Difference between holding fixed income in bondETFs or banks
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Difference between holding fixed income in bondETFs or banks
I have been comparing AER to YTM (less the TER) to decide which is better for me to hold my safe side of my portfolio. I think the differences are:
1. For a bond ETF you have to pay a TER, for a bank deposit generally you don’t, so the AER should be compared to the YTM less the TER.
2 If the interest rates drop the bond value will rise and if we hold a demand deposit with a bank the opposite will happen. And vice versa. As bond prices should take into account the likelihood of interest rates dropping or rising, buying a bond because we think rates will drop or leaving our finds in a bank “until” rates rise is purely speculation, and as bogleheads we should simply choose which has the higher return by comparing AER to (YTM-TER).
3 Bonds are known to be inversely correlated to equities which is the main swinging point for bonds. Is it worth forfeiting the extra 0.5-1% interest per year to hold them instead of bank deposits?
1. For a bond ETF you have to pay a TER, for a bank deposit generally you don’t, so the AER should be compared to the YTM less the TER.
2 If the interest rates drop the bond value will rise and if we hold a demand deposit with a bank the opposite will happen. And vice versa. As bond prices should take into account the likelihood of interest rates dropping or rising, buying a bond because we think rates will drop or leaving our finds in a bank “until” rates rise is purely speculation, and as bogleheads we should simply choose which has the higher return by comparing AER to (YTM-TER).
3 Bonds are known to be inversely correlated to equities which is the main swinging point for bonds. Is it worth forfeiting the extra 0.5-1% interest per year to hold them instead of bank deposits?
Re: Difference between holding fixed income in bondETFs or b
The YTD performance (total return) of VCSH is about 1.3%. Not bad for a short-term bond fund.
That's the deal with bond ETFs and funds: Sometimes they have capital gains either realized or unrealized. And sometimes they have capital losses either realized or unrealized. I think it is worth owning bond ETFs and funds over certificates of deposit and savings accounts at a bank.
That's the deal with bond ETFs and funds: Sometimes they have capital gains either realized or unrealized. And sometimes they have capital losses either realized or unrealized. I think it is worth owning bond ETFs and funds over certificates of deposit and savings accounts at a bank.
Re: Difference between holding fixed income in bondETFs or b
If you are unwilling to do more than 2 mouse clicks to rebalance, you should use a bond fund.
If you are going to jump off a cliff if your bond fund temporarily drops 5% in value, you should use CDs.
If you are going to jump off a cliff if your bond fund temporarily drops 5% in value, you should use CDs.
- Peter Foley
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Re: Difference between holding fixed income in bondETFs or b
I'm sorry - I just can't decipher the acronyms. . . . The topic looks interesting however.
Re: Difference between holding fixed income in bondETFs or b
Same here. I have no idea what this means -I'm sorry - I just can't decipher the acronyms. . . . The topic looks interesting however.
I have been comparing AER to YTM (less the TER)
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The most important thing you should know about me is that I am not an expert.
Re: Difference between holding fixed income in bondETFs or b
Use the SEC yield of a bond fund for this comparison; it takes the yield of the bonds and subtracts the expense ratios.alwaysonit wrote:I have been comparing AER to YTM (less the TER) to decide which is better for me to hold my safe side of my portfolio. I think the differences are:
1. For a bond ETF you have to pay a TER, for a bank deposit generally you don’t, so the AER should be compared to the YTM less the TER.
While you shouldn't be speculating on rising rates, you should take the risk into account. Vanguard's Long-Term Bond ETF (or Admiral shares of the fund) has a 3.57% SEC yield; Intermediate-Term Bond ETF has a 2.34% yield. This doesn't make the long-term fund a better investment; the extra 1.03% is the compensation you get for taking significantly more interest-rate risk. Similarly, Intermediate-Term Corporate Bond ETF has a 2.98% yield; here, the higher yield is compensation for taking more risk by holding corporate bonds and no Treasury bonds.As bond prices should take into account the likelihood of interest rates dropping or rising, buying a bond because we think rates will drop or leaving our finds in a bank “until” rates rise is purely speculation, and as bogleheads we should simply choose which has the higher return by comparing AER to (YTM-TER).
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Re: Difference between holding fixed income in bondETFs or b
AER - DEFINITION of 'Annual Equivalent Rate - AER' Interest that is calculated under the assumption that any interest paid is combined with the original balance and the next interest payment will be based on the slightly higher account balance.Peter Foley wrote:I'm sorry - I just can't decipher the acronyms. . . . The topic looks interesting however.
YTM - DEFINITION of 'Yield To Maturity (YTM)' The rate of return anticipated on a bond if held until the end of its lifetime. YTM is considered a long-term bond yield expressed as an annual rate. The YTM calculation takes into account the bond's current market price, par value, coupon interest rate and time to maturity.
TER - Total expense rate.
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Re: Difference between holding fixed income in bondETFs or b
Is there a website that has a quick summary for the YTM of all EUR denominated bond ETFs?
I would like to check something like this monthly and move funds if the YTM gets above the AER my banks are paying me.
I would like to check something like this monthly and move funds if the YTM gets above the AER my banks are paying me.
Re: Difference between holding fixed income in bondETFs or b
Here in the UK typically High Street Bank bonds are illiquid, i.e. a three year ladder of such bonds requires that each rung is held to maturity.
Treasury bonds (Gilts) can be sold in the secondary market, as can a bond ETF.
Accordingly you might anticipate a element of premium on high street bank bonds.
For a three year bond ladder, 33% maturing each year, then if that's sufficient to cover your liquidity requirements (perhaps part of a portfolio that's rebalanced once/year as/when a bond matures) then the premium is worthwhile. If you might need more ready access to the capital then the more liquid choice might be better. Or perhaps a combination of both might meet your needs.
Treasury bonds (Gilts) can be sold in the secondary market, as can a bond ETF.
Accordingly you might anticipate a element of premium on high street bank bonds.
For a three year bond ladder, 33% maturing each year, then if that's sufficient to cover your liquidity requirements (perhaps part of a portfolio that's rebalanced once/year as/when a bond matures) then the premium is worthwhile. If you might need more ready access to the capital then the more liquid choice might be better. Or perhaps a combination of both might meet your needs.
Last edited by Clive on Tue Apr 28, 2015 9:34 am, edited 1 time in total.
Re: Difference between holding fixed income in bondETFs or b
THANK YOU alwaysonit !!!
Retired CSRS on 12/19/2012 @ age 57 w/39 years |
Good Bye Tension, Hello Pension !!!
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Re: Difference between holding fixed income in bondETFs or b
Does anyone know a website like this?alwaysonit wrote: ↑Mon Apr 27, 2015 3:08 pm Is there a website that has a quick summary for the YTM of all EUR denominated bond ETFs?
I would like to check something like this monthly and move funds if the YTM gets above the AER my banks are paying me.
Re: Difference between holding fixed income in bondETFs or banks
The yield of a bond fund is after expenses so the formulation is a little off. On the other hand if there are transaction fees, a front end load, an advisory fee, a 401 plan fee, or trading costs in the fund, then that does have to be taken into account.