Are bond ETF's "safe" (Bernstein) - sounding board please

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guppyguy
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Are bond ETF's "safe" (Bernstein) - sounding board please

Post by guppyguy »

Ever read something that just stuck, whether you wanted it to or not?

Long time reader of Dr Bernstein and one of his imperatives is to never utilize ETFs for fixed income. I understand his argument, and have goggled several posts here discussing it. It easily resonates because it appears the most cautious approach, given the asset class's cautious objectives.

So has he changed his position or has time altered this tenet, surprisingly anchored in my head by the law of primacy? I've seen graphs from last March where NAV and ETF price diverge for a short period of time, but I gut thinks that the risk Bernstein had in mind was much more insidious??

Not considering any changes nor seeking advice, other than whether I am being irrational. I realize this is probably very subjective, hence no right answer, I guess I'm just wondering if I am missing out in something by not having an open mind?????
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

guppyguy wrote: Tue Mar 09, 2021 1:24 pm Ever read something that just stuck, whether you wanted it to or not?

Long time reader of Dr Bernstein and one of his imperatives is to never utilize ETFs for fixed income. I understand his argument, and have goggled several posts here discussing it. It easily resonates because it appears the most cautious approach, given the asset class's cautious objectives.

So has he changed his position or has time altered this tenet, surprisingly anchored in my head by the law of primacy? I've seen graphs from last March where NAV and ETF price diverge for a short period of time, but I gut thinks that the risk Bernstein had in mind was much more insidious??

Not considering any changes nor seeking advice, other than whether I am being irrational. I realize this is probably very subjective, hence no right answer, I guess I'm just wondering if I am missing out in something by not having an open mind?????
I hope you're either misremembering what you read or that Bernstein has come to his senses.

ETFs are highly superior to old-fashioned mutual funds as a vehicle for holding bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by alex_686 »

guppyguy wrote: Tue Mar 09, 2021 1:24 pm So has he changed his position or has time altered this tenet, surprisingly anchored in my head by the law of primacy? I've seen graphs from last March where NAV and ETF price diverge for a short period of time, but I gut thinks that the risk Bernstein had in mind was much more insidious??
Do you know what risks that Bernstein had in mind? Otherwise we are kind of shooting in the dark.

In my informed opinion, the market prices of the ETF were of higher quality than the accountant's estimate of a mutual fund's NAV. I say informed because I used to work in a mutual fund accounting department where we did this stuff. The ETFs were certainly more liquid than the underlying bonds.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Robot Monster »

vineviz wrote: Tue Mar 09, 2021 3:05 pm ETFs are highly superior to old-fashioned mutual funds as a vehicle for holding bonds.
Never heard that before. What makes them highly superior?
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by watchnerd »

guppyguy wrote: Tue Mar 09, 2021 1:24 pm Ever read something that just stuck, whether you wanted it to or not?

Long time reader of Dr Bernstein and one of his imperatives is to never utilize ETFs for fixed income. I understand his argument, and have goggled several posts here discussing it. It easily resonates because it appears the most cautious approach, given the asset class's cautious objectives.

So has he changed his position or has time altered this tenet, surprisingly anchored in my head by the law of primacy? I've seen graphs from last March where NAV and ETF price diverge for a short period of time, but I gut thinks that the risk Bernstein had in mind was much more insidious??

Not considering any changes nor seeking advice, other than whether I am being irrational. I realize this is probably very subjective, hence no right answer, I guess I'm just wondering if I am missing out in something by not having an open mind?????
I don't know what you read, but there is this:

"PREFER

Individual US Treasury bonds, manually laddered.
US Treasury bond mutual funds, for smaller balances.
Top-yielding FDIC-Insured Certificates of Deposit, manually laddered.
Short-term or intermediate-term, higher-quality municipal-bond funds, for large taxable balances.

OKAY

“Total bond index” mutual funds, as they consist mainly of high-grade, government-backed bonds.
US Treasury bond mutual funds for larger balances.

AVOID

All corporate bonds, but especially avoid lower-grade and/or longer-term corporate bonds.
Lower-grade and/or longer-term municipal bonds.:

https://www.mymoneyblog.com/william-ber ... bonds.html
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by junior »

vineviz wrote: Tue Mar 09, 2021 3:05 pm
I hope you're either misremembering what you read or that Bernstein has come to his senses.

ETFs are highly superior to old-fashioned mutual funds as a vehicle for holding bonds.

I just skimmed Rational Expectations and on page 169 of 192 on Kindle he warns against bond ETFs but he isn't really recommending mutual funds as an alternative. He recommends buying individual treasury bonds at auction.

He says the only bonds worth owning as mutual funds are open-end municipal and corporate bond funds if the investor wants to own corporate or municipal bonds.
Last edited by junior on Tue Mar 09, 2021 3:44 pm, edited 2 times in total.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by livesoft »

Mr Rick Ferri has posted on the OP's subject. Here are some links found by a simple search of Bogleheads.org:

viewtopic.php?t=308778 (Understanding Bond ETF Discounts)

viewtopic.php?t=315013 (Bond ETFs: Market Price vs NAV)

viewtopic.php?t=307175 ([Bond ETFs Face Toughest Liquidity Test Yet 3/12/20])


My synopsis is that in times of stress when one probably wants to rebalance into equities and get the money to do so out of bonds, then bond ETFs may not be the place the get the money while bond mutual funds may be OK.

OTOH, if one wants to buy bond ETFs at a substantial discount during times of stress, then where would one get the money?
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Robot Monster
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Robot Monster »

livesoft wrote: Tue Mar 09, 2021 3:43 pm My synopsis is that in times of stress when one probably wants to rebalance into equities and get the money to do so out of bonds, then bond ETFs may not be the place the get the money while bond mutual funds may be OK.
Kinda don't want my safe bond money to have any "funny business" going on in times of stress. Feel like that's a huge vote for sticking with my Vanguard mutual funds (but I'd be open to anything Vineviz has to say on the subject.)
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by livesoft »

Robot Monster wrote: Tue Mar 09, 2021 3:52 pmKinda don't want my safe bond money to have any "funny business" going on in times of stress. Feel like that's a huge vote for sticking with my Vanguard mutual funds (but I'd be open to anything Vineviz has to say on the subject.)
The way I figure it: I own both VBTLX and BND and other bond ETFs. If I notice I need to exchange bonds into equities during times of stress, then I have a choice. Or maybe I need to exchange bond mutual funds into bond ETFs in order to capture the funny business? :twisted: Win! Win!
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Bill Bernstein »

99% of the time, it shouldn't make a difference.

But it's how liquid you are the other 1% of the time that matters most, when you don't want to take a haircut to pay for living expenses or to buy stocks at the fire sale, which is certainly what happened to bond ETFs in late '08.

Yes, ETFs are certainly more liquid than the underlying bonds, and that's a problem: liquidity mismatch. Again, see late 2008.

There's a reason why Warren Buffett holds the bulk of Berkshire's liquid reserves in T-bills.

Bill
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by drk »

Via Matt Levine's Money Stuff, a paper from the BIS on bond ETFs that explains why bond ETFs tend to trade at a discount to NAV during dashes for liquidity:
The flexibility inherent in baskets' composition may allow ETFs to withstand episodes of market stress. In the face of panic selling (runs), which generates redemption pressure, ETF sponsors could tilt redemption baskets towards riskier or less liquid securities. This would decrease prices of ETF shares since shares are exchanged for a lower-quality subset of ETF holdings. Meanwhile, non-running investors would be better off given that the average quality of the bonds in the ETF portfolio has improved. This mechanism could reduce incentives to redeem, thus nipping runs in the bud.
Last edited by drk on Tue Mar 09, 2021 6:56 pm, edited 1 time in total.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by alex_686 »

Bill Bernstein wrote: Tue Mar 09, 2021 4:47 pm But it's how liquid you are the other 1% of the time that matters most, when you don't want to take a haircut to pay for living expenses or to buy stocks at the fire sale, which is certainly what happened to bond ETFs in late '08.
This always confuses me.

In 2008, bond ETF prices were lower than their corresponding mutual fund counterparts because the ETF prices were more accurate. How is this a bad thing?

Let us review what happened in 2008 and spring of 2020, because basically the same thing happened in both cases. There was a liquidity crisis. That is, bonds were not trading. This is a problem for mutual funds. Mutual funds have to "mark-to-market" their holdings to generate a price. That is, to price a bond in their portfolio they need to see a actual trade for that bond. During a liquidity crisis there is no market, so no prices, so it is really hard to strike the NAV. The fund accountants have to use stale data, which is why the mutual fund prices lagged.

While you site the benefit of avoiding a "haircut to pay for living expenses", I think this is a horrible idea. The bonus that you get is from the rest of the shareholders - to the determent of the buy-and-hold crowd.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

Robot Monster wrote: Tue Mar 09, 2021 3:27 pm
vineviz wrote: Tue Mar 09, 2021 3:05 pm ETFs are highly superior to old-fashioned mutual funds as a vehicle for holding bonds.
Never heard that before. What makes them highly superior?
Generally speaking, bonds are much less liquid than stocks are. Compared to stocks, bonds are highly heterogenous and a single publicly traded company might have only one type of stock outstanding but dozens (possibly hundreds of different bonds). Compare Vanguard Total Stock Market fund with 3,640 holdings to Vanguard Total Bond Market fund with 10,025 holdings (and that fund only includes investment-grade debt).

As a consequence, on any particular day many (maybe even most) bonds aren't actually traded: no one buys any and no one sells any. This can be true even for bonds with large market values. And when they do trade they often trade at very wide bid-ask spread, even for sophisticated trade desks like Vanguard or BlackRock.

Since a bond fund or ETF (broadly speaking) reports its NAV based on the last reported transaction for each bonds, the reported NAV is almost always "stale" or based on old data. Sometimes days old.

If bond markets are not very volatile the stale NAVs aren't a big deal. But when bond markets ARE volatile, anyone buying or selling shares of the fund is doing so based at a share price that doesn't reflect the actual value of the underlying holdings. They could very well be paying more than the fund holdings are worth when they buy or getting less than they are worth when they sell. Who ends up paying those costs? The fund holders who are quietly sitting tight. And even in normal times the long-term buy-and-hold investor is paying the bid-ask spreads for mutual fund investors who are buying and selling shares of the fund.

The other impact is on re-balancers who, in the absence of accurate fund pricing, could be rebalancing from a fund that LOOKS like it's not down much but which in reality IS down considerably. Now, stocks might be down even more but if you're going to sell bonds at depressed prices wouldn't you rather know that beforehand

Now, if you are trading MORE frequently than the AVERAGE investor in your mutual fund you end up coming out ahead: the other shareholders are subsidizing your trading costs. If you are trading LESS frequently than the average investor in your mutual fund, guess who's paying that subsidy. That's right, it's you.

Add in the tax efficiencies that go along with ETFs and the case is open and shut.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

alex_686 wrote: Tue Mar 09, 2021 5:40 pm
Bill Bernstein wrote: Tue Mar 09, 2021 4:47 pm But it's how liquid you are the other 1% of the time that matters most, when you don't want to take a haircut to pay for living expenses or to buy stocks at the fire sale, which is certainly what happened to bond ETFs in late '08.
This always confuses me.
That's because it makes no sense. The idea that people can make better decisions using fake prices than they can with real prices is, well, baffling at the very least.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by guppyguy »

Bill Bernstein wrote: Tue Mar 09, 2021 4:47 pm 99% of the time, it shouldn't make a difference.

But it's how liquid you are the other 1% of the time that matters most, when you don't want to take a haircut to pay for living expenses or to buy stocks at the fire sale, which is certainly what happened to bond ETFs in late '08.

Yes, ETFs are certainly more liquid than the underlying bonds, and that's a problem: liquidity mismatch. Again, see late 2008.

There's a reason why Warren Buffett holds the bulk of Berkshire's liquid reserves in T-bills.

Bill
Thanks Bill!!...I should have searched out some of your posts here. It’s the risk of reading (and re-reading and re-reading in the case of the year of COVID) older financial gems (4 Pillars/RE)....you never know when the author has updated their thinking.

I’ll stick with my treasury/CD ladder.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by typical.investor »

Robot Monster wrote: Tue Mar 09, 2021 3:52 pm
livesoft wrote: Tue Mar 09, 2021 3:43 pm My synopsis is that in times of stress when one probably wants to rebalance into equities and get the money to do so out of bonds, then bond ETFs may not be the place the get the money while bond mutual funds may be OK.
Kinda don't want my safe bond money to have any "funny business" going on in times of stress. Feel like that's a huge vote for sticking with my Vanguard mutual funds (but I'd be open to anything Vineviz has to say on the subject.)
Based on the events surrounding 3.2020, I don't find the generalization that ETFs get wonky and should be avoided in times of stress to be factual.

Sure it's a fact that mutual funds traded at NAV at the end of the day, while the ETFs were trading at a discount to NAV during the day. In my experience though, it was better to have rebalanced when stock prices were sharply lower during the day before they recovered at close.

Here is a thread arguing that ETFs are better. viewtopic.php?t=308463
To support the OPs argument, yesterday I waited until 3:50 p.m. to place an order. In the next 9 minutes, the market jumped 4%. In volatile times like this that doesn't seem like much. However, when the market averages less than 10% a year, that represents about five months on average of time in the market which that's insane to happen in 9 minutes. The size of my order cost me approximately $8,000. I wish I had traded in that particular moment with an ETF
Similarly in my case, I am not bent out of shape by having sold ETFs "at a discount to NAV" because the benefit of doing so at the time was so high, and the simple fact is that I received the amount for which the bonds could be sold.
Last edited by typical.investor on Tue Mar 09, 2021 7:49 pm, edited 2 times in total.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by aristotelian »

There were a couple of days during the March 2020 crash where bond ETF's also dropped well below NAV. A few people on this board picked up on it and made a nice trade. viewtopic.php?f=10&t=307175

Within a few days the two converged. IMO this is only a concern if you are the type to rebalance on a day to day basis.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Bill Bernstein »

It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.

(Of course, you could make the opposite case, that if you want to buy bonds, you'll get a better price with the ETF. But in a bad state of the world, that's not what most of us want to do.)

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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by gasman »

Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008),
Bill
Dr. Bernsein,

Do you have any comments about the current state of the markets?
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.
That’s far from the end of the story, Bill, and it’s not even a true story.

ETF buyers and sellers were transacting at the ACTUAL level of NAV.

Open-end buyers were transacting at a fictional NAV, and if we know anything about financial markets it’s that when individual investors trade despite having an information deficit they aren’t usually the ones who come out on top.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by typical.investor »

Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.
I disagree. It's not the end of the story.

There are two prices here. The bond price and the stock price.

As I and others have experienced, getting a little higher bond price at the end of the day but also paying a much higher stock price at that time would have taken money out of our pocket.

But yes, if you look at your bond returns in isolation, yes using the open end fund would have been advantageous.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by ChinchillaWhiplash »

I like buying close end bond funds at a discount. 8-)
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by AlohaJoe »

Robot Monster wrote: Tue Mar 09, 2021 3:52 pm
livesoft wrote: Tue Mar 09, 2021 3:43 pm My synopsis is that in times of stress when one probably wants to rebalance into equities and get the money to do so out of bonds, then bond ETFs may not be the place the get the money while bond mutual funds may be OK.
Kinda don't want my safe bond money to have any "funny business" going on in times of stress. Feel like that's a huge vote for sticking with my Vanguard mutual funds (but I'd be open to anything Vineviz has to say on the subject.)
You have it completely backwards. It is mutual funds that have the "funny business" going on. The mutual fund ignores the market price, so you get an artificially high or low price at the expense of the mutual fund investors who didn't sell. I mean, that happens to work in your favor when bonds are dropping. It doesn't work in your favor when bonds are going up.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by AlohaJoe »

vineviz wrote: Tue Mar 09, 2021 9:01 pm Open-end buyers were transacting at a fictional NAV, and if we know anything about financial markets it’s that when individual investors trade despite having an information deficit they aren’t usually the ones who come out on top.
If you want the "benefits" of a mutual fund but in ETF form, you can just look at last week's bond ETF prices when deciding to trade 8-)
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Bill Bernstein »

Well, it's a metaphysical question as to which is the "real" price, the ETF's or the open-end fund's.

But when I want to sell bonds and buy stocks at times like end-2008, I want to get the higher price for my bonds, and that's with the open-end fund.

And if that's because the open-end price is "fictional," then it's certainly a happy fiction.

And, of course, to repeat, if you're buying bonds, you should buy the ETF. But in really bad states of the world, most rational, disciplined investors who want to adhere to their investment policy aren't going to be doing that.

Bill
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Zosima »

livesoft wrote: Tue Mar 09, 2021 4:32 pm Or maybe I need to exchange bond mutual funds into bond ETFs in order to capture the funny business? :twisted: Win! Win!
It is one of the very few almost risk free arbitrage opportunities available for retail investors even if it occurs for about one week every decade.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by typical.investor »

Bill Bernstein wrote: Tue Mar 09, 2021 9:19 pm
But when I want to sell bonds and buy stocks at times like end-2008, I want to get the higher price for my bonds, and that's with the open-end fund.

And if that's because the open-end price is "fictional," then it's certainly a happy fiction.
viewtopic.php?t=308463
I waited until 3:50 p.m. to place an order. In the next 9 minutes, the market jumped 4%. In volatile times like this that doesn't seem like much. However, when the market averages less than 10% a year, that represents about five months on average of time in the market which that's insane to happen in 9 minutes. The size of my order cost me approximately $8,000. I wish I had traded in that particular moment with an ETF
Not sure what is happy about losing $8,000, but yes that person did sell their bonds at a higher NAV that the market was actually trading them for.

I experienced that several times myself in March 2020, but fortunately was selling bond ETFs to buy stocks before they jumped by end of day.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Steve Reading »

Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.
The ETF price is lower because the underlying securities were worth less. The ETF price is the fair, correct, market price, enforced by market makers and APs. The VBTLX price is a stale, imaginary price.

If VBTLX experienced net redemptions, it was redeeming shares at prices it couldn't even fetch in the market. This means ALL fund holder (not just those poor souls who were getting fleeced buying at the inflated NAV) subsidized the redemptions at the stale, inflated NAV.

The argument of "use VBTLX because when bonds crash, Vanguard will still give you a lot of money for your shares, to the detriment of everyone else" almost borders the immoral IMO.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Steve Reading »

AlohaJoe wrote: Tue Mar 09, 2021 9:15 pm The mutual fund ignores the market price, so you get an artificially high or low price at the expense of the mutual fund investors who didn't sell. I mean, that happens to work in your favor when bonds are dropping. It doesn't work in your favor when bonds are going up.
I'm not even sure it's about staleness. I think it's just the wrong price. It could be higher or lower than the correct market price, regardless of the direction of prices. Bonds have been losing value, yet BND price is lower than NAV. So here, the "disciplined, rational, Bernstein investors" selling their stocks and buying bonds to rebalance are getting fleeced by buying into VBTLX *shrus*.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by klaus14 »

vineviz wrote: Tue Mar 09, 2021 9:01 pm
Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.
That’s far from the end of the story, Bill, and it’s not even a true story.

ETF buyers and sellers were transacting at the ACTUAL level of NAV.

Open-end buyers were transacting at a fictional NAV, and if we know anything about financial markets it’s that when individual investors trade despite having an information deficit they aren’t usually the ones who come out on top.
if i can sell the mutual fund at a better price than ETF why do i care which price is ACTUAL ?
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by typical.investor »

klaus14 wrote: Wed Mar 10, 2021 4:10 am
vineviz wrote: Tue Mar 09, 2021 9:01 pm
Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.
That’s far from the end of the story, Bill, and it’s not even a true story.

ETF buyers and sellers were transacting at the ACTUAL level of NAV.

Open-end buyers were transacting at a fictional NAV, and if we know anything about financial markets it’s that when individual investors trade despite having an information deficit they aren’t usually the ones who come out on top.
if i can sell the mutual fund at a better price than ETF why do i care which price is ACTUAL ?
Because as others have already pointed out, if you are one of those continuing to hold the fund after many have liquidated their positions at a better price than ACTUAL, then you will care what the ACTUAL price was because the difference is the loss that you are holding.

And also, as I and others have pointed out, selling for more than ACTUAL doesn’t mean you will be better off. Being able to sell at ACTUAL value when stocks are really depressed is better than having to wait until end of day and prices recover. Volatility is high in times of crises and that was a repeated pattern I experienced rebalancing in March.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by klaus14 »

typical.investor wrote: Wed Mar 10, 2021 4:18 am
klaus14 wrote: Wed Mar 10, 2021 4:10 am
if i can sell the mutual fund at a better price than ETF why do i care which price is ACTUAL ?
Because as others have already pointed out, if you are one of those continuing to hold the fund after many have liquidated their positions at a better price than ACTUAL, then you will care what the ACTUAL price was because the difference is the loss that you are holding.

And also, as I and others have pointed out, selling for more than ACTUAL doesn’t mean you will be better off. Being able to sell at ACTUAL value when stocks are really depressed is better than having to wait until end of day and prices recover. Volatility is high in times of crises and that was a repeated pattern I experienced rebalancing in March.

First point makes sense. But you can choose to liquidate (and even buy a bond ETF the next day) to avoid that issue.

Second point is just intra-day market timing. Something i (and many others) aren't very talented at. I can't know at 3pm that it is a better price than 4 pm.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

klaus14 wrote: Wed Mar 10, 2021 4:10 am
vineviz wrote: Tue Mar 09, 2021 9:01 pm
Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.
That’s far from the end of the story, Bill, and it’s not even a true story.

ETF buyers and sellers were transacting at the ACTUAL level of NAV.

Open-end buyers were transacting at a fictional NAV, and if we know anything about financial markets it’s that when individual investors trade despite having an information deficit they aren’t usually the ones who come out on top.
if i can sell the mutual fund at a better price than ETF why do i care which price is ACTUAL ?
Because, on any given day, you’re more likely to be NOT selling than selling. On those days, you’re giving your ACTUAL returns to other investors.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by birdog »

Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.

(Of course, you could make the opposite case, that if you want to buy bonds, you'll get a better price with the ETF. But in a bad state of the world, that's not what most of us want to do.)

Bill
This make sense to me.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by alex_686 »

Bill Bernstein wrote: Tue Mar 09, 2021 9:19 pm Well, it's a metaphysical question as to which is the "real" price, the ETF's or the open-end fund's.

But when I want to sell bonds and buy stocks at times like end-2008, I want to get the higher price for my bonds, and that's with the open-end fund.

And if that's because the open-end price is "fictional," then it's certainly a happy fiction.

And, of course, to repeat, if you're buying bonds, you should buy the ETF. But in really bad states of the world, most rational, disciplined investors who
I hope you understand why as a former mutual fund accountant I find this deeply morally offensive. Pricing should be fair to all shareholders.

The fact that you are able to game a defect in the pricing system to your advantage at the expense of other shareholders is not a feature. It is not a risk of owning a ETFs, but rather a risk of owning a mutual fund.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

Bill Bernstein wrote: Tue Mar 09, 2021 9:19 pm And, of course, to repeat, if you're buying bonds, you should buy the ETF. But in really bad states of the world, most rational, disciplined investors who want to adhere to their investment policy aren't going to be doing that.
I'm not being facetious when I say that the "most rational, disciplined" thing investors can do in the middle of a liquidity crisis is almost always "nothing". Literally. Nothing.

Those five days (or whatever) every decade or two when chaos is breaking loose in financial markets are arguably the most dangerous days for long-term individual investors to do ANYTHING. Trying to engage in a game of short-term arbitrage against the financial markets is the OPPOSITE of what "rational, disciplined investors" should be attempting.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by livesoft »

vineviz wrote: Wed Mar 10, 2021 8:48 amThose five days (or whatever) every decade or two when chaos is breaking loose in financial markets are arguably the most dangerous days for long-term individual investors to do ANYTHING....
But those 5 days are also potentially the most profitable days of the year. :twisted:

We all know about the "missing 10-best days, missing the 10-worst days" story. Any money that I have invested in fixed income on a worst day for equities will --by definition-- have missed that worst day and be available by action (i.e. selling and buying equities) to be invested and potentially catch a follow-on best day or a different worst day. I love "Those five days" myself.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by abuss368 »

I converted our mutual fund accounts with Vanguard to the newer brokerage platform last year. I then converted from mutual funds to ETFs.

As part of that we now own Total Bond Market ETF. Is that the best? Shrug....Vanguard investment experts think so. It is good enough for me.

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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

livesoft wrote: Wed Mar 10, 2021 8:56 am
vineviz wrote: Wed Mar 10, 2021 8:48 amThose five days (or whatever) every decade or two when chaos is breaking loose in financial markets are arguably the most dangerous days for long-term individual investors to do ANYTHING....
But those 5 days are also potentially the most profitable days of the year. :twisted:

We all know about the "missing 10-best days, missing the 10-worst days" story. Any money that I have invested in fixed income on a worst day for equities will --by definition-- have missed that worst day and be available by action (i.e. selling and buying equities) to be invested and potentially catch a follow-on best day or a different worst day. I love "Those five days" myself.
If day-trading is your strategy, more power to you. But every legitimatetrader I've ever worked with would give their right leg and their firstborn child for a 30 millisecond information advantage over the next trader: the idea of trying to arbitrage an instrument whose price you can't even estimate would laughable to them.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by alluringreality »

abuss368 wrote: Wed Mar 10, 2021 9:13 am we now own Total Bond Market ETF. Is that the best? Shrug....
One complication with applying some of the suggested implications from this discussion at Vanguard relates to how they have structured many of their funds. If a Vanguard customer actually considers the discussion from this thread relevant to their decisions, then the way their funds are structured may also be relevant. The following has some comments about Vanguard ETFs, and it begins with the suggestion that "it isn't worth losing sleep over".
https://www.morningstar.com/articles/96 ... -tax-risks
30% Savings Bonds, 45% US Indexes, 25% Ex-US Indexes - Buy & Hold
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Robot Monster »

AlohaJoe wrote: Tue Mar 09, 2021 9:15 pm
Robot Monster wrote: Tue Mar 09, 2021 3:52 pm
livesoft wrote: Tue Mar 09, 2021 3:43 pm My synopsis is that in times of stress when one probably wants to rebalance into equities and get the money to do so out of bonds, then bond ETFs may not be the place the get the money while bond mutual funds may be OK.
Kinda don't want my safe bond money to have any "funny business" going on in times of stress. Feel like that's a huge vote for sticking with my Vanguard mutual funds (but I'd be open to anything Vineviz has to say on the subject.)
You have it completely backwards. It is mutual funds that have the "funny business" going on. The mutual fund ignores the market price, so you get an artificially high or low price at the expense of the mutual fund investors who didn't sell. I mean, that happens to work in your favor when bonds are dropping. It doesn't work in your favor when bonds are going up.
I remember, around the time of the Covid plunge, reading scary articles about bond ETF's, e.g. one entitled, "Bond ETFs Will Never Be the Same After Coronavirus" from Bloomberg. A little tasty quote from that article:
But for now, bond ETFs across the world are trading at staggering discounts to their net asset values in what some have dubbed an “illiquidity doom loop.”
A doom loop????? Running for the door!!!

But from what I'm reading in this thread, seems like I did indeed have it all wrong. Why is everything so complicated. *Sigh* Looks like I'm gonna convert these two bond funds into ETFs:

Vanguard Short-Term Treasury Index Fund Admiral Shares
Vanguard Intermediate-Term Treasury Index Fund Admiral Shares
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by klaus14 »

vineviz wrote: Wed Mar 10, 2021 6:43 am
klaus14 wrote: Wed Mar 10, 2021 4:10 am
vineviz wrote: Tue Mar 09, 2021 9:01 pm
Bill Bernstein wrote: Tue Mar 09, 2021 8:52 pm It's not that hard; in very bad states of the world (and I'm not talking about a year ago, I'm talking about late 2008), if you owned the open end fund, you sold your bond fund at NAV to buy stocks.

If you owned an ETF, you got less than NAV.

End of story.
That’s far from the end of the story, Bill, and it’s not even a true story.

ETF buyers and sellers were transacting at the ACTUAL level of NAV.

Open-end buyers were transacting at a fictional NAV, and if we know anything about financial markets it’s that when individual investors trade despite having an information deficit they aren’t usually the ones who come out on top.
if i can sell the mutual fund at a better price than ETF why do i care which price is ACTUAL ?
Because, on any given day, you’re more likely to be NOT selling than selling. On those days, you’re giving your ACTUAL returns to other investors.
This actually contradicts itself. You don't know which part of the subset you'll end up (sellers vs holders) so expected effect of this to average fund investor is zero.
In addition, you also have control. You can see ETF is much cheaper, sell your fund and buy the ETF (or you keep holding). Mutual fund certainly gives more flexibility.
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

klaus14 wrote: Wed Mar 10, 2021 3:49 pm This actually contradicts itself. You don't know which part of the subset you'll end up (sellers vs holders) so expected effect of this to average fund investor is zero.
Not true. On any given day you are NOT equally like to sell, hold, or buy: you are much more likely to hold
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by klaus14 »

vineviz wrote: Wed Mar 10, 2021 5:02 pm
klaus14 wrote: Wed Mar 10, 2021 3:49 pm This actually contradicts itself. You don't know which part of the subset you'll end up (sellers vs holders) so expected effect of this to average fund investor is zero.
Not true. On any given day you are NOT equally like to sell, hold, or buy: you are much more likely to hold
i didn't mean they are equally likely every day. I said "expected effect". which is calculated by summing {probability x effect} for both sellers and buyers.
And this is zero by definition because the impact to total set of fund investors (buyers and sellers) is zero. hence, zero is also the impact to average investor.
And as i said before, you can actually influence which side of this average you'll end up.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by hudson »

watchnerd wrote: Tue Mar 09, 2021 3:34 pm
guppyguy wrote: Tue Mar 09, 2021 1:24 pm Ever read something that just stuck, whether you wanted it to or not?

Long time reader of Dr Bernstein and one of his imperatives is to never utilize ETFs for fixed income. I understand his argument, and have goggled several posts here discussing it. It easily resonates because it appears the most cautious approach, given the asset class's cautious objectives.

So has he changed his position or has time altered this tenet, surprisingly anchored in my head by the law of primacy? I've seen graphs from last March where NAV and ETF price diverge for a short period of time, but I gut thinks that the risk Bernstein had in mind was much more insidious??

Not considering any changes nor seeking advice, other than whether I am being irrational. I realize this is probably very subjective, hence no right answer, I guess I'm just wondering if I am missing out in something by not having an open mind?????
I don't know what you read, but there is this:

"PREFER

Individual US Treasury bonds, manually laddered.
US Treasury bond mutual funds, for smaller balances.
Top-yielding FDIC-Insured Certificates of Deposit, manually laddered.
Short-term or intermediate-term, higher-quality municipal-bond funds, for large taxable balances.

OKAY

“Total bond index” mutual funds, as they consist mainly of high-grade, government-backed bonds.
US Treasury bond mutual funds for larger balances.


AVOID

All corporate bonds, but especially avoid lower-grade and/or longer-term corporate bonds.
Lower-grade and/or longer-term municipal bonds.:

https://www.mymoneyblog.com/william-ber ... bonds.html
The above PREFER and OKAY work for me.
Here's what W. Bernstein said in April 2020....along the same line:

viewtopic.php?p=5160087#p5160087
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Triple digit golfer »

alex_686 wrote: Wed Mar 10, 2021 8:39 am
Bill Bernstein wrote: Tue Mar 09, 2021 9:19 pm Well, it's a metaphysical question as to which is the "real" price, the ETF's or the open-end fund's.

But when I want to sell bonds and buy stocks at times like end-2008, I want to get the higher price for my bonds, and that's with the open-end fund.

And if that's because the open-end price is "fictional," then it's certainly a happy fiction.

And, of course, to repeat, if you're buying bonds, you should buy the ETF. But in really bad states of the world, most rational, disciplined investors who
I hope you understand why as a former mutual fund accountant I find this deeply morally offensive. Pricing should be fair to all shareholders.

The fact that you are able to game a defect in the pricing system to your advantage at the expense of other shareholders is not a feature. It is not a risk of owning a ETFs, but rather a risk of owning a mutual fund.
I must be missing something. What is offensive about anything in that post?
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Blue456 »

Triple digit golfer wrote: Wed Mar 10, 2021 7:28 pm
alex_686 wrote: Wed Mar 10, 2021 8:39 am
Bill Bernstein wrote: Tue Mar 09, 2021 9:19 pm Well, it's a metaphysical question as to which is the "real" price, the ETF's or the open-end fund's.

But when I want to sell bonds and buy stocks at times like end-2008, I want to get the higher price for my bonds, and that's with the open-end fund.

And if that's because the open-end price is "fictional," then it's certainly a happy fiction.

And, of course, to repeat, if you're buying bonds, you should buy the ETF. But in really bad states of the world, most rational, disciplined investors who
I hope you understand why as a former mutual fund accountant I find this deeply morally offensive. Pricing should be fair to all shareholders.

The fact that you are able to game a defect in the pricing system to your advantage at the expense of other shareholders is not a feature. It is not a risk of owning a ETFs, but rather a risk of owning a mutual fund.
I must be missing something. What is offensive about anything in that post?
You are not missing anything.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Makefile »

Triple digit golfer wrote: Wed Mar 10, 2021 7:28 pm
alex_686 wrote: Wed Mar 10, 2021 8:39 am
Bill Bernstein wrote: Tue Mar 09, 2021 9:19 pm Well, it's a metaphysical question as to which is the "real" price, the ETF's or the open-end fund's.

But when I want to sell bonds and buy stocks at times like end-2008, I want to get the higher price for my bonds, and that's with the open-end fund.

And if that's because the open-end price is "fictional," then it's certainly a happy fiction.

And, of course, to repeat, if you're buying bonds, you should buy the ETF. But in really bad states of the world, most rational, disciplined investors who
I hope you understand why as a former mutual fund accountant I find this deeply morally offensive. Pricing should be fair to all shareholders.

The fact that you are able to game a defect in the pricing system to your advantage at the expense of other shareholders is not a feature. It is not a risk of owning a ETFs, but rather a risk of owning a mutual fund.
I must be missing something. What is offensive about anything in that post?
Because if the NAV is such that the fund pays a higher-than-reality value for the shares at the time of redemption, the remaining shareholders are left holding the bag in that the departing shareholder got more than their rightful share of the "pot" of assets.

I would also point out that the Vanguard Total Bond prospectus says they have the right to delay redemption payments for up to seven days. I would assume other bond funds all have the same right. It would be interesting to hear from alex_686 whether, outside of a Reserve Primary money market fund situation, funds ever actually do this or if doing it would cause a "bank run" of sorts.

Edit: There is the precedent after March 2020 that the Federal Reserve can step in and buy ETFs. So take that for whatever it might mean for the future.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Triple digit golfer »

Makefile wrote: Wed Mar 10, 2021 8:10 pm
Triple digit golfer wrote: Wed Mar 10, 2021 7:28 pm
alex_686 wrote: Wed Mar 10, 2021 8:39 am
Bill Bernstein wrote: Tue Mar 09, 2021 9:19 pm Well, it's a metaphysical question as to which is the "real" price, the ETF's or the open-end fund's.

But when I want to sell bonds and buy stocks at times like end-2008, I want to get the higher price for my bonds, and that's with the open-end fund.

And if that's because the open-end price is "fictional," then it's certainly a happy fiction.

And, of course, to repeat, if you're buying bonds, you should buy the ETF. But in really bad states of the world, most rational, disciplined investors who
I hope you understand why as a former mutual fund accountant I find this deeply morally offensive. Pricing should be fair to all shareholders.

The fact that you are able to game a defect in the pricing system to your advantage at the expense of other shareholders is not a feature. It is not a risk of owning a ETFs, but rather a risk of owning a mutual fund.
I must be missing something. What is offensive about anything in that post?
Because if the NAV is such that the fund pays a higher-than-reality value for the shares at the time of redemption, the remaining shareholders are left holding the bag in that the departing shareholder got more than their rightful share of the "pot" of assets.

I would also point out that the Vanguard Total Bond prospectus says they have the right to delay redemption payments for up to seven days. I would assume other bond funds all have the same right. It would be interesting to hear from alex_686 whether, outside of a Reserve Primary money market fund situation, funds ever actually do this or if doing it would cause a "bank run" of sorts.
But what is offensive about wanting to get the best price? Is holding a bond mutual fund and selling to buy stocks in the case of last March's crash immoral? Should everybody just use bond ETFs as to not be immoral?
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by Makefile »

Triple digit golfer wrote: Wed Mar 10, 2021 8:14 pm But what is offensive about wanting to get the best price? Is holding a bond mutual fund and selling to buy stocks in the case of last March's crash immoral? Should everybody just use bond ETFs as to not be immoral?
I don't think he was calling your personal actions offensive or immoral, just that if the bond mutual fund NAVs are indeed overpriced in crisis situations, it's creating an arbitrage opportunity that should not exist. It might be more outrageous if a hedge fund, etc. came in and tried to take advantage of the situation as opposed to some retail shareholders, and I would expect/hope Vanguard to take action to intervene if that happened.
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