patrick wrote: ↑
Tue Dec 11, 2018 4:43 am
longinvest wrote: ↑
Sat Dec 08, 2018 6:56 pm
Of course, STRIPS aren't speculation for a pension fund
with nominal liabilities! You're changing the context
of my statement.
I have yet to hear a retail investor tell me of a nominal liability of his in 20 to 30 years that would be best covered by investing the money into an ETF of "equal-weighted par" STRIPS that doesn't go down in duration over time.
Are you such a retail investor? What's the amount and date of your nominal liability? How does EDV help you with with covering it?
I doubt that many retail investors would have nominal liabilities that are best covered by more ordinary long-term bond funds either. With the exception of mortgages, which would often be better prepaid instead, is there any other common nominal liability beyond the very short term? Even for those who do have a nominal liability known 10+ years in advance, the regular long-term bond fund also keeps its duration at 10+ years rather than reducing its duration as the liability becomes closer.
If markets dried up, tomorrow, an index fund of 2,141 long-term bonds like VBLTX wouldn't need to make any trade to receive coupons and use them to continue making monthly payments to its fund investors.
A STRIPS is a derivative product with embedded hidden fees. The stripping process has costs and those who do the stripping want to make a profit. Despite these hidden fees, a single STRIPS could still be attractive for retails investors with a nominal liability in the future. They might be willing to pay these undisclosed hidden fees in exchange of certainty of a precise nominal payment on a specific future date.
EDV is different. It's a portfolio of only 81 STRIPS kept within a maturity range of 20 to 30 years. It isn't capitalization-weighted; it aims to weight its holdings on an equal par value basis. If markets dried up, it would take 20 years before EDV would receive its first payment. In normal times, EDV's objective is to sell STRIPS when they fall below 20 years to maturity and reinvest the proceeds within the target maturity range. EDV never receives payments; the only way it can pay for expenses (Expense Ratio) and make some payments to its investors is as a result of trading or through the ETF creation and redemption process.
Just for comparison, the average maturity of VBLTX's bonds is 23.9 years. At 2 coupons per year, it's similar to a collection of ((23.9 X 2) coupons + 1 principal) X 2,141 = 104,481
STRIPS* with an average 14.6 years duration and without
embedded hidden fees (VBLTX's low expense ratio isn't
hidden). VBLTX is a diversified bond investment; EDV with its 81
* Not exactly, because a STRIPS is a stripped Treasury. But, I'm just trying to make a quick comparison, here.
Let me repeat Vanguard's warning on EDV's web page
: "The fund is primarily intended for institutional investors with extremely long-term liabilities—20 years or more. Prospective individual investors are urged to consult with their own advisors to determine if the fund is suitable for their overall investment programs and financial positions.
Unsurprisingly, Vanguard's long-term bond index fund (VBLTX) has no such warning.