Postmon wrote:I'm 60/40 equities/FI and looking for a conservative short-term investment grade bond fund to complete my bond allocation. I fall in the camp of taking risks on the equity side but want some diversification within FI. I initially thought about the Vanguard Short Term Index (BSV) but want a bit more duration with Treasuries and a bit less with Corporates. So, here's what I came up with:
35% 3 - 7 year Treasuries (iShares IEI, duration 4.43, exp 0.15)
20% TIPS (Fidelity Spartan TIPS - FSIYX, duration 5.3, exp. 0.10)
20% ST Inv Grade (?????)
Taxable (Tax deferred space is full)
25% Munis (Baird Muni BMBIX, duration 4.92, exp. 0.30)
I'm with Fidelity so it seems like the only two options are the Vanguard Short-Term Corporate Bond ETF VCSH (exp 0.12) or iShares 1-3 Year Credit Bond ETF CSJ (exp 0.20). It seems to me that CSJ is less risky than VCSH. But I haven't found much on these boards about CSJ. I'm wondering what your opinions are of these two ETFs and if there are any others worth considering (I don't have access to DFA)?
These are the differences that stood out to me:
1. CSJ has less term risk than VCSH: Duration 1.84 vs 2.8
2. CSJ seems to have a higher rated bond mix:
Rating VCSH - CSJ
Aaa 0.7% - 16%
Aa 12.2% - 16%
A 51.2% - 44%
Baa 35.9% - 22%
other 0- 2%
3. CSJ holds 11% Supranational, 3% Sovereign, 3% Local Authority and VCSH doesn't. I'm not sure how this additional diversity impacts risk.
Look forward to your input. Thanks!
There are all kinds of issues with corporate bond ETFs.
The problem is most corporate bonds don't trade much-- illiquid. Either the issue sizes aren't big enough, or most of the investors just 'buy and hold'. It's therefore hard to build an index (or rather for anyone to accurately track that index in the real world), and hence an ETF. You get big bid offer spreads on the ETF and there's an inefficiency in the construction of the thing (one way around this, some ETF providers use, is to sign a 'swap' derivative contract with financial institutions, that guarantees the performance of the underlying index. My issue with that is that in a repeat of Lehman, we might find such swaps do not work as expected. ishares in particular tends to hold the actual underlying asset, not use swaps-- only close reading of the Prospectus and the Annual Reports will tell you what this ETF manager does).
For the mutual fund, as I understand it, VG gets around the problem by 'not indexing'. What they do is buy (and hold) corporate bonds of the right credit risk and maturity. They don't try to hold every bond nor the exact ones that are in the index. Also a lot of corporate bonds are callable, they pay higher yield but they are not nice for investors-- again I believe VG avoids bonds that may be called.
Therefore in this, as with many illliquid and slightly 'tricky' asset classes, I would prefer to own the Vanguard fund than an ETF.
VG fixed income are shrewd people, they've been doing this a long time. Probably DFA has as good people and approach, but I'd trust Vanguard on this one.
On your concern re duration I think the impact even on a big interest rate move will be marginal.
On credit quality I look at bonds down to A as essentially indistinguishable. I agree Vanguard has a somewhat higher weighting towards Baa, but 13.9% should not make a huge difference to final performance (one could test that by seeing how the 2 funds did in 2008-09).
On makeup 'supranationals' are things like Inter American Development Bank, IMF, World Bank etc. Backed collectively by the world's governments. They should be supersafe.
Also in an illiquid asset class, frequent contributions or redemptions kill performance for all unit holders. ETF managers can't do much about that, but again I trust Vanguard to restrict trading if that becomes a problem. They've done it before and, for example, they've closed (I believe) the High Yield Bond Fund to new investors.