I understand individual bonds. I understand laddering. I understand coupons aka dividends aka interest.
I do not (most assuredly do not) understand how these ETFs "work".
I have a number of questions. Perhaps some of the bond gurus could chime in.
All these ETFs seem to start out around $20, then shoot up to $21 (or more) fairly rapidly, then flat-line, or jiggle around. Why is that?
All these ETFs pay out in current dividends less (actually, much less) than the coupons of the underlying bonds (less ER). Why is that? Why do the dividends vary month-to-month? Is the paper churned?
I assume, as with brokered CDs, the coupon payments made to the fund, less expenses and dividends paid out to investors, are not re-invested (compounded) but act as "retained earnings". Where are they put? Are they reflected in the ETF price? If that were the case, and the "delta" was around 3%/annum, wouldn't the share price show a nice, steady upward trajectory until liquidated? Except for "drag" (see immediately below). Or, are the coupon payments (less ER and amounts paid out) used to buy more paper of the same vintage until the last year before liquidation? If so, wouldn't the effect on share price be the same, or nearly so?
In a rising-rate environment, how much drag is exerted? Stated another way, if you own a bunch of 2018 paper at 6% and I can go buy equivalent paper at 7%, I will buy your paper at a discount. So, the folks buying at $21/share today might get less (maybe, much less). Can this be quantified?
The concept is interesting. Very interesting. But I'd want to know a whole lot more, and see a couple of years worth of performance in a rising-rate environment, before I'd plunk any serious money into these ETFs.
Last edited by john94549
on Wed Jan 30, 2013 10:42 am, edited 1 time in total.