$0 commissions; so what's the best bond ETF? and why?

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MarkVH0518
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$0 commissions; so what's the best bond ETF? and why?

Post by MarkVH0518 » Thu Oct 10, 2019 11:50 am

Now that my IRAs accounts (Schwab and Fidelity) are all offering $0 commissions on ETF trades,
what is the best Bond ETF for a 3-fund portfolio?

I'd been using the funds listed in the 3-fund portfolio wiki, that is, those that traded free at each particular brokerage.
Now that approach is unnecessary.

The bond etf candidates are:
Vanguard BND: ER: 0.035; volume: 1.5M shares
Schwab SCHZ: ER: 0.04; volume 400K shares
iShares AGG: ER: 0.05; volume 1.5M shares

It seems BND with the higher volume and 1/2 basis points lower fee is the winner.
Are there any other factors to consider?
Is there something about how these funds manage investments that would cause one fund to be preferred over others?

I recall that when Fidelity introduced 0% ER mutual funds, there was discussion that other fund factors
might become more important than ER once the ER was below 0.10% (i.e. 10 basis points).
I never understood the other factors.
Are these other factors now important than ETF ER and trading costs? If so, what are the factors?

Thanks much
Mark

longleaf
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by longleaf » Thu Oct 10, 2019 12:14 pm

Why does this change in commissions matter for a passive portfolio? There shouldn't be enough trading activity to warrant any change in strategy.
Frugality, indexing, time.

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whodidntante
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by whodidntante » Thu Oct 10, 2019 12:30 pm

longleaf wrote:
Thu Oct 10, 2019 12:14 pm
Why does this change in commissions matter for a passive portfolio? There shouldn't be enough trading activity to warrant any change in strategy.
Maybe you would want to invest some money from every paycheck, or because you just got a $500 credit card signup bonus. Or maybe you would like to tax-loss harvest. Or maybe you didn't consider a certain fund on a limited commission-free appetizer list to be best in class.

lassevirensghost
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by lassevirensghost » Thu Oct 10, 2019 12:33 pm

longleaf wrote:
Thu Oct 10, 2019 12:14 pm
Why does this change in commissions matter for a passive portfolio? There shouldn't be enough trading activity to warrant any change in strategy.
How do you figure? Someone DCAing each paycheck could have been buying shares costing hundreds of dollars of commissions.
“Groucho, how do you invest your money?” | “All in bonds.” | “But Groucho, they don’t pay much return.” | “They do when you have a lot of em!”

longleaf
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by longleaf » Thu Oct 10, 2019 12:38 pm

lassevirensghost wrote:
Thu Oct 10, 2019 12:33 pm
How do you figure? Someone DCAing each paycheck could have been buying shares costing hundreds of dollars of commissions.
I have never paid any trading commissions on Vanguard ETFs. In this scenario, it does not seem prudent to use a brokerage which is any more expensive.
Frugality, indexing, time.

livesoft
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by livesoft » Thu Oct 10, 2019 12:39 pm

MarkVH0518 wrote:
Thu Oct 10, 2019 11:50 am
Are there any other factors to consider?
If you only have $60 to invest, then you won't be buying BND nor AGG. That's an important factor to consider. :twisted:

If one is buying integral shares, then the cash potentially not invested may be highest with AGG and lowest with SCHZ.

However, a 1 cent spread is less than 0.01% for AGG, more than 0.01% for BND, and about 0.02% for SCHZ. So that might be something to worry about or not.

If you are automatically reinvesting dividends, then BND pays its dividend a day before AGG does (and probably SCHZ does, but I didn't check).

How big is the size of head of the pin we are dancing on?
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lassevirensghost
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by lassevirensghost » Thu Oct 10, 2019 12:52 pm

longleaf wrote:
Thu Oct 10, 2019 12:38 pm
lassevirensghost wrote:
Thu Oct 10, 2019 12:33 pm
How do you figure? Someone DCAing each paycheck could have been buying shares costing hundreds of dollars of commissions.
I have never paid any trading commissions on Vanguard ETFs. In this scenario, it does not seem prudent to use a brokerage which is any more expensive.
Right. And now the playing field is level. So there are choices.
“Groucho, how do you invest your money?” | “All in bonds.” | “But Groucho, they don’t pay much return.” | “They do when you have a lot of em!”

retired@50
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by retired@50 » Thu Oct 10, 2019 1:06 pm

lassevirensghost wrote:
Thu Oct 10, 2019 12:52 pm
longleaf wrote:
Thu Oct 10, 2019 12:38 pm
lassevirensghost wrote:
Thu Oct 10, 2019 12:33 pm
How do you figure? Someone DCAing each paycheck could have been buying shares costing hundreds of dollars of commissions.
I have never paid any trading commissions on Vanguard ETFs. In this scenario, it does not seem prudent to use a brokerage which is any more expensive.
Right. And now the playing field is level. So there are choices.
So now that commissions are not a consideration, if you're still using an ETF, the next consideration is the bid/ask spread. If I were in the accumulation phase of life, I'd use a mutual fund instead of an ETF. Regards,

Domadosolo
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by Domadosolo » Thu Oct 10, 2019 1:23 pm

retired@50 wrote:
Thu Oct 10, 2019 1:06 pm
lassevirensghost wrote:
Thu Oct 10, 2019 12:52 pm
longleaf wrote:
Thu Oct 10, 2019 12:38 pm
lassevirensghost wrote:
Thu Oct 10, 2019 12:33 pm
How do you figure? Someone DCAing each paycheck could have been buying shares costing hundreds of dollars of commissions.
I have never paid any trading commissions on Vanguard ETFs. In this scenario, it does not seem prudent to use a brokerage which is any more expensive.
Right. And now the playing field is level. So there are choices.
So now that commissions are not a consideration, if you're still using an ETF, the next consideration is the bid/ask spread. If I were in the accumulation phase of life, I'd use a mutual fund instead of an ETF. Regards,
What is the benefit of a MF vs ETF?

livesoft
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by livesoft » Thu Oct 10, 2019 1:38 pm

Domadosolo wrote:
Thu Oct 10, 2019 1:23 pm
What is the benefit of a MF vs ETF?
If one had $500 or $1000 or $20000 and wanted to leave no money leftover and use all of that money to buy shares in an ETF, could they do it? Could they use all of it to buy shares of a mutual fund?

If one wanted to have their broker set it up so that they could automatically invest $1000 every 2 weeks into shares of an ETF, could they do it? How about into shares of a mutual fund?
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UpperNwGuy
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by UpperNwGuy » Thu Oct 10, 2019 2:14 pm

MarkVH0518 wrote:
Thu Oct 10, 2019 11:50 am
I'd been using the funds listed in the 3-fund portfolio wiki, that is, those that traded free at each particular brokerage.
Now that approach is unnecessary.
"Now that approach is unnecessary." Maybe unnecessary, but still an excellent approach. I see no need for you to change. These total bond ETFs are all pretty much the same.

retired@50
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by retired@50 » Thu Oct 10, 2019 2:27 pm

livesoft wrote:
Thu Oct 10, 2019 1:38 pm
Domadosolo wrote:
Thu Oct 10, 2019 1:23 pm
What is the benefit of a MF vs ETF?
If one had $500 or $1000 or $20000 and wanted to leave no money leftover and use all of that money to buy shares in an ETF, could they do it? Could they use all of it to buy shares of a mutual fund?

If one wanted to have their broker set it up so that they could automatically invest $1000 every 2 weeks into shares of an ETF, could they do it? How about into shares of a mutual fund?
Mutual funds allow for fractional share purchases, as I understand it, and ETFs do not. Therefore to buy an ETF, you must purchase in whole shares, while mutual funds allow for purchase in whole dollars. Since most people save each week or month in whole dollars, this is a convenience that allows the mutual fund saver to put all their money to work. As an example, suppose you save $100 per week, if the ETF is trading at $75 per share, you can only buy 1 share, and the remaining $25 sits on the sidelines until you come up with another $50, if a mutual fund trades at $75 per share, you can buy 1.333 shares. Regards,

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Re: $0 commissions; so what's the best bond ETF? and why?

Post by oldcomputerguy » Thu Oct 10, 2019 2:31 pm

MarkVH0518 wrote:
Thu Oct 10, 2019 11:50 am
Now that my IRAs accounts (Schwab and Fidelity) are all offering $0 commissions on ETF trades,
what is the best Bond ETF for a 3-fund portfolio?
Does it have to be an ETF? You mentioned Fidelity, I'm not sure why you would not want simply to invest in Fidelity's FXNAX U.S. Bond Index fund (ER 0.025%, lower than all the ETFs you listed).
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

Topic Author
MarkVH0518
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by MarkVH0518 » Thu Oct 10, 2019 2:50 pm

livesoft wrote:
Thu Oct 10, 2019 12:39 pm
How big is the size of head of the pin we are dancing on?
Yes, although I didn't state it so pithily or cleverly, my question is what is the nature of the pinhead?

So far I've heard:
1) for small investments the quantum nature of ETF shares is a factor, use mutual funds instead.
My investments are typically $30K are more, so I don't consider this an issue - for myself.
2) The bid/ask spread, typically a penny, would give an advantage to higher priced EFT, as the spread is small fraction of the investment.

To get at the 'best-in-class', as WhoDidntAnte phrased it, nature of my concern. Let me propose these risks. Are they legitimate?
a) Are the bonds of any of the EFT necessarily superior to the others. I think not, but now bond quality could be the most significant difference among them.
b) Is there a redemption/bank-rush issue? Is it different for the different bond ETFs?
Since ETF are do not offer redemption to the general public, there is never a risk that a redemption run could some how squeeze the fund.
Am I mistaken?
c) Are any of these funds exposed to leverage - beyond the inherit nature of a bond being borrowed money and the borrower defaulting?
I know that some mutual funds lend shares to short sellers, conceivably a short squeeze could bankrupt some short sellers causing them to
default on their shares borrowed from the mutual fund. I don't believe that is short selling is available in the bond market, but maybe I'm mistaken.

Or are these funds exactly identical?
Thanks again,
Mark

DonIce
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by DonIce » Thu Oct 10, 2019 3:55 pm

AGG has intrinsically outperformed BND and SCHZ over the last 8 years by more than the various other factors discussed here

link

Topic Author
MarkVH0518
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by MarkVH0518 » Thu Oct 10, 2019 5:46 pm

DonIce wrote:
Thu Oct 10, 2019 3:55 pm
AGG has intrinsically outperformed BND and SCHZ over the last 8 years by more than the various other factors discussed here

link
OK, but I don't see that the 8 year performance is repeatable.

GoPackGo
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by GoPackGo » Thu Oct 10, 2019 7:19 pm

DonIce wrote:
Thu Oct 10, 2019 3:55 pm
AGG has intrinsically outperformed BND and SCHZ over the last 8 years by more than the various other factors discussed here

link
And it gets tighter if you change the time period to month-to-month. :D

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Re: $0 commissions; so what's the best bond ETF? and why?

Post by billthecat » Thu Oct 10, 2019 8:03 pm

GoPackGo wrote:
Thu Oct 10, 2019 7:19 pm
DonIce wrote:
Thu Oct 10, 2019 3:55 pm
AGG has intrinsically outperformed BND and SCHZ over the last 8 years by more than the various other factors discussed here

link
And it gets tighter if you change the time period to month-to-month. :D
We need an index of indices!
We cannot direct the winds but we can adjust our sails.

Domadosolo
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by Domadosolo » Thu Oct 10, 2019 8:57 pm

retired@50 wrote:
Thu Oct 10, 2019 2:27 pm
livesoft wrote:
Thu Oct 10, 2019 1:38 pm
Domadosolo wrote:
Thu Oct 10, 2019 1:23 pm
What is the benefit of a MF vs ETF?
If one had $500 or $1000 or $20000 and wanted to leave no money leftover and use all of that money to buy shares in an ETF, could they do it? Could they use all of it to buy shares of a mutual fund?

If one wanted to have their broker set it up so that they could automatically invest $1000 every 2 weeks into shares of an ETF, could they do it? How about into shares of a mutual fund?
Mutual funds allow for fractional share purchases, as I understand it, and ETFs do not. Therefore to buy an ETF, you must purchase in whole shares, while mutual funds allow for purchase in whole dollars. Since most people save each week or month in whole dollars, this is a convenience that allows the mutual fund saver to put all their money to work. As an example, suppose you save $100 per week, if the ETF is trading at $75 per share, you can only buy 1 share, and the remaining $25 sits on the sidelines until you come up with another $50, if a mutual fund trades at $75 per share, you can buy 1.333 shares. Regards,
Thanks retired@50, livesoft!

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Re: $0 commissions; so what's the best bond ETF? and why?

Post by ruralavalon » Fri Oct 11, 2019 11:34 am

MarkVH0518 wrote:
Thu Oct 10, 2019 11:50 am
Now that my IRAs accounts (Schwab and Fidelity) are all offering $0 commissions on ETF trades,
what is the best Bond ETF for a 3-fund portfolio?

I'd been using the funds listed in the 3-fund portfolio wiki, that is, those that traded free at each particular brokerage.
Now that approach is unnecessary.

The bond etf candidates are:
Vanguard BND: ER: 0.035; volume: 1.5M shares
Schwab SCHZ: ER: 0.04; volume 400K shares
iShares AGG: ER: 0.05; volume 1.5M shares

It seems BND with the higher volume and 1/2 basis points lower fee is the winner.
Are there any other factors to consider?
Is there something about how these funds manage investments that would cause one fund to be preferred over others?

I recall that when Fidelity introduced 0% ER mutual funds, there was discussion that other fund factors
might become more important than ER once the ER was below 0.10% (i.e. 10 basis points).
I never understood the other factors.
Are these other factors now important than ETF ER and trading costs? If so, what are the factors?

Thanks much
Mark
My suggestion would be:
Fidelity U.S. Bond Index Fund (FXNAX) ER 0.025%; or
Schwab U.S.Aggregate Bond Index Fund (SWAGX) ER 0.04%.
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hudson
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Re: $0 commissions; so what's the best bond ETF? and why?

Post by hudson » Fri Oct 11, 2019 12:57 pm

MarkVH0518 wrote:
Thu Oct 10, 2019 2:50 pm
livesoft wrote:
Thu Oct 10, 2019 12:39 pm
How big is the size of head of the pin we are dancing on?
a) Are the bonds of any of the EFT necessarily superior to the others. I think not, but now bond quality could be the most significant difference among them.

Or are these funds exactly identical?
Mark
Identical? no
AGG...first...BND second

credit quality...% US/AAA/AA: 74% vs 72%
SEC yield....2.25% vs 2.25%
total assets 66B vs 241B
average duration: 5.52 years vs 6.2 years
trailing twelve months yield...or what owners got paid over the last 12 months: 2.72% vs 2.75%

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