Bond ETFs

anyone into bond etfs? or you buy direct bonds?
I wonder if now is a good time to diversify the portfolio and increase the bond portion.

The bond market just seriously crashed, which would make an ETF a bad idea (or good if you want to get in at the “bottom” … or is it the bottom?). However, if we are talking about yield, CDs or individual bonds might be a very good idea indeed. I am seriously considering putting a portion of my portfolio into Canadian CDs “GICs” or solid bonds. They are producing yield of over 5%, for 1-5 year GICs, and they are completely insured.

So the question right now is how much to put into them and not completely miss out on possible gains over the next few years? We may need some of our money in the next decade, but it would mostly be for over 65, which is a few years yet. It definitely has got me thinking lately.

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Noel is correct, but he only touched on the concept. If you’re looking to make a big bet on the future direction of interest rates, then TLT / TBT are waiting. But understand that these things are not bonds and do not expire in 20-30 years. Thus, it might not be what you think it is, in terms of trying to diversify into bonds.

If you want to own government bonds, buy government bonds directly. You will receive the yield-to-maturity that is on the quote, with zero chance of credit loss. If you buy a 10-year at c,4.7% today, that’s what you’ll receive over the next ten years – 4.7% of your investment paid annually as interest.

Corporate bonds are another class altogether. Never, ever, ever, ever invest in corporate bond ETFs.

If you want to take a punt on individual corporate bonds, I don’t recommend it because the spread over US treasuries doesn’t adequately compensate for the risk, but then again I won’t stand in your way. Just don’t buy the fucking corporate bond ETFs while thinking it’s the same thing as a corporate bond. That’s a scam.

Hope this helps.


Why is that?

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It’s a bit of a long story but let’s start with why bond ETFs are not the same thing as bonds.

The numbers below are estimates from my hazy memory, so they are not exact figures but they are approximately accurate.

If you purchased a 30 year Treasury Bond three years ago at par value with a c.1% yield, you have received 1% interest for three years and will continue to receive 1% interest for the next 27 years, at which point the bond will mature and you will get your principal back. Although the 30 year bond yield has since risen to nearly 5%, and your bond’s market price has fallen by 50%, you don’t care because you are still getting the promised 1% plus full repayment of principal in 2030. You are thus indifferent to price changes.

If you instead bought the long term Treasury bond ETF (TLT is the big one), you have lost 50% of your investment AND there is no guarantee or promise of principal repayment. There is no maturity for TLT, so in effect you have taken on an equity-like risk which is mainly a bet on long term interest rates. A bond also has interest rate risk, but the price will revert to par value as it moves toward maturity. The ETF price will only reflect this duration risk both because it doesn’t hold long term bonds to maturity and because it has no maturity of its own. You also have to pay them management fees for the privilege, but fees are not my main criticism – my main criticism is that retail investors are led to believe that buying this ETF is the same as buying a diverse group of bonds.

Corporate ETFs have the same problem, plus credit risk (for which I believe the bond yields do not adequately compensate) and liquidity risk. The latter is especially meaningful because corporate bond liquidity (reflected in market turnover and bid-ask spreads) can be quite low, especially during a crisis which is when most investors are panicking and trying to sell. The corporate bond ETFs are marketed as offering easy liquidity (because the ETFs are large and liquid and trade like stocks) but their underlying assets (the corporate bonds) are far less liquid, and in extreme cases that liquidity can go to zero. That’s why I think the corporate bond ETFs are a scam.

Some of the greatest investors in history have been distressed credit investors. Check out Howard Marks of Oaktree Capital – his commentary is well worth reading, and free on their website. Others have made their money punting on the direction of long term interest rates

But some people are slightly less intelligent than Howard Marks etc. I’m one of them. If you’re not a financial genius and you’re primarily just looking for yield, you should buy treasuries directly and plan to hold them to maturity. You won’t have to worry about any of the above.


I understand your general concerns with holding a bond ETF. I also understand you say corporate bond ETFs have additional credit risk and liquidity risk over treasury bond ETFs. That is fair enough.

I think there is still a place for corporate bond ETFs in that you do not need to re-invest money when bonds mature (since the ETF re-invests money from maturing bonds) and also you are more differentiated since the ETF holds bonds from many different companies and your capital is spread amongst them all. You need much less capital to achieve differentiation. Liquidity on the ETF is likely better than liquidity on individual bonds and so you will lose less money due to slippage.

No argument from me on diversification. The credit risk on a portfolio of bonds is lower than that of a single bond, and that holds true for the corporate bond ETFs.

But the liquidity argument is problematic in my humble opinion. Consider the environment of a financial crisis. If the corporate bond market freezes up, and ETF owners are selling the ETF, you get into a situation in which the ETF manager cannot meet redemptions and the ETF blows up.

This is not an impossible scenario. It’s exactly what happened to the inverse VIX ETF a few years ago (admittedly that wasn’t a corporate bond ETF so not a fair comp, but it was a big and popular vehicle for betting on volatility and the gamblers got immolated during a relatively short period of sky-high volatility).

But credit risk isn’t really my issue with the corporate bond ETFs. A corporate bond ETF is also a bet on the future direction of interest rates,like TLT, with the added risk of credit spreads widening or closing.

Maybe rates will come down and spreads will tighten, in which case you’ll make money. But it’s not the same investment as holding a portfolio of the same bonds would be, because there is no promise of principal repayment and no maturity for the ETF.

As long as the investor understands the product’s characteristics and how they differ from those of the underlying bonds, that’s fine. Betting on rates and credit spreads and a relatively long period of liquid financial markets is what you’re doing, and that’s fine.

The problem is that most retail investors don’t understand the difference and believe that they are taking on the same risks as those of the underlying bonds – which is incorrect.

That’s why I said these things are scams – because of how they are marketed. Retail investors reading Motley Fool, Yahoo Finance, etc. and never going near the prospectus for the thing they are getting suckered, in my opinion.

But opinions can differ, and that’s what makes a market.

So if say I want to store up some money but want it to grow higher than inflation, what are my options? Bonds?

Thanks for the discussion!

I understand and so I would select ETFs by market cap, but you have a point. Individual bonds may be even harder to sell though.

Holding individual bonds is too though. The only difference is that you get your inlay back sooner whereas the advantage of a bond ETF is that you stay invested over the longer term.

I recently opened an account with Cathay Securities and this is what they sent me today:
Treasury note maturing 2029, YTM 4.38%, selling at 98.
Altria corp bond maturing 2029, YTM 5.5%, selling at 96.78.

The ETF will never repay your principal.

If you bought TLT at $160 and it is now trading at $80, the value of your investment has gone down by 50%. If 20-30 year bond interest rates remain flat at c.5% forever, TLT will stay at $80 forever and you have lost 50% of your investment, permanently.

If interest rates go up, you will lose more. If they go back down to 2%, you will lose less. If they go below 1%, you might break even. If they go below zero, you will make money.

TLT is a bet on the future direction of long term interest rates. That’s all it is.

The investment characteristics of TLT are not the same as those of a bond or a portfolio of bonds because TLT does not hold bonds to maturity and does not itself have a date of maturity. The operators of TLT will never pay you your “inlay” back. They don’t even pretend that they will do this.

That’s a pretty big difference. If you want to trade based on your expectations of interest rates, then go for it, I have no objection. TLT is perfect for that.

But if you’re looking for the safety and yield of Treasury bonds, then you should just buy Treasury bonds and plan to hold them to maturity.

Different toys for different games.

For what it’s worth, I’m a big buyer of short term treasuries at 5%-plus. I’d buy 10-years at 5%-plus if they get there.

I’d buy TLT if long term rates were much higher than they are and I had a confident view that they were heading for a fall (that’s a bet that worked extremely well for 40 years, until it didn’t).


Treasury note maturing 2029, YTM 4.38%

If you can open an account with Schwab, Fidelity, Vanguard, or Interactive Brokers you should be able to get a better quote than the above.

Today’s yield for the 5yr was 4.69 and 4.73 for the 7 yr.

You can buy new issues or purchase bonds via the secondary market at the above 4 brokers at better rates, assuming the rate you provided was for Thursday’s or Friday’s close US time. (Even Wednesday was better than the above.)

These brokerages also offer corporate and government agency bonds.

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@gator , any thoughts on something like this?

As I understand it, it’s an etf that has very short term treasury bills (1-3 months) amd then adds a little bit of extra money by doing some, questionable, but still relatively low risk bets against the s and p dropping a huge amount.

If the options part of this is a horrible idea, what about a hypothetical etf that just invests on short term treasury bills? I imagine you’re paying a bit for the convenience of not having to buy the short term treasury bills yourself, but how much would you be losing out on by buying the etf and is there substantial risk to something like this?

Selling puts on the S&P 500 is a high risk activity. Most of the time you make a little bit of money, and once in a while you get absolutely crushed.

Turkeys at the turkey farm find that most days are pleasant days, and the world is a nice place to be. But eventually, not too long from now in fact, a very bad day is coming for Mr. Turkey.

Nicholas Taleb is worth a read on this concept. “The Black Swan” is more famous, but “Fooled By Randomness” is arguably more cogent.

The guys managing that fund might be ethical geniuses and might be managing the risks prudently. But they might be hoovering up nickels in front of a steamroller with no thought of fiduciary duty and only thoughts about ensuring their annual bonuses. I don’t know them and don’t have a view. But that’s the bet that you’re making, if you invest with them.

Aside from that fund, there are pure short term Treasury ETFs and money market funds without the options thing attached – no shortage of plain vanilla products out there to choose from.

Such funds are indeed less risky than TLT is because duration risk is lower for short term fixed income securities than it is for long term fixed income securities.

It’s still possible to lose money on such funds, and likewise said losses can be permanent – but the value of the funds won’t drop by 50% (like TLT already has).

If you have a US brokerage account I don’t see the advantage of using such funds vs. just buying the bonds directly.

If I understand you (sorry – maybe it was TG-2000 or somebody else) correctly, the convenience factor is a primary consideration because you (???) don’t want to have to reinvest the money when the bonds/bills mature.

But it takes maybe 30 seconds to type your order in – it’s not like visiting a Taiwan bank branch to ask for a loan or whatever. It’s super easy if you have a half decent broker.

Put another way, lets say you have $100,000 and you want to put that in a safe 12-month maturity investment. Would you pay me a 1% service fee to manage it for you? What if my “management” consisted of taking the cash to a bank and opening a 12-month CD? Is it worth the fee that you’re paying? I sort of doubt it.

TD Ameritrade and I think Interactive Brokers both have much tighter spreads than the Taiwan banks like Cathay are showing in the table above. Of course they have to make a profit so this isn’t a criticism of Cathay, but the more levels of intermediation you add, the worse the fees are for the investor. That also applies to bond funds – they are charging you a fee whether or not you make any profits.

FYI, TD Ameritrade lets me buy new issues of Treasuries, and the commissions I pay on new issues are zero. I assume the same is true for other US brokers.

Just buy the bonds and forget the bond funds. In my opinion – everybody’s different.


Thank you so much for all this! I appreciate the level of detail.

I came across this when I was looking at money market funds and thought the returns looked not bad, but I never ended up buying any. And now I’m glad I didn’t :sweat_smile:

Just a follow up question because I’m curious, what actually is a put? I was looking at some stuff online and didn’t really understand it lol

Basically a contract between two parties that gives the put buyer the right, but not the obligation, to sell an asset to the put seller, at a predetermined price and within a certain period of time.

If you buy a put option on Stock X, you want the price of Stock X to drop below the option’s strike price, in which case you will make money.

Probably not something the average retail investor wants to play around with. And never, ever, ever sell (to open) a put option.

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It will re-pay your principle just like any other ETF will, or not. Things can go up and things can go down, that is clear.

When you buy a bond you speculate on interest rates. When you buy a bond ETF you speculate on interest rates. There is not really any difference except maybe time-horizon.

“It will re-pay your principle just like any other ETF” is factually incorrect. This is because a bond ETF is an equity, and it will not repay your principal. You might be thinking “If it goes up, I can sell it and make money” which is accurate, but this is not the same thing as repaying principal. Even in an unlikely scenario where the ETF manager decides to wind up the fund, there is no guarantee of principal repayment. The ETF manager would divest the underlying assets and you would be entitled to a share of the proceeds after fees, but your share of the proceeds would be a function of the market price of the assets at the time of divestment, not how much you paid when you bought into the fund.

“When you buy a bond you speculate on interest rates.”

Not if you hold the bond to maturity. I just had a bond mature on Monday. Actually your response here reminded me not to wait around with excess cash at my broker (so thank you for keeping the conversation alive). I plowed the cash into short-term US treasury bonds that mature in May 2024 at an annualized yield of 5.4%. If short-term rates go to 10% tomorrow, the market price of those bonds will be less than I paid for them but I couldn’t care less because I know that I’ll get my 5.4% annualized until May 2024. Explain to me how I am speculating on interest rates.

“When you buy a bond ETF you speculate on interest rates.”

Agreed 100%. That’s what you’re doing when you buy a bond ETF. It is not a safe, secure investment like you seem to believe. It is a speculation on interest rates (or, if you’re buying a corporate bond ETF, it’s a speculation on interest rates plus credit spreads with a small risk of catastrophic loss in a liquidity crisis).

It’s okay to speculate on interest rates – really, I hope you make money doing it. But you might want to understand a bit more about the investment characteristics of the products that you are putting your money into.

“There is not really any difference except maybe time-horizon.”

It’s fine for you to continue to believe this despite my summary of why bonds and bond ETFs have very different investment characteristics. But for anybody else who might read this, please don’t walk away with the view that bond ETFs and bonds are the same thing.

I suppose that it’s possible that I’m in the wrong here in my assumption that the OP was asking about bond ETFs because he’s looking for safety and yield.

If the OP’s question was really “How can I speculate on interest rates?” then an ETF like TLT is indeed the correct answer.


Thanks for explaining the difference between holding bonds and bond ETFs, that’s useful financial info. Bond ETFs sound like trash for suckers.

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I would disagree with that statement: You’re still speculating that your bond will give you a higher interest rate than the current overnight rate.

If interest rates climb, you’re loosing money on your bond investment in terms of opportunity cost: The money you’ve invested in your bond (that you’re holding until maturity) would have earned you more if you bought a bond at a later date.

Thus, your bond also goes down in value (even if you’re not selling). Just like the ETF. You would have been better off not buying it and just letting the money sit in a cash investment at market rate.

If you invest $1000 today in a bond ETF instead of a particular bond, you can always sell the ETF and buy the same bond later. If the ETF invest in the same category as the bond you’d be buying, their values should fluctuate in the same order of magnitude. So you could buy the same bond after selling your ETF investment (because the market value of the bond has gone down too after interest rates have risen!)

The only way of not speculating on interest rates is buying bonds which are close to expiry or ETFs which track market interest rates (or a high-yield savings account in some cases).