Let's say I'm risk-averse and want to adhere to the following:
Annette Thau on page 408 wrote:
If you are risk-averse, for most of your bond portfolio, two-to-five-year Treasuries and five-to-ten-year munis will provide the best combination of risk and return.
But of my entire bond portfolio, I can only fit 10% in tax-advantaged accounts. Also assuming I want to hold 50% treasuries/50% munis. The munis can be placed in taxable using an ETF like MUB (iShares National AMT-Free Muni Bond ETF) which has an effective duration of 6.07 years so that criteria is easily met. Also worth noting I live in Florida so no state income tax on munis.
I'm considering different options to break up the treasuries. Here are the average effective durations of various bond ETFs:
SHV - iShares Short Treasury Bond ETF - 0.44
SHY - iShares 1-3 Year Treasury Bond ETF - 1.80
IEI - iShares 3-7 Year Treasury Bond ETF - 4.43
IEF - iShares 7-10 Year Treasury Bond ETF - 7.42
TLH - iShares 10-20 Year Treasury Bond ETF - 9.97
TLT - iShares 20+ Year Treasury Bond ETF - 16.8
EDV - Vanguard Extended Duration Treasury ETF - Vanguard - 26.4
If I want to hold 50% of my bonds as 2-5 year treasuries, which option makes the most sense?
1) Hold IEI and spread it amongst both taxable and non-taxable space. This averages our to a 4.43 year effective duration.
2) Hold TLT in non-taxable, hold SHY in taxable. This averages out to a 4.8 year effective duration - (1.80*4+16.8)/5
3) Hold EDV in non-taxable, hold SHV in taxable. This averages out to a 5.6 year effective duration - (0.44*4+26.4)/5
Now that's assuming I'm correct in my calculations about bond barbells. And to be sure, this is an exercise in trying to maximize my tax advantaged space.
So there's average duration as well as yield to consider. The TLT/SHY mix appears to have the same average yield to maturity as holding 100% IEI. The EDV mix loses .2%. Perhaps that is made up with greater convexity, but frankly I just barely understand that concept at the moment.
I know holding long-term bonds is generally frowned upon, but I'm wondering if in this case, a barbell really does make more sense.
(Thanks for the tip Taylor)