Emmy should be the case but not always the case the way some wall street cowboys operate .
Of course, itâs up to the investor to check which strategy a particular ETF follows in terms of what bonds it is buying and when it sells them. That certainly makes the ETF the more complex product.
However, if you buy letâs say a 10-year bond, hold it to maturity, and then directly buy a new 10-year bond for the money after it matures, you wonât magically have more money than an ETF which invest into 10-year bonds (even if it sells them before maturity). You might get lucky that at the time your bond matures, you get a more favorable interest rate by chance.
But again: Then youâre also speculating on interest rates (at the time when you buy your bond and at the time when it matures).
The ETF will keep selling bonds (as they mature or become to close to their maturity), but will also keep buying new bonds at their current market value. If you invest in individual bonds, you also have a risk of unfavorable interest rates at the time your bond matures.
Itâs never a bad idea to hold some kind of medium/long term mix of bonds in your portfolio. For the super lazy (but effective), just buy a bond ETF like the Vanguard Aggregate Bonds (I suggest to buy one hedged to your local currency to reduce risk): https://www.justetf.com/en/etf-profile.html?query=vanguard++aggregate&groupField=index&from=search&isin=IE00BG47KH54
âThus, your bond also goes down in value (even if youâre not selling). Just like the ETF.â
But this is where the bond is not âjust like the ETFâ. Regardless of what happens with interest rates, the bondâs value will gradually move toward par value as it approaches maturity, and will actually hit par value upon maturity. The price of TLT will not behave this way â if interest rates rise and stay high, TLTâs price will fall and stay fallen. If interest rates fall and stay low, TLTâs price will rise and stay risen. There is no maturity for TLT, and TLTâs price will not gradually revert to âparâ â because TLT is not a bond.
Your comments on reinvestment risk and opportunity cost are valid. Reinvestment risk is a characteristic of all fixed income investments (and not TLT because TLT is not a bond). And opportunity cost is present in all financial decisions that we humans with limited capital ever make.
Anyway, I think Iâve said enough â if you folks want to buy bond ETFs, go right ahead. But for the love of God, please donât tell other people on this platform that bond ETFs and bonds are âthe sameâ or âalmost the sameâ because thatâs just factually incorrect. Itâs not a matter of opinion. Read the damned ETF prospectuses and stop following some idiot writing on Yahoo Finance or whatever.
In the real world, I am invested heavily in short-term treasuries yielding over 5% and I am very happy with this situation. I happen to believe in âhigher for longerâ and Iâm waiting for 5%-plus 10-year yields before moving out further in terms of duration. If and when I buy the 10-year treasuries, my intention will be to hold them to maturity and collect the income. But my view on rates is nothing special or unique, and I might very well be wrong â I just know that this strategy will give me yield and zero credit risk over the next 6-24 months. Nuff said â caveat emptor to all and to all a good night.
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I was interested in why you believe this, because from what I understand high interest rates cause US debt repayments to very burdensome, I wonder how long high interest rates can and will be maintained once things start slowing down a bit. Too high interest rates curb inflation and you want some inflation to inflate away the debt
I would say locking in a good whack of 5 or even 10 year bonds is a pretty good bet now, of course nobody has a crystal ball so keep a portion for further investment if they do increase.
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Indeed. I have been waiting for 5%-plus on the 10-year to start nibbling, and here we are at 4.95%âŚ
âHigher for longerâ doesnât mean that long-term rates will necessarily continue to soar from here to the moon, just that (in my opinion â which might be wrong and this is not investment advice) hopes for a quick Fed pivot back to ZIRP and QE are likely to be dashed, at least until inflation cools down sustainably.
If thatâs correct, then rates should remain high for a while (albeit not necessarily much higher than they are now).
So yeah, adding a bit of longer duration treasuries into the portfolio mix is certainly tempting. I mean, letâs face it, 5% with zero credit risk for the next ten years is really unbelievable compared to what weâve become accustomed to since the GFC.
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One would say now is the time to take the dive and not wait for 0.05%.
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âŚand 4.99% this morning.
Yes, waiting for that extra 1 basis point would be silly. But the strategy, in my opinion, is to nibble, not to gorge.
That slowly-slowly approach might be a mistake, if it rapidly becomes clear that the US is both in for a recession and for sharply lower rates of core PCE inflation. We shall see.
Iâve been stashing my sidelined money into:
Itâs my understanding that with TFLO (and FLRN) thereâs basically no interest rate risk, and the fund wonât get crushed if interest rates come down â itâll just pay out a lower yield to match. The effective duration is 0.01. Meanwhile collect a yield pretty much on par with the fed rate.
Seems like all of the benefit of a bond but with full liquidity.
If we have a market slump Iâll move funds back into stocks. For now the risk vs reward on stocks isnât that appealing (tho Iâm still heavily invested).
Another article.
The Gems Hiding in Plain Sight in the Treasury Market https://www.nytimes.com/2023/10/20/business/treasury-bonds-rates-investing.html?smid=nytcore-android-share
You didnât have to be a financial wizard to get a safe return of more than 7 percent on your money for decades to come. All you had to do was buy a 30-year U.S. Treasury bond in the last nine months of 1994.
10-year bond rates were at 4.7% when this discussion started and then breached 5.0% briefly, and have since fallen down to around 4.6%. As a result, anybody who bought TLT 2 weeks ago would be up 6% on the trade. Congratulations.
But remember that TLT is just a bet on the direction of long-term interest rates. It is not the same thing as buying a basket of long-term US treasuries.
Now, if long-term interest rates continue to move south inexorably for the next ten years, like they have for the previous 40 years, then TLT will give you good returns.
So the main question that you need to ask and answer is as follows, and I quote: Whither long-term interest rates?
I came across this article on defined maturity bond ETFs. Based on the WSJ description, these things appear to be exchange-traded funds that invest in bonds, hold the bonds to maturity, and themselves have a maturity date at which point you would get your principal back.
I still donât recommend these things, but for those of you who insist on donating value to the vampires of Wall Street, take a look. And for anyone who believes (against all evidence) that TLT is âthe same thingâ or âalmost the same thingâ as holding a portfolio of individual long-term treasuries, please read the article to understand why thatâs not accurate.
Because some guy online might lie to you, but surely the Wall Street Journal, in cahoots with Blackrock and Invesco, would never mislead you.
I do not think anybody said they are the same thing. They have both have pros and cons.
I just bought five individual bonds a few days back to lock in some yield. Not very exciting, sure, but getting around 5% for the next 6-10 years (I have a ladder of 5 bonds), pretty close to guaranteed, sounds pretty good to me.
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