’s value, although the diversification inherent in a fund generally reduces the market risk of any one bond issuer. When you redeem shares of a fund, the sale may result in a capital gain or loss." - https://www.fidelity.com/learning-center/investment-products/mutual-funds/bond-vs-bond-funds
 
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Running_Man said:
This is a quote from the article and is patently false. Bond funds typically hold an average maturity and duration that is quite different than an individual holding a ladder made of equal rungs of maturity. Most classify themselves as either long, short or intermediate type bond funds or a total bond fund, which represents itself based on the makeup of the market, not an individual portfolio.

Typically, bond issuers try to take advantage of bond market ETF's by issuing at the most advantageous interest rate, like the Austrian negative yield bond which the Vanguard Total World Bond Market then were forced into purchasing. And as the Central Banks pushed the yield more negative longer term negative yielding bonds became a gold mine for countries to issue.

Therefore when a bond ladder gets back to purchase price that can be lower or higher than the bond ETF depending on the investment strategy and reinvestment. If everyone in the bond fund sold but you would you really expect to be holding the ladder of bonds that you would hold otherwise?

Bond ETF's do not exist for investors. They exist for issuers.
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Seems that you headed a different direction than the article with your example of foreign countries issuing bonds. That does not seem relevant to this article IMO.

VW
 
VanWinkle said:
Seems that you headed a different direction than the article with your example of foreign countries issuing bonds. That does not seem relevant to this article IMO.

VW
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What he stated is actually correct.

"Bond ETF's do not exist for investors. They exist for issuers."

Bond issuers took advantage of inflows into passive funds to issue debt at record low yields because they could. No rational bond investor would buy those bonds with record low coupons or negative yields. But bond funds do and this is why they are stuck holding a portfolio of low coupon debt with no ability to raise their distributions. So when these simpletons write these silly articles with cartoons of ladders they ignore the reality that bond ETF portfolios are burdened with too much low coupon debt. No rational investor would try to replicate the garbage that a bond fund currently holds in a ladder. Those that ladder bonds are always shifting durations to optimize to the yield curve. Go look at what all those people are doing with CD purchases in the CD and money market thread. Nobody is locking in CDs now beyond 5 years and right now with yields falling back, most people are focused on 2-3 year durations. This is normal behavior.
 
Freedom56 said:
What he stated is actually correct.

"Bond ETF's do not exist for investors. They exist for issuers."

Bond issuers took advantage of inflows into passive funds to issue debt at record low yields because they could. No rational bond investor would buy those bonds with record low coupons or negative yields. But bond funds do and this is why they are stuck holding a portfolio of low coupon debt with no ability to raise their distributions. So when these simpletons write these silly articles with cartoons of ladders they ignore the reality that bond ETF portfolios are burdened with too much low coupon debt. No rational investor would try to replicate the garbage that a bond fund currently holds in a ladder. Those that ladder bonds are always shifting durations to optimize to the yield curve. Go look at what all those people are doing with CD purchases in the CD and money market thread. Nobody is locking in CDs now beyond 5 years and right now with yields falling back, most people are focused on 2-3 year durations. This is normal behavior.
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The other option ignored in the article is that people are free to switch from bond funds to bonds and, if rates decline enough, back to bond funds. There is no benefit to sticking with a bond fund when investors can get higher yields with less risk in individual bonds when rates are rising. It isn't like a bad marriage where one may need to stick it out due to the kids or finances. Investors can switch back and forth as much as they want and the bond funds will always welcome them back with open arms.

Many of us here had bond funds up until The Fed indicated they were going to raise rates this year. Those who sold their bonds funds after peak prices when interest rates bottomed out and then switched to bonds when rates started rising have had a pretty decent year and avoided large losses.

For those still skeptical, just type BND into Google and check out the NAVs since inception on the price graph. The prices are volatile, and depending when an investor bought, they might get more or less than their original investment back based upon the specific date they sell. Sometimes just buying or selling one month in either direction can make a big difference in NAV price, while with bonds held to maturity and bought at par or under they would get back their original investment. Bonds held to maturity have no market risk and bond funds can be quite volatile. That isn't an opinion it is simply a fact of how they both work.

"Of course, market risk is not an issue for investors who hold bonds to maturity because the face value, not the market value, of the bond is received at maturity." - From the St. Louis Fed web site, Investment Improvement: Adding Duration to the Toolbox | St. Louis Fed (stlouisfed.org)
 
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I always held bond funds, I never even thought of owning a bond, after all if you hold the fund for it's duration and reinvest all the dividends you don't lose any money. Well that is BS.

It was not until I started to read the bond threads here and the very wise posts by several investors, who obviously had a different opinion than that and I saw the huge losses in the bond funds I held, even in the short term funds, that I realized in a rising rate environment bond funds are weapons of wealth destruction.

I find it hard to believe after this year and how poorly bond funds have performed, often as bad as equity funds and I'm not even talking about long term bond funds, that people still don't get it especially when these wise bond investors have been warning us all year. Those bond funds are filled with expensive bonds that have very low yields, then the managers sell them at a loss to buy bonds with higher yields, it's a losing proposition.

If you buy bond funds at the peak of interest rates and they are intermediate or long term bond funds, you can make a lot on the rising nav as interest rates drop. Let me know when that is about to happen and I'll buy some of those.
 
Graybeard said:
I always held bond funds, I never even thought of owning a bond, after all if you hold the fund for it's duration and reinvest all the dividends you don't lose any money. Well that is BS.

It was not until I started to read the bond threads here and the very wise posts by several investors, who obviously had a different opinion than that and I saw the huge losses in the bond funds I held, even in the short term funds, that I realized in a rising rate environment bond funds are weapons of wealth destruction.

I find it hard to believe after this year and how poorly bond funds have performed, often as bad as equity funds and I'm not even talking about long term bond funds, that people still don't get it especially when these wise bond investors have been warning us all year. Those bond funds are filled with expensive bonds that have very low yields, then the managers sell them at a loss to buy bonds with higher yields, it's a losing proposition.

If you buy bond funds at the peak of interest rates and they are intermediate or long term bond funds, you can make a lot on the rising nav as interest rates drop. Let me know when that is about to happen and I'll buy some of those.
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Unfortunately, those of us who have been warning about the dangers of passive bond funds for several years now on this forum have been drowned out. People have a right to believe their irrational Boglehead theories just like people had a right to invest in companies featuring sock puppets during the dotcom bubble. This is what makes a market. Right now with an inverted yield curve, short duration bonds funds are incurring capital losses that are not only preventing them from increasing distributions but not allowing them to even payout anything close to their stated average coupon. This is why money market funds still yield more than short term bond funds. We are nearing the end of the year and Fed funds rates have moved up from zero to 4% so far. CD, treasury, money market, and corporate bond yields have moved up accordingly. But notice that distributions from short, medium, and long duration funds have barely budged. Nevermind that the distributions are nowhere close to the funds stated SEC yield, but they aren't even close to the funds average coupon as they are incurring capital losses as the year progresses and they are stuck with a portfolio of low coupon debt. Medium to long term bond funds have been hit hard and a lot of bond fund cheerleaders on Wall Street are jumping into them for a bounce. Right now 10 and 30 year treasury yields are below 4%. But the future is even more grim for those funds. As the yield curve normalizes, long term yields will move higher than short term rates and those funds will drop precipitously if and when 10 and 30 year treasury yields approach 5%-6%.

Treasuries, CDs, Agency Notes, and corporate bonds are for generating income and are conservative investments. When their yields drops to near zero, they no longer become investable. But passive bonds funds ignored that reality and the rest is history.
 
I think I missed the boat to sell my Vanguard Intermediate-Term Treasury Index mutual funds last January. Then Feb, March, etc. :-(

Before each rate hike, I think "I should probably do something". But, I don't.

My investment horizon is plenty long, so I'll just stick with it. Whatever I did do would probably not be the right thing. I'll just stand here.
 
I’m still holding my bond funds and will likely be buying more in Jan when I rebalance. I don’t care about holding to maturity or distribution yield as I don’t invest for an income stream and I pretty much hold bond funds indefinitely.

I think someone already posted a link to that article in one of the other bond threads.
 
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I missed that reference.
Moderators : If you could either end this thread or merge it. Thank you.
 
mrfeh said:
If your horizon matches your holdings, doing nothing is absolutely the right thing to do.
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Check out the price history graph in Google Finance by typing in BND or TLT and click the MAX option to see the prices since fund inception.
 
daylatedollarshort said:
The other option ignored in the article is that people are free to switch from bond funds to bonds and, if rates decline enough, back to bond funds. There is no benefit to sticking with a bond fund when investors can get higher yields with less risk in individual bonds when rates are rising. It isn't like a bad marriage where one may need to stick it out due to the kids or finances. Investors can switch back and forth as much as they want and the bond funds will always welcome them back with open arms.

Many of us here had bond funds up until The Fed indicated they were going to raise rates this year. Those who sold their bonds funds after peak prices when interest rates bottomed out and then switched to bonds when rates started rising have had a pretty decent year and avoided large losses.

For those still skeptical, just type BND into Google and check out the NAVs since inception on the price graph. The prices are volatile, and depending when an investor bought, they might get more or less than their original investment back based upon the specific date they sell. Sometimes just buying or selling one month in either direction can make a big difference in NAV price, while with bonds held to maturity and bought at par or under they would get back their original investment. Bonds held to maturity have no market risk and bond funds can be quite volatile. That isn't an opinion it is simply a fact of how they both work.

"Of course, market risk is not an issue for investors who hold bonds to maturity because the face value, not the market value, of the bond is received at maturity." - From the St. Louis Fed web site, Investment Improvement: Adding Duration to the Toolbox | St. Louis Fed (stlouisfed.org)
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I have to admit during the accumulation phase I ran with a set AA and annual rebalance with my fixed allocation in funds. It served me well up until retirement, which started at the beginning of 2022. At the beginning of 2022, I thought I would hold 10 yrs worth spend in bond funds (de facto bond ladder bucket) as my bond fund performance of the past acted reasonably as a ballast. Well, thanks to many of you and after revisiting my revised investment strategy once retired, I determined individual bonds were a much better vehicle (at least for me) in implementing my plan. The benefits for me (and I would assume others)...

- I know I have 10 years worth of planned spend ready to be available as needed.
- I know what my yield will be, at least for the maturity I signed up for.
- By using effectively a 10 year bond ladder bucket, I can ride out a long bear market and give my equities plenty of time to recover.
- Historically speaking, equities recover in shorter periods allowing me to replenish my bond ladder.
- Having conservatively underwritten only 5% annual growth in my overall portfolio (current AA around 67/33) and 2.5% - 3% WR, I frankly view fixed yields over 3% in my fixed allocation as a win.

However, the bolded/underlined comment above does have me wondering if that is a reasonable strategy if/when bond yields truly have a downward trajectory? Of course, I could make the decision to buildout my bond ladder with 5+ year maturities at any time between now and next 3 years (currently all my bonds mature within 3 years).

Maybe I am missing something, but as a former bond fund guy, I find individual bonds more effective in my particular strategy.
 
mrfeh said:
One holds total bond for dividends; the NAV is irrelevant.
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If you don't care if you might lose half your original investment / principal or more with bond funds, then carry on. You've picked the right investment style for your needs.
 
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daylatedollarshort said:
My point is the same one I've explained in detail higher up in the thread.
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Ok, so from this quote I am guessing we should all be timing the interest rates between individual bonds and bond funds? Is this your point?

"The other option ignored in the article is that people are free to switch from bond funds to bonds and, if rates decline enough, back to bond funds. There is no benefit to sticking with a bond fund when investors can get higher yields with less risk in individual bonds when rates are rising. It isn't like a bad marriage where one may need to stick it out due to the kids or finances. Investors can switch back and forth as much as they want and the bond funds will always welcome them back with open arms."
 
DawgMan said:
However, the bolded/underlined comment above does have me wondering if that is a reasonable strategy if/when bond yields truly have a downward trajectory?
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This Kiplinger's article says it is - Bonds Are Having a Rough Year. Here Are 3 Actions That Can Help | Kiplinger

The people that say they are going to stick with their funds because that is what has worked for them for the last few decades, are overlooking the fact that for the last few decades interest rates were declining worldwide up until recently, and in that kind of environment bond funds have an edge because they are holding older bonds with higher yields than one can buy a current prices. But now that trend is reversing. This is explained in this Forbes article - https://www.early-retirement.org/forums/f28/bond-vs-bond-fund-114703-9.html#post2816309
 
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