Why would anyone own a treasury bond fund?
Why would anyone own a treasury bond fund?
Why would anyone own a treasury bond fund or ETF?
I recently made my first purchase of 10-year treasuries through VBS and it was really easy. Unlike bond funds and ETFs, individual treasuries have no expense ratio. There is no need to diversify, since they are riskless. They can be purchased without transaction costs and the spreads are very low. There is high demand for treasuries, so they can always be sold quickly and easily during a market correction. And it is easy to maintain a target duration. Once a year, when your n year treasuries become n-1 year treasuries, sell them and buy new n year treasuries.
I recently made my first purchase of 10-year treasuries through VBS and it was really easy. Unlike bond funds and ETFs, individual treasuries have no expense ratio. There is no need to diversify, since they are riskless. They can be purchased without transaction costs and the spreads are very low. There is high demand for treasuries, so they can always be sold quickly and easily during a market correction. And it is easy to maintain a target duration. Once a year, when your n year treasuries become n-1 year treasuries, sell them and buy new n year treasuries.
Re: Why would anyone own a treasury bond fund?
Was there a transaction fee or commission?
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Re: Why would anyone own a treasury bond fund?
Holding Treasurys for your bond allocation is a good alternative to using a bond fund.berntson wrote:Why would anyone own a treasury bond fund or ETF?
I recently made my first purchase of 10-year treasuries through VBS and it was really easy. Unlike bond funds and ETFs, individual treasuries have no expense ratio. There is no need to diversify, since they are riskless. They can be purchased without transaction costs and the spreads are very low. There is high demand for treasuries, so they can always be sold quickly and easily during a market correction. And it is easy to maintain a target duration. Once a year, when your n year treasuries become n-1 year treasuries, sell them and buy new n year treasuries.
Convenience is a benefit to using a bond fund, your Treasury bond fund manager does all purchases and sales and maintains your desired duration. Another plus for a bond fund is automatic reinvestment. Finally with a bond fund there is no need to have a brokerage account or service.
We currently own Treasurys plus Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares (VFIDX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
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Re: Why would anyone own a treasury bond fund?
Shrug.
1) I like the easy-come-easy-go of a fund.
Automatic reinvestment of dividends.
No need to purchase or sell in large chunks.
2) I don't have much choice: roughly 4% of assets in an IRA, the rest is either not appropriate for 10 year T Bonds (taxable) or not available (employer's plan).
3) I'm happy to let someone else deal with the buying and selling.
I could see setting up a ladder if the expectation was that I would be *spending* the rungs as they mature. I'm not at that stage.
1) I like the easy-come-easy-go of a fund.
Automatic reinvestment of dividends.
No need to purchase or sell in large chunks.
2) I don't have much choice: roughly 4% of assets in an IRA, the rest is either not appropriate for 10 year T Bonds (taxable) or not available (employer's plan).
3) I'm happy to let someone else deal with the buying and selling.
I could see setting up a ladder if the expectation was that I would be *spending* the rungs as they mature. I'm not at that stage.
Re: Why would anyone own a treasury bond fund?
No fee or commission through Vanguard.toto238 wrote:Was there a transaction fee or commission?
Ah, a good point. Treasuries pay interest every six months, so an investor would need to buy twice a year to reinvest the dividends.ruralavalon wrote: Another plus for a bond fund is automatic reinvestment.
Last edited by berntson on Tue Aug 19, 2014 12:44 pm, edited 1 time in total.
Re: Why would anyone own a treasury bond fund?
Maybe because they have little to no interest in investing and want as little maintenance as possible. It's like those who buy their fruit cut up from the grocery store vs. those who buy the whole fruit and cut it up themselves. Some people are willing to pay a little extra for the convenience of not having to do it themselves.berntson wrote:Why would anyone own a treasury bond fund or ETF?
Re: Why would anyone own a treasury bond fund?
1) Because the fees are tiny even compared to the small amount of effort required.
2) Because it removes the temptation to make calls or micromanage.
3) Ask Doc.
2) Because it removes the temptation to make calls or micromanage.
3) Ask Doc.
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Re: Why would anyone own a treasury bond fund?
This. You are basically paying a little bit more for a bond fund for less effort managing. Paying a little bit more for convenience is worth it to many.ogd wrote:1) Because the fees are tiny even compared to the small amount of effort required.
2) Because it removes the temptation to make calls or micromanage.
3) Ask Doc.
Re: Why would anyone own a treasury bond fund?
If you own one treasury bond, your maturity decreases by a year every year. So you'll want to sell it and buy a new one once a year to maintain your desired maturity. It's a bit more work and requires more effort. Also requires a bit more knowledge for how the markets work. A brokerage account is a bit harder to manage than a mutual fund account. The mutual fund automatically reinvests those interest payments for you, doesn't require any ongoing work from you, and makes rebalancing a lot easier. One transaction takes care of it. With individual treasury bonds, you have to decide which bonds to sell, sell them out into your settlement fund. Then you have to wait for that trade to settle a few days, then go ahead and purchase the stock fund that you wanted. Or the reverse where you sell the stock fund, wait a few days for the money to settle in your money market, then use the proceeds to purchase treasury bonds.
Re: Why would anyone own a treasury bond fund?
This is a good point. For investors with stock mutual funds, the fund may be more convenient given the settlement issue. Since I own stock ETFs, the individual treasuries are in fact more convenient. Otherwise, when I sell stocks, I have to wait for settlement to move the money to a bond mutual fund. I could use a bond ETF but, as William Bernstein points out in his latest book, no one should be using bond ETFs if they can help it.toto238 wrote:If you own one treasury bond, your maturity decreases by a year every year. So you'll want to sell it and buy a new one once a year to maintain your desired maturity. It's a bit more work and requires more effort. Also requires a bit more knowledge for how the markets work. A brokerage account is a bit harder to manage than a mutual fund account. The mutual fund automatically reinvests those interest payments for you, doesn't require any ongoing work from you, and makes rebalancing a lot easier. One transaction takes care of it. With individual treasury bonds, you have to decide which bonds to sell, sell them out into your settlement fund. Then you have to wait for that trade to settle a few days, then go ahead and purchase the stock fund that you wanted. Or the reverse where you sell the stock fund, wait a few days for the money to settle in your money market, then use the proceeds to purchase treasury bonds.
Whether the fees are "tiny" depends on how much you have in bonds. 10 basis points a year is $500 for a half-million dollar bond portfolio. I would happily put in an extra few minutes of effort for $500.ogd wrote:1) Because the fees are tiny even compared to the small amount of effort required.
2) Because it removes the temptation to make calls or micromanage.
3) Ask Doc.
Last edited by berntson on Tue Aug 19, 2014 1:27 pm, edited 1 time in total.
Re: Why would anyone own a treasury bond fund?
This doesn't apply to Treasuries for the same reason that it's okay for you to trade them on your own, liquidity.berntson wrote:This is a good point. For investors with stock mutual funds, the fund may be more convenient given the settlement issue. Since I own stock ETFs, the individual treasuries are in fact more convenient. Otherwise, when I sell stocks, I have to wait for settlement to move the money to a bond mutual fund. I could use a bond ETF but, as William Bernstein points out in his latest book, no one should be using bond ETFs if they can help it.
Re: Why would anyone own a treasury bond fund?
Yes, you're right.ogd wrote:This doesn't apply to Treasuries for the same reason that it's okay for you to trade them on your own, liquidity.berntson wrote:This is a good point. For investors with stock mutual funds, the fund may be more convenient given the settlement issue. Since I own stock ETFs, the individual treasuries are in fact more convenient. Otherwise, when I sell stocks, I have to wait for settlement to move the money to a bond mutual fund. I could use a bond ETF but, as William Bernstein points out in his latest book, no one should be using bond ETFs if they can help it.
Re: Why would anyone own a treasury bond fund?
May I suggest that if you had $500K in Treasuries in a 90/10 portfolio, your views on the worth of your time might be differentberntson wrote:Whether the fees are "tiny" depends on how much you have in bonds. 10 basis points a year is $500 for a half-million dollar bond portfolio. I would happily put in an extra few minutes of effort for $500.
If nothing else, the large amounts involved in even maintenance tasks would make you double-check everything, doubt yourself, etc.
- nisiprius
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Re: Why would anyone own a treasury bond fund?
I have holdings about twenty individual TIPS issues which I've been collecting over the years and they are a royal PITA. (Just nobody gets the wrong idea about my net worth they are all tiny amounts, most of them having being purchased with annual Roth contributions).
They have a bad habit of maturing when I am on vacation.
Attempted rollovers sometimes have failed because there wasn't a big old wad of cash in the account, and the brokerage computer didn't get it that the old bond was going to mature before the settlement date for the purchase of the new bond.
Some portfolio analysis tools don't know what a "912828JE1" is.
Although my plans are to hold them to maturity, I have occasionally bought and sold them on the secondary market and I hate it. I have no confidence at all that I am getting fair prices on my onesies-and-twosies transactions.
I tell myself that if I had any sense I'd just give up my ego involvement and exchange the whole wad for VIPSX and be done with it, and to heck with theory.
They have a bad habit of maturing when I am on vacation.
Attempted rollovers sometimes have failed because there wasn't a big old wad of cash in the account, and the brokerage computer didn't get it that the old bond was going to mature before the settlement date for the purchase of the new bond.
Some portfolio analysis tools don't know what a "912828JE1" is.
Although my plans are to hold them to maturity, I have occasionally bought and sold them on the secondary market and I hate it. I have no confidence at all that I am getting fair prices on my onesies-and-twosies transactions.
I tell myself that if I had any sense I'd just give up my ego involvement and exchange the whole wad for VIPSX and be done with it, and to heck with theory.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Why would anyone own a treasury bond fund?
You underestimate the strength of the Frugal Boglehead Spirit.ogd wrote:May I suggest that if you had $500K in Treasuries in a 90/10 portfolio, your views on the worth of your time might be differentberntson wrote:Whether the fees are "tiny" depends on how much you have in bonds. 10 basis points a year is $500 for a half-million dollar bond portfolio. I would happily put in an extra few minutes of effort for $500.
If nothing else, the large amounts involved in even maintenance tasks would make you double-check everything, doubt yourself, etc.
The point about fiddling is a good one. I do wonder how much holding bond funds actually helps with this? There seem to be no shortage of posts from investors wondering if the should own shorter bond funds or CDs while they wait for rates to rise...
Re: Why would anyone own a treasury bond fund?
Well, the people wondering certainly don't think they're doing this for a mere 0.1% a year. And at least when it comes to CDs in fixed income heavy portfolios, they're right. I admit to fiddling occasionally when the CD market gets too enticing. As for choices between marketable bonds, my view is it doesn't matter that much and one should generally trust the market, but then again if you don't hold that view you expect a bigger difference than 0.1% a year.berntson wrote:The point about fiddling is a good one. I do wonder how much holding bond funds actually helps with this? There seem to be no shortage of posts from investors wondering if the should own shorter bond funds or CDs while they wait for rates to rise...
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Re: Why would anyone own a treasury bond fund?
David Swensen in the excellent investment book "Unconventional Success" has recommended that the bond portion of a portfolio be allocated 50% to Treasuries and 50% to TIPS.
A bond fund allows for simplicity and management.
A bond fund allows for simplicity and management.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Why would anyone own a treasury bond fund?
Assuming we're talking nominal Treasuries and you want an average maturity of 1, 1.5, 2.5, 3.5, or 5 years; I'd suggest a rolling ladder of 2, 3, 5, 7, or 10-year Treasuries respectively. For example to maintain an average maturity of 5 years, buy 10 bonds maturing 2015 - 2024. (See WSJ Treasury Note & Bond Quotes.) Each year when one matures, replace it with a new 10-year bond purchased at auction. This way all bonds will be held until maturity, and -- except for the initial purchases -- all will be purchased at auction. This will reduce your costs due to the bid-ask spread in the secondary market.berntson in original post wrote:And it is easy to maintain a target duration. Once a year, when your n year treasuries become n-1 year treasuries, sell them and buy new n year treasuries.
Treasury securities bought and sold in the secondary market settle the next day.toto238 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2160477#p2160477]this post[/url] wrote:Then you have to wait for that trade to settle a few days,
Could you explain more what this problem is, Nisi? I don't see it. All TIPS mature on the 15th of the month. And since 2011 new ones have been issued the last business day of the month. (See TIPS Auctions list.) The auctions occur the previous week and are announced the week before that. For example, the recent July 2024 was announced on 7/17, auctioned on 7/24, and issued on 7/31. (See Auction Announcement PDF file.) You could only place an order to buy at the auction beginning 7/17. If you were rolling over the July 2014, it matured on 7/15 and its redemption proceeds would already have been in your account.nisiprius in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2160542#p2160542]this post[/url] wrote:I have holdings [of] about twenty individual TIPS issues ... Attempted rollovers sometimes have failed because there wasn't a big old wad of cash in the account, and the brokerage computer didn't get it that the old bond was going to mature before the settlement date for the purchase of the new bond.
Re: Why would anyone own a treasury bond fund?
BIV and AGG my two favorite bond funds have expense ratios of 10 and 9 basis points respectively. Well worth the simplicity.
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Re: Why would anyone own a treasury bond fund?
Before I talked her out of it (mind you, it wasn't easy) my Mom kept rolling over her 6-mo Treasury, like clockwork. She thought it patriotic. Seriously.
Mind you, she was up in age (90's) and remembered War Bonds. I suspect those War Bonds paid better interest.
Mind you, she was up in age (90's) and remembered War Bonds. I suspect those War Bonds paid better interest.
Re: Why would anyone own a treasury bond fund?
Nisi wrote,
1. Wasted a boatload of time and effort sitting in a banker's office. When a new banker showed up we had to go over everything again because apparently NO ONE has Coverdell ESAs.
2. Since I didn't really know about 529 Plans and did want to or have the time to learn, I took on the terrible CD ladder. If I would have invested in a balanced 529 Plan, my kids would have more college money and with another boatload of less time and effort on my part.
3. Take a CD ladder and multiply it FOUR times. Nightmare. I pretty much missed the 7 day window on occasion and blew out the CD ladder.
4. My bank blew up during the banking crisis and was taken over by the FDIC. The transition went fine but a bunch of new people and different CD policies.
5. Grandpa would pop in and add some Coverdell money into a CD of his random choosing and busted up the ladder. The kids and I were grateful for the cash but I was left picking up all the CD pieces.
6. It wasn't even really a ladder just a cluttered collection of random CDs with no light at the end of the tunnel.
7. I was blinded by love. Foolishly, I invested my limited funds on my KIDS future! Kids can borrow for an education. It's kind of hard to borrow a couple million bucks for your retirement at age 65-70.
8. The more money you save, the less college aid you get.
9. Eventually I consolidated the CDs into one for each kid. The CD earn less than inflation and alot less than college inflation. Despite the boatload of effort, I ended up failing the kids anyway. Even though, there should be enough to cover the first year at a public college, still less than a balanced 529 with little effort.
Things I learned:
1. I am pretty much done with any ladder. Don't want to waste my retirement on tracking any ladders.
2. Do not under any circumstance be blinded by love. Don't fund your kids education first. Fund your retirement first.
Lastly, if you like a ladder or have one, that's fine. It is just not for me.
My CD ladder has been much worse that a royal PITA! About 17 years ago, I started a Coverdell ESA CD ladder for the kids. If I could only go back in time...I have holdings about twenty individual TIPS issues which I've been collecting over the years and they are a royal PITA.
1. Wasted a boatload of time and effort sitting in a banker's office. When a new banker showed up we had to go over everything again because apparently NO ONE has Coverdell ESAs.
2. Since I didn't really know about 529 Plans and did want to or have the time to learn, I took on the terrible CD ladder. If I would have invested in a balanced 529 Plan, my kids would have more college money and with another boatload of less time and effort on my part.
3. Take a CD ladder and multiply it FOUR times. Nightmare. I pretty much missed the 7 day window on occasion and blew out the CD ladder.
4. My bank blew up during the banking crisis and was taken over by the FDIC. The transition went fine but a bunch of new people and different CD policies.
5. Grandpa would pop in and add some Coverdell money into a CD of his random choosing and busted up the ladder. The kids and I were grateful for the cash but I was left picking up all the CD pieces.
6. It wasn't even really a ladder just a cluttered collection of random CDs with no light at the end of the tunnel.
7. I was blinded by love. Foolishly, I invested my limited funds on my KIDS future! Kids can borrow for an education. It's kind of hard to borrow a couple million bucks for your retirement at age 65-70.
8. The more money you save, the less college aid you get.
9. Eventually I consolidated the CDs into one for each kid. The CD earn less than inflation and alot less than college inflation. Despite the boatload of effort, I ended up failing the kids anyway. Even though, there should be enough to cover the first year at a public college, still less than a balanced 529 with little effort.
Things I learned:
1. I am pretty much done with any ladder. Don't want to waste my retirement on tracking any ladders.
2. Do not under any circumstance be blinded by love. Don't fund your kids education first. Fund your retirement first.
Lastly, if you like a ladder or have one, that's fine. It is just not for me.
Information is more valuable sold than used. - Fischer Black (1938-1995)