Purchased a ST Corp Bond ETF in March - Now What?

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Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

I did some tax loss harvesting in March trading one "not significantly identical" bond ETF for another. As hoped for, the market recovered and the new fund now has a substantial short term cap gain. If I sell it now the loss and gain have offset each other and I've accomplished nothing.

I could wait until the gain goes long term and then sell but I don't think I've accomplished anything then either since I've got a whole lot of other losses from equity TLH during the time period.

If interest rates go up I would normally presume that the price of the ETF will go down and my gain will get diminished. But the price change in March was (maybe) not due to a change in interest rates but by a rush to quality situation so I don't know if there is an interest rate/price relationship here.

Another problem is that the new ETF has a low trading volume and I would prefer to have a fund with a larger trading volume in my portfolio.

I can't get my head around this "dilemma". Any ideas?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by midareff »

Why does there have to be an action other than collecting monthly distributions?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

midareff wrote: Thu Aug 06, 2020 4:02 pm Why does there have to be an action other than collecting monthly distributions?
When I sell something to do a TLH I usually want a replacement that will give similar returns with similar risk. In this case that condition was met but the trading volume of the new security is very low and I would like to go back to my original position but then I would have to take the cap gains in the replacement shares. This would negate my my original TLH.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by sycamore »

If you wait long enough, the trading volume may get high enough :)

What's the bid/ask spread? Wouldn't that be the salient question?

How big is your holding compared to the trading volume? Guessing high enough is why you want to sell.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by livesoft »

I'd label it "Dead Money" and ignore it until a decade from now when I need to donate something to charity or my children.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by saintsfan342000 »

Doc wrote: Thu Aug 06, 2020 4:54 pm When I sell something to do a TLH I usually want a replacement that will give similar returns with similar risk. In this case that condition was met but the trading volume of the new security is very low and I would like to go back to my original position but then I would have to take the cap gains in the replacement shares. This would negate my my original TLH.
If it gives similar returns with similar risk, why do you need to go back to the former position?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by midareff »

Doc wrote: Thu Aug 06, 2020 4:54 pm
midareff wrote: Thu Aug 06, 2020 4:02 pm Why does there have to be an action other than collecting monthly distributions?
When I sell something to do a TLH I usually want a replacement that will give similar returns with similar risk. In this case that condition was met but the trading volume of the new security is very low and I would like to go back to my original position but then I would have to take the cap gains in the replacement shares. This would negate my my original TLH.
Not every move always works out as planned Doc. Was the trading volume not known in advance?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by vineviz »

Doc wrote: Thu Aug 06, 2020 4:54 pm
midareff wrote: Thu Aug 06, 2020 4:02 pm Why does there have to be an action other than collecting monthly distributions?
When I sell something to do a TLH I usually want a replacement that will give similar returns with similar risk. In this case that condition was met but the trading volume of the new security is very low and I would like to go back to my original position but then I would have to take the cap gains in the replacement shares. This would negate my my original TLH.
It sounds like you have no problems if you just stand pat. Why fret, when you don't really need to do anything? You know from our MANY discussions on the topic that trading volume is completely unimportant.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Stinky »

livesoft wrote: Thu Aug 06, 2020 6:01 pm I'd label it "Dead Money" and ignore it until a decade from now when I need to donate something to charity or my children.
I like the concept of "Dead Money".

Keep it until the price comes down or you want to donate to charity. And collect your distributions while you hold it.

There are worse problems than having an unrealized gain on a security that you purchased a few months ago.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

vineviz wrote: Thu Aug 06, 2020 6:28 pm Why fret, when you don't really need to do anything? You know from our MANY discussions on the topic that trading volume is completely unimportant.
I've read many of your previous discussions on the trading volume issue. And while I don't disagree I am still hesitant to place a limit order that is 5 to 10% of the daily trading volume especially when I need to sell to cover a buy order.
midareff wrote: Thu Aug 06, 2020 6:20 pm Was the trading volume not known in advance?
No. My bad.
sycamore wrote: Thu Aug 06, 2020 5:57 pm How big is your holding compared to the trading volume? Guessing high enough is why you want to sell.
In the past month on at least one day what I would want to sell was 20% of the daily volume.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

This thread is not going in the direction I had hoped.

What I am trying to get at is what is the expectation that future rate increases will wipe out a lot of the gain. The answer depends on whether the price crash when I bought was due to an interest rate increase or a flight to quality situation. (In this case the position was not quality and it was a flight from poor quality.)

If it was a rate related issue than the price should drop when the yield curve normalizes. If is was a flight to quality issue then rates would have to increase much more than what might be expected to wipe out the gain.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by jebmke »

Doc wrote: Fri Aug 07, 2020 9:50 am What I am trying to get at is what is the expectation that future rate increases will wipe out a lot of the gain. The answer depends on whether the price crash when I bought was due to an interest rate increase or a flight to quality situation.
My personal opinion is that the quality flight was short-lived and risk now is interest rate. That could change of course but my general sense is that the FED has pretty much taken major (wide-spread) default risk off the table (for now) - either explicitly or implicitly.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by neurosphere »

Doc wrote: Fri Aug 07, 2020 9:50 am This thread is not going in the direction I had hoped....

(seems to be a regular occurance here, don't take it personally, lol)

If it was a rate related issue than the price should drop when the yield curve normalizes. If is was a flight to quality issue then rates would have to increase much more than what might be expected to wipe out the gain.
But either way, if rates rise (regardless of the reason) your gains will decrease or become losses and you could get out of the fund. Are there any other problems with this fund apart from the trading volume? I have a similar issue with my muni bond funds. I TLH from long-term to intermediate term. I prefer to have long term, but now I have a ton of gains in my intermediate term fund and am also "stuck". Do I pay gains tax (or otherwise erase the benefits of my losses) to get back to long term? Here are some suggestions, most of which are likely obvious to you already:

-- The poor trading volume now will likely still be present later. But unlike a fee/expense related problem, there is no "cost" to you for holding. E.g. no hurry to get out. And trading volume may increase later. Likewise, there is not an asset allocation problem, right? It's not as if one TLH from Total International to Developed Markets, but really wanted to "get back" the missing countries that are are in Total International but not in Dev. Markets.
-- You could decide to gradually sell over time, minimizing volume related problems
-- Direct the dividends/income to your preferred bond fund or other investments (I doubt you are reinvesting the income back into the ETF, but just listing this for completeness sake)
-- Keep forever or donate to charity, as others have mentioned

Yes you would "prefer to have a fund" with higher trading volume, but otherwise, so what? The risk would be if you NEEDED to sell urgently AND there was a liquidity crisis AND there was very low volume for whatever reason in that particular fund. So if there was a risk that you might really need access to that particular ETF, that might be one reason to sell just enough now to lessen that future risk.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by aristotelian »

Are you trying to time the market or simply lock in the loss? If it is an equivalent asset that was purchased as a long term position I would simply let it ride. If you are trying to time the market and make a trade you would have to decide what asset you would purchase that would outperform in the scenario you think is going to happen (for example, pushing money from bonds to stocks). However, that raises all sorts of speculative questions that none of us can answer without crystal balls, and gets you into trading rather than investing.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

neurosphere wrote: Fri Aug 07, 2020 10:19 am The risk would be if you NEEDED to sell urgently AND there was a liquidity crisis AND there was very low volume for whatever reason in that particular fund.
That is the issue. The position is 25% of our total in one of our accounts and it is the only fixed income position in that account. So I would like to have more flexibility but on the other hand I don't want to "lose" my tax loss carry forward for future needs.
aristotelian wrote: Fri Aug 07, 2020 10:22 am If it is an equivalent asset that was purchased as a long term position I would simply let it ride.
Same answer.

As far a "long term position" is concerned, given what has gone on recently we have no long term fixed income position left and only 8% intermediate term. And half of the rest is in T-Bills. Normally our FI portfolio would look like a 1-10 Gov/credit index.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

For vineviz and all you other FI guru's out there:

We have a 14% gain in this position over the last five months. What is the likelihood that much of that will disappear when the yield curve normalizes?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by aristotelian »

Doc wrote: Fri Aug 07, 2020 11:11 am For vineviz and all you other FI guru's out there:

We have a 14% gain in this position over the last five months. What is the likelihood that much of that will disappear when the yield curve normalizes?
Sounds like you are trying to time the bond market. Nobody can help you with that. Rates may go lower before they start to normalize. Or this could be the new normal.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by rkhusky »

A good example for heeding the typical TLH warning - "don't choose a TLH partner that you aren't willing to keep for a long time". Timing the bond market is just as difficult as timing the stock market. Both are affected by future world events, many of which are unknowable.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by vineviz »

Doc wrote: Fri Aug 07, 2020 11:11 am For vineviz and all you other FI guru's out there:

We have a 14% gain in this position over the last five months. What is the likelihood that much of that will disappear when the yield curve normalizes?
Even if I were to stipulate that we could agree on what "normalize" means in this context, I don't think it would be easy to make an estimate of the likelihood.

The yield curve isn't particularly steep right now, so I'd guess (and it's nothing more than a guess) that a sharp increase in short-term rates is not very likely in the normal course of events. An exogenous shock is impossible to predict though, so it's really hard to say.

At the point of a spear I'd probably say the likelihood of your gain disappearing is < 50% but I can't stress enough how uncertain I am about that.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

aristotelian wrote: Fri Aug 07, 2020 11:13 am Sounds like you are trying to time the bond market.
Huh. I want to know if it is likely that the price will go down substantially some time soon. Rates will rise and the price will go down. If I sell I'm going to put the money back into the exact same market. So I don't have any gain or loss potential.

The question is was the big dip in March due to an interest rate change or a flight to quality situation? If it's an interest rate change the answer may be a few years based on looking at a historical price chart. If it's a flight to quality situation it's may be a decade or so based on looking at 2008 and 2020 for "similar" market crashes.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by neurosphere »

Doc wrote: Thu Aug 06, 2020 3:43 pm....since I've got a whole lot of other losses from equity TLH during the time period.
So then does it really matter? How long do your expect to take to use up all your accumulated losses currently? And how long if you incur gains by selling this fund? Just use up some of the losses to "correct" this mistake and get back to your. Then if there is another decrease in bond prices you can find a more suitable TLH partner.

If the decision is difficult from a tax standpoint, then perhaps it's acceptable to simply sell from a psychological one. I have no desire to minimize taxes for my heirs, so a stepped up basis is not that important to me. Thus my accumulated losses are protection against unplanned/unexpected future capital gains, but also they give my flexibility to make moves and not have to worry about tax considerations. Your losses give you that flexibility too. :D
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by aristotelian »

Doc wrote: Fri Aug 07, 2020 12:07 pm
aristotelian wrote: Fri Aug 07, 2020 11:13 am Sounds like you are trying to time the bond market.
Huh. I want to know if it is likely that the price will go down substantially some time soon. Rates will rise and the price will go down. If I sell I'm going to put the money back into the exact same market. So I don't have any gain or loss potential.

The question is was the big dip in March due to an interest rate change or a flight to quality situation? If it's an interest rate change the answer may be a few years based on looking at a historical price chart. If it's a flight to quality situation it's may be a decade or so based on looking at 2008 and 2020 for "similar" market crashes.
Like I said, you are trying to time the market and nobody knows if rates will go up or when.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

aristotelian wrote: Fri Aug 07, 2020 12:22 pm Like I said, you are trying to time the market and nobody knows if rates will go up or when.
I don't think that anyone believes that rates will not go up. When is another matter.

The price drop in the short corporate bond ETFs was not due to a rate change as is evidenced by the minimal price change in Treasury ETFs during the same period.

But as vineviz said "An exogenous shock is impossible to predict though, so it's really hard to say."
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by aristotelian »

Doc wrote: Fri Aug 07, 2020 1:03 pm
aristotelian wrote: Fri Aug 07, 2020 12:22 pm Like I said, you are trying to time the market and nobody knows if rates will go up or when.
I don't think that anyone believes that rates will not go up. When is another matter.

The price drop in the short corporate bond ETFs was not due to a rate change as is evidenced by the minimal price change in Treasury ETFs during the same period.

But as vineviz said "An exogenous shock is impossible to predict though, so it's really hard to say."
If the market thinks that rates are going up, why would anyone buy at current rates?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

aristotelian wrote: Fri Aug 07, 2020 1:09 pm If the market thinks that rates are going up, why would anyone buy at current rates?
The question is when. If you belive rates will be 2% in a year would you stay in cash for a year or invest at 1%? Five years?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by aristotelian »

Doc wrote: Fri Aug 07, 2020 1:47 pm
aristotelian wrote: Fri Aug 07, 2020 1:09 pm If the market thinks that rates are going up, why would anyone buy at current rates?
The question is when. If you belive rates will be 2% in a year would you stay in cash for a year or invest at 1%? Five years?
It is not just a question of when. Many other developed countries have gone lower and stayed lower. Regardless you are asking the board to help you time the market. It's a futile exercise.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

aristotelian wrote: Fri Aug 07, 2020 2:53 pm
Doc wrote: Fri Aug 07, 2020 1:47 pm
aristotelian wrote: Fri Aug 07, 2020 1:09 pm If the market thinks that rates are going up, why would anyone buy at current rates?
The question is when. If you belive rates will be 2% in a year would you stay in cash for a year or invest at 1%? Five years?
It is not just a question of when. Many other developed countries have gone lower and stayed lower. Regardless you are asking the board to help you time the market. It's a futile exercise.
Market timing is about buying or selling a security in order to increase one's gain. I am addressing selling and buying essentially the same maturity at the same time. There is no question about increasing one's gain. It is only concerned with when you recognize the taxes.

I own "A". It has a short term gain of some 20%. If I sell "A" and buy "A" back I have not changed the amount of my gain in the long run. I have just changed when I recognize that gain for tax purposes. And since I have a substantial tax loss carry forward it doesn't even change my current tax liability.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by aristotelian »

Doc wrote: Fri Aug 07, 2020 3:19 pm
aristotelian wrote: Fri Aug 07, 2020 2:53 pm
Doc wrote: Fri Aug 07, 2020 1:47 pm
aristotelian wrote: Fri Aug 07, 2020 1:09 pm If the market thinks that rates are going up, why would anyone buy at current rates?
The question is when. If you belive rates will be 2% in a year would you stay in cash for a year or invest at 1%? Five years?
It is not just a question of when. Many other developed countries have gone lower and stayed lower. Regardless you are asking the board to help you time the market. It's a futile exercise.
Market timing is about buying or selling a security in order to increase one's gain. I am addressing selling and buying essentially the same maturity at the same time. There is no question about increasing one's gain. It is only concerned with when you recognize the taxes.

I own "A". It has a short term gain of some 20%. If I sell "A" and buy "A" back I have not changed the amount of my gain in the long run. I have just changed when I recognize that gain for tax purposes. And since I have a substantial tax loss carry forward it doesn't even change my current tax liability.
I understand you harvested a loss. Now I am not understanding why you would consider selling a short term gain if your only purpose is tax efficiency, especially since in March your plan was to harvest the loss.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by neurosphere »

aristotelian wrote: Fri Aug 07, 2020 4:30 pm I understand you harvested a loss. Now I am not understanding why you would consider selling a short term gain if your only purpose is tax efficiency, especially since in March your plan was to harvest the loss.
Because he realized, after the fact, that this fund has some potential problems (volume) and all things equal he would rather not hold it. So essentially he's asking whether there may likely/possibly be economic changes such that the gain will sooner than later be erased and he can move to a better fund. Or whether he should probably just ignore what might happen in the future and get out now.

Summary: I made a mistake buying this fund, and do you think I should exchange now, or wait, given it now has gains?

There is some element of "timing" in that question, sure. I would simply turn the question around to Doc and say "suppose it's 50/50 whether your gains will evaporate in the near future or whether they will increase. What would you DO with that answer?
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

aristotelian wrote: Fri Aug 07, 2020 4:30 pm I understand you harvested a loss. Now I am not understanding why you would consider selling a short term gain if your only purpose is tax efficiency, especially since in March your plan was to harvest the loss.
I'm not. I don't want to take the gain at all. I don't like the ETF because it has a very very low trading volume.
Doc wrote: Fri Aug 07, 2020 9:40 am In the past month on at least one day what I would want to sell was 20% of the daily volume.
vineviz has been trying to convince me that I worry about trading volume too much. But I still worry about it if I was selling this position to rebalance on a RBD.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by aristotelian »

Doc wrote: Fri Aug 07, 2020 5:03 pm
aristotelian wrote: Fri Aug 07, 2020 4:30 pm I understand you harvested a loss. Now I am not understanding why you would consider selling a short term gain if your only purpose is tax efficiency, especially since in March your plan was to harvest the loss.
I'm not. I don't want to take the gain at all. I don't like the ETF because it has a very very low trading volume.
Doc wrote: Fri Aug 07, 2020 9:40 am In the past month on at least one day what I would want to sell was 20% of the daily volume.
vineviz has been trying to convince me that I worry about trading volume too much. But I still worry about it if I was selling this position to rebalance on a RBD.
Then why are you worried about interest rates rising?

Anyway I would just keep it. You are going to have to sell sometime. Just as much risk getting screwed on bid/ask later.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Angst »

Doc wrote: Fri Aug 07, 2020 3:19 pm Market timing is about buying or selling a security in order to increase one's gain. I am addressing selling and buying essentially the same maturity at the same time. There is no question about increasing one's gain. It is only concerned with when you recognize the taxes.
The best "market timing" opportunity in this scenario probably occurred exactly 30 calendar days after you'd TLH'd the original bond fund. Easy to point out now, but that would have been the moment I was waiting for to get back into my preferred fund. Now if the TLH partner at that point in time had already gained more than the TLH amount you'd booked, so be it. There are worse things than paying tax on an unexpected gain. I'm probably missing something - I haven't carefully read the entire thread.
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Re: Purchased a ST Corp Bond ETF in March - Now What?

Post by Doc »

Angst wrote: Fri Aug 07, 2020 5:36 pm The best "market timing" opportunity ...
This is not market timing. I opened a position in March and it has had a large price gain since then. I would prefer to have this position in another ETF because of liquidity concerns with the new position. I could take the gain now and pay the tax now or just wait until later. Except I will owe no tax because I have large harvested tax losses. If I take the gain now I will buy essentially the same position back except in another ETF. Whatever the original position might do in the future the replacement position will do the same.

I am just trying to get an idea of what the price of either position might be in the future. The big price drop in March was almost certainly due to flight to quality issues not a change in market interest rates. In the future interest rates will almost certainly increase and the price of the ETF whether I hold the original position or a replacement position will fall. At least if the timing or the future interest rate increase is short compared to the duration of the ETF. One of the ideas I was trying to confirm was whether this last statement was a reasonable one.

The suggestion that the low volume of the new position was not a major concern was helpful.
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