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

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

Post by longinvest »

junior wrote: Thu Mar 11, 2021 6:36 pm
longinvest wrote: Thu Mar 11, 2021 6:29 pm
junior wrote: Thu Mar 11, 2021 6:04 pm Back testing like that in portfolio visualizer certainly shows that the mutual fund version has done slightly better than the EFT in the last 10 years or so.
On the contrary, the ETF has done slightly better [... omitted!!!]
You link has BND doing better. (Start period, 2007). Change start period to 2009 and VBMFX is doing better when I add an annual contribution:

link

Seems like a wash, really.
Dear junior,

Quoting only the first words of my post lead to the omission of the main point of my post:
longinvest wrote: Thu Mar 11, 2021 6:29 pm On the contrary, the ETF has done slightly better over the longest available period spanning from May 2007 to February 2021 (source), beating the mutual fund by 3 basis points (BND 4.13%, VBMFX 4.10%). But that's irrelevant, because they're the same fund! All fund holders (traditional and exchange-traded) bear the penalty caused by mutual fund trading during times of uncertain prices.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by livesoft »

longinvest wrote: Thu Mar 11, 2021 6:29 pm On the contrary, the ETF has done slightly better over the longest available period spanning from May 2007 to February 2021
I have to laugh at that because how/when PortVis figured out how/when BND's dividends were reinvested cannot match reality because there has not been a consistent way that has been done. The variation could easily be more than 3 basis points in the wrong direction. But of course it could also be more than 3 basis points in the right direction, but who knows?
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by longinvest »

livesoft wrote: Thu Mar 11, 2021 6:45 pm
longinvest wrote: Thu Mar 11, 2021 6:29 pm On the contrary, the ETF has done slightly better over the longest available period spanning from May 2007 to February 2021
I have to laugh at that because how/when PortVis figured out how/when BND's dividends were reinvested cannot match reality because there has not been a consistent way that has been done. The variation could easily be more than 3 basis points in the wrong direction. But of course it could also be more than 3 basis points in the right direction, but who knows?
Maybe reading the entire post could be useful...
longinvest wrote: Thu Mar 11, 2021 6:29 pm On the contrary, the ETF has done slightly better over the longest available period spanning from May 2007 to February 2021 (source), beating the mutual fund by 3 basis points (BND 4.13%, VBMFX 4.10%). But that's irrelevant, because they're the same fund! All fund holders (traditional and exchange-traded) bear the penalty caused by mutual fund trading during times of uncertain prices.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by raven15 »

junior wrote: Thu Mar 11, 2021 6:04 pm
raven15 wrote: Thu Mar 11, 2021 4:59 pm Unless someone can show why this is not so, it seems like Dr. Bernstein is correct, end of story.
I think it makes sense to back test with the assumption new money is flowing into both funds.

Back testing like that in portfolio visualizer certainly shows that the mutual fund version has done slightly better than the EFT in the last 10 years or so. The difference could be noise, though, for all I know. It doesn't seem like there's a whole lot of evidence to prefer one over the other.
Right it is noise. I'm not trying to show that VBTLX is better, I am showing that BND is not better for a long term investor. There is no meaningful difference, which is something some posters were implying.

However for people trying to sell bonds during a market crash, so far VBTLX has often been notably better.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by junior »

longinvest wrote: Thu Mar 11, 2021 6:47 pm
Maybe reading the entire post could be useful...
I read the whole thread including your whole post. We have multiple experts in this thread saying contradictory things so I don't know what to make of the rest of your post. I responded to the part about back-testing I understood.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by alex_686 »

jason2459 wrote: Thu Mar 11, 2021 5:47 pm Though I'm not sure how closely tied together BND is to vbtlx. Unlike other MF/ETF pairs that Vangaurd will swap with out tax implications from the Mutual Fund to the ETF (not the other way) they will not do that with VBTLX to BND.
This whole string of posts are off. VBTLX And BND are the same fund. As such, the bad behavior on the mutual fund side would hurt both share classes. You can’t test the thesis this way.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

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alex_686 wrote: Thu Mar 11, 2021 6:57 pm
jason2459 wrote: Thu Mar 11, 2021 5:47 pm Though I'm not sure how closely tied together BND is to vbtlx. Unlike other MF/ETF pairs that Vangaurd will swap with out tax implications from the Mutual Fund to the ETF (not the other way) they will not do that with VBTLX to BND.
This whole string of posts are off. VBTLX And BND are the same fund. As such, the bad behavior on the mutual fund side would hurt both share classes. You can’t test the thesis this way.


No, I agree they are considered the same and part of the same asset class but I was wondering how tightly these two are actually vs other ETF/MF sets that Vangaurd has because of the lack of conversion ability from the MF to the ETF. There seems to me something that is not making them exactly the same. I don't know but it wasn't to say they were not the same basket of funds or assets.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by raven15 »

alex_686 wrote: Thu Mar 11, 2021 6:57 pm
jason2459 wrote: Thu Mar 11, 2021 5:47 pm Though I'm not sure how closely tied together BND is to vbtlx. Unlike other MF/ETF pairs that Vangaurd will swap with out tax implications from the Mutual Fund to the ETF (not the other way) they will not do that with VBTLX to BND.
VBTLX And BND are the same fund. As such, the bad behavior on the mutual fund side would hurt both share classes.
We would know if this occurred because BND and VBTLX would begin to lag their indexes and also start to lag bond ETF's that have no mutual fund class, such as AGG. But so far I have not seen any sign this occurring. Am I not looking at the right thing?
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by sycamore »

Another reason the comparison of BND to VBTLX is problematic is that they have different expense ratios -- BND is 1.5 basis points cheaper.

Comparing BND to VBMFX (investor shares) is even worse as the ER difference is 11.5 basis points. That could dwarf any other impact.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by jason2459 »

sycamore wrote: Thu Mar 11, 2021 7:22 pm Another reason the comparison of BND to VBTLX is problematic is that they have different expense ratios -- BND is 1.5 basis points cheaper.

Comparing BND to VBMFX (investor shares) is even worse as the ER difference is 11.5 basis points. That could dwarf any other impact.
You mean costs matter? 8-)
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by sycamore »

jason2459 wrote: Thu Mar 11, 2021 7:24 pm
sycamore wrote: Thu Mar 11, 2021 7:22 pm Another reason the comparison of BND to VBTLX is problematic is that they have different expense ratios -- BND is 1.5 basis points cheaper.

Comparing BND to VBMFX (investor shares) is even worse as the ER difference is 11.5 basis points. That could dwarf any other impact.
You mean costs matter? 8-)
Indeed! :) Bogleheads philosophy - Keep costs low
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by longinvest »

jason2459 wrote: Thu Mar 11, 2021 7:07 pm I was wondering how tightly these two are actually vs other ETF/MF sets that Vangaurd has because of the lack of conversion ability from the MF to the ETF. There seems to me something that is not making them exactly the same. I don't know but it wasn't to say they were not the same basket of funds or assets.
Here's what the Statutory prospectus says:
What Are Vanguard ETF Shares?

Vanguard ETF Shares are an exchange-traded class of shares issued by certain Vanguard funds. ETF Shares represent an interest in the portfolio of stocks or bonds held by the issuing fund. The following ETF Shares are offered through this prospectus:

Code: Select all

Vanguard Fund                   Vanguard ETF Shares     ...
Total Bond Market Index Fund    Total Bond Market ETF   ...
...
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by alex_686 »

raven15 wrote: Thu Mar 11, 2021 7:16 pm
alex_686 wrote: Thu Mar 11, 2021 6:57 pm
jason2459 wrote: Thu Mar 11, 2021 5:47 pm Though I'm not sure how closely tied together BND is to vbtlx. Unlike other MF/ETF pairs that Vangaurd will swap with out tax implications from the Mutual Fund to the ETF (not the other way) they will not do that with VBTLX to BND.
VBTLX And BND are the same fund. As such, the bad behavior on the mutual fund side would hurt both share classes.
We would know if this occurred because BND and VBTLX would begin to lag their indexes and also start to lag bond ETF's that have no mutual fund class, such as AGG. But so far I have not seen any sign this occurring. Am I not looking at the right thing?
As I have said before, the impact is small. Over long stretches it would turn into noise compared to the other drags and inefficiencies in the market. You would need to look at very short periods around liquidity situation. Dive down to the daily data.

That the impact is small does not change my morale position.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by drk »

I'm going to point again to the paper I posted above, this paragraph in particular:
BIS wrote: If there is excessive selling of ETF shares in the secondary market, which puts redemption pressure on APs, the ETF sponsor can include only the riskier or less liquid securities from the pool of holdings in the redemption basket. The lower-quality bonds that APs obtain after redeeming ETF shares would in turn reassure non-running investors that their shares are now backed with holdings of higher average quality. This would discourage further runs and lead to ETF discounts during run episodes. In fact, such a stabilisation mechanism was arguably in place during the March–April 2020 episode (Graph 1, right-hand panel) when some ETFs traded at a discount while redeeming baskets that were more illiquid than the holdings.
The market makers won't buy at the actual NAV when they can only redeem for a basket that's worse than the fund's holdings. That implies that the discounts on bond ETFs during stressful periods are something of an illusion. A holder feels some distress at the paper loss but ends up with better holdings, the seller bears the cost of liquidity, and a buyer stands to benefit from the discounted price. Given Total Bond's holdings, I imagine this would explain some of the apparent dislocation between BND and VBTLX last March.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

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

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bck63 wrote: Fri Mar 12, 2021 10:43 amfollowing
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by GoneOnTilt »

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
Would the issue of bond ETFs being "safe" apply to treasury ETFs, which it seems to me would always be in demand in times of stress, and therefore would likely be safe at such times?
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by GoneOnTilt »

jeffyscott wrote: Fri Mar 12, 2021 10:58 am
bck63 wrote: Fri Mar 12, 2021 10:43 amfollowing
In case you're not aware, you can click/tap on the wrench below the post and then "subscribe".
Oh that's great. Thanks!
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by typical.investor »

bck63 wrote: Fri Mar 12, 2021 11:11 am
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
Would the issue of bond ETFs being "safe" apply to treasury ETFs, which it seems to me would always be in demand in times of stress, and therefore would likely be safe at such times?
Because there isn't always demand in times of stress for treasuries.

When everyone liquidated assets in March 2020 to raise cash, the treasury market collapsed (along with everything else -- municipal bonds, corporates etc ) and needed federal invention to return liquidity to the market.

It was then that ETFs showed a large (5% I think I saw) discount to "NAV" [calculated value]. I am not a market timing advocate or guru or enthusiast but it happened on the three times I rebalanced in March that I sold bond ETFs at a higher price during the day than they ended up at, and on the same day bought stocks at a lower price during the day that they ended up at. So my experience is very limited and maybe will reverse the next time around, but I personally benefited from being able to trade at market price during the day.

But Bernstein isn't completely wrong I think. I was paying attention and at my current age am still quite lucid though my wife disputes that. It's just a power grab on her part ...

Anyway, if you did sell an ETF bond fund during that time to fund your retirement spending, you would have been better off using a mutual fund. But doesn't everyone know you have to be careful selling into market turmoil? Who would be selling Treasuries as the market froze up unless you had a very good reason (i.e extremely depressed equity prices). The bid-ask spread rose to nearly 30 times their normal level as mutual funds and foreign entities dumped treasuries en-masse. I mean isn't that what a high yield bank account is for ... to provide liquidity when needed.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by AlohaJoe »

I'm surprised so many Bogleheads are arguing that the market price is wrong but the "real" price, as determined by a handful of experts with no skin in the game, is right. And not in some thinly traded security but in something that has half-a-billion dollars traded on it every day. It seems like a belief like that presents a massive problem to Boglehead principles. Since it means that you can easily and consistently market time. After all, instead of simply preferring to hold the mutual fund over the ETF, you should be trading every time you see a bond ETF diverge from NAV. And it shouldn't be limited to the single largest bond ETF in the world; presumably the problem is even bigger in all the other ones. I mean, why are you passing up a (according to your beliefs) guaranteed 5% return on a completely safe asset when you see it diverge from NAV?

And once we've opened the door to experts being able to determine the "true" price of an asset far better than the market....why limit yourself to index funds at all? Shouldn't the TPS service go into business as active bond traders? If Bill Gross and PIMCO are anything to go by, they'd make far more money that way than providing price data to mutual funds. Shouldn't I put my money with them instead of with a passive index fund? After all, we've said they can always and accurately determine the "right" price.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by jeffyscott »

What's the value of my house, is it only what I can get as a cash offer in the next 24 hours?

What was the correct value of the car I was selling in 2019. Was it the $900 that the dealer, where I was buying, offered or was it the $1700 offered down the street by Carmax? Or was it the $3500 that an individual offered a few days later?

While bonds are more liquid than cars or houses, they are less liquid than stocks. So when you are willing to take whatever you can get for them in the next 5 minutes, that affects the price you will get.

Bond mutual funds can be affected by forced selling and when it's an index fund, they can't really choose to sell only the more liquid bonds or only the ones that they are able to get good prices on. This and the general inefficiency of the bond market, in comparison to that for stocks, could mean that a low cost managed fund is a better option for those who want to invest in bonds, other than Treasuries.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by GoneOnTilt »

jeffyscott wrote: Fri Mar 12, 2021 10:58 am
bck63 wrote: Fri Mar 12, 2021 10:43 amfollowing
In case you're not aware, you can click/tap on the wrench below the post and then "subscribe".
So, question, if I may: when I click the wrench and then subscribe, I don't see the thread in "my posts." Is there another place to see the threads I'm subscribed to? Can't seem to locate them.

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

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bck63 wrote: Sat Mar 13, 2021 9:23 am
jeffyscott wrote: Fri Mar 12, 2021 10:58 am
bck63 wrote: Fri Mar 12, 2021 10:43 amfollowing
In case you're not aware, you can click/tap on the wrench below the post and then "subscribe".
So, question, if I may: when I click the wrench and then subscribe, I don't see the thread in "my posts." Is there another place to see the threads I'm subscribed to? Can't seem to locate them.

Thanks.
Go to "user control panel" in upper right menu that drops from your username.

I had actually never really noticed that was in that menu before. :)
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by GoneOnTilt »

jeffyscott wrote: Sat Mar 13, 2021 9:48 am
bck63 wrote: Sat Mar 13, 2021 9:23 am
jeffyscott wrote: Fri Mar 12, 2021 10:58 am
bck63 wrote: Fri Mar 12, 2021 10:43 amfollowing
In case you're not aware, you can click/tap on the wrench below the post and then "subscribe".
So, question, if I may: when I click the wrench and then subscribe, I don't see the thread in "my posts." Is there another place to see the threads I'm subscribed to? Can't seem to locate them.

Thanks.
Go to "user control panel" in upper right menu that drops from your username.

I had actually never really noticed that was in that menu before. :)
Got it! Thanks very much jeffyscott.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by guppyguy »

Bill Bernstein wrote: Wed Mar 10, 2021 8:24 pm The assumption that some are making here is that the market price of the ETF is a more accurate measure of the NAV than the NAV determined by the third-party service used by the fund company to determine the NAV of the open-end fund.

That, as they say, is a strong assumption; one has to ask oneself: which the real price in a bad state of the world: the estimate made by the TPS who has access to thousands of transactions of the same and similar bonds made during that day, or that of panicked shareholders trading the ETFs?

The question answers itself.

So, yes, there is an an arbitrage opportunity here; as pointed out, it's the person who wants to buy the ETF and sell the closed end fund.

But that's not the person I'm talking about. There's no arbitrage available to the person I'm concerned with, which is the investor, who, in the ordinary course of rebalancing their stock allocation back to policy in a bad state of the world, is selling an open-end bond fund to buy a stock fund.

Bill
All-
As the OP I wanted to see if I could sum up this thread into something instructive to the average individual's IPS. I've replied to Dr Bernstein, as I don't want to say/infer something he never intended, but am open to all feedback.

First, Dr Bernstein's position is that the purpose of bonds is to be as risk-less as possible consisting of 1) plain treasuries/CDs less than 5 years in maturity followed by maybe 2)a total bond market mutual fund. So there are two distinctions here, the removal of corporate bonds and then how to own them, ie individual bonds/mutual fund/ETF.

Secondly, he doesn't have a singular purpose for the risk-less portion. For example, in The Four Pillars of Investing he advocates including one's six month emergency fund as a component. In fact there could be various length duration requirements within the bond side requiring different instruments. While opposite to the simplicity of the 3 fund portfolio, it's not better or worse, just distinct to the needs and consistency of the investor yet important in framing the discussion.

It's apparent that there are times that ETF and fund prices diverge causing in a non-optimum "hair cut" if the ETF owner has a need to sell. The extent of this affects all bond ETFs and yet a little more so to corporates and thinly traded bond ETFs. Right? This market may last for days/weeks (like last year) or theoretically much longer. Therefore, it is obviously prudent that to the extent one has their short term/emergency fund cash needs as part of their risk-less allocation, that those monies should absolutely NOT be in an ETF bond product. Mr. Bernstein's "bad state" world is NOT 2020. It's a hypothetical risk but easy to avoid.

The opportunistic rebalancing portion is a bit tougher. First, let's assume a SET 80/20 bond allocation with the bond side short duration, ie constant value, for simplicity. If the stocks slide 50% and I rebalance at the most opportunistic time, only 40% (8% of the 20%) is needed for rebalancing and should therefore NOT be in a bond ETF.

So what I'm left with is a risk-less allocation that looks like this:
  • 40% non-ETF (preferable individual bonds if no credit risk) for rebalancing+
  • x% of non-ETF funds for short term emergency needs (to the extent one includes their EF in their portfolio..please no thread drift :) +
  • 60-x% of anything else (ETFs are okay)
I realize this is very generalized and the added complexity in implementation may not be worth it, however, I DO think it is a valid compromise between the opinion of Dr Bernstein and an investor who may have 100% of their fixed income in BND.

Only thing I'm not done with looking at is:
Just how much more liquid are T-Bills than Notes during a crisis (as in 2020)?
Last edited by guppyguy on Wed Apr 21, 2021 3:22 pm, edited 1 time in total.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by vineviz »

guppyguy wrote: Wed Apr 21, 2021 3:03 pm I realize this is very generalized and the added complexity in implementation may not be worth it, however, I DO think it is a valid compromise between the opinion of Dr Bernstein and an investor who may have 100% of their fixed income in BND.
This seems like a complex solution to an imaginary problem.
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by secondopinion »

guppyguy wrote: Wed Apr 21, 2021 3:03 pm
Bill Bernstein wrote: Wed Mar 10, 2021 8:24 pm The assumption that some are making here is that the market price of the ETF is a more accurate measure of the NAV than the NAV determined by the third-party service used by the fund company to determine the NAV of the open-end fund.

That, as they say, is a strong assumption; one has to ask oneself: which the real price in a bad state of the world: the estimate made by the TPS who has access to thousands of transactions of the same and similar bonds made during that day, or that of panicked shareholders trading the ETFs?

The question answers itself.

So, yes, there is an an arbitrage opportunity here; as pointed out, it's the person who wants to buy the ETF and sell the closed end fund.

But that's not the person I'm talking about. There's no arbitrage available to the person I'm concerned with, which is the investor, who, in the ordinary course of rebalancing their stock allocation back to policy in a bad state of the world, is selling an open-end bond fund to buy a stock fund.

Bill
All-
As the OP I wanted to see if I could sum up this thread into something instructive to the average individual's IPS. I've replied to Dr Bernstein, as I don't want to say/infer something he never intended, but am open to all feedback.

First, Dr Bernstein's position is that the purpose of bonds is to be as risk-less as possible consisting of 1) plain treasuries/CDs less than 5 years in maturity followed by maybe 2)a total bond market mutual fund. So there are two distinctions here, the removal of corporate bonds and then how to own them, ie individual bonds/mutual fund/ETF.

Secondly, he doesn't have a singular purpose for the risk-less portion. For example, in The Four Pillars of Investing he advocates including one's six month emergency fund as a component. In fact there could be various length duration requirements within the bond side requiring different instruments. While opposite to the simplicity of the 3 fund portfolio, it's not better or worse, just distinct to the needs and consistency of the investor yet important in framing the discussion.

It's apparent that there are times that ETF and fund prices diverge causing in a non-optimum "hair cut" if the ETF owner has a need to sell. The extent of this affects all bond ETFs and yet a little more so to corporates and thinly traded bond ETFs. Right? This market may last for days/weeks (like last year) or theoretically much longer. Therefore, it is obviously prudent that to the extent one has their short term/emergency fund cash needs as part of their risk-less allocation, that those monies should absolutely NOT be in an ETF bond product. Mr. Bernstein's "bad state" world is NOT 2020. It's a hypothetical risk but easy to avoid.

The opportunistic rebalancing portion is a bit tougher. First, let's assume a SET 80/20 bond allocation with the bond side short duration, ie constant value, for simplicity. If the stocks slide 50% and I rebalance at the most opportunistic time, only 40% (8% of the 20%) is needed for rebalancing and should therefore NOT be in a bond ETF.

So what I'm left with is a risk-less allocation that looks like this:
  • 40% non-ETF (preferable individual bonds if no credit risk) for rebalancing+
  • x% of non-ETF funds for short term emergency needs (to the extent one includes their EF in their portfolio..please no thread drift :) +
  • 60-x% of anything else (ETFs are okay)
Such a short duration... it seems liquidity is the focus over the reduced risk of long-term returns. Reinvestment risk seems to not be on the radar (which is my larger concern for bonds); when the maturity is short, a lot can happen to mess up the yield you you reinvest the principal. If I where to advise, I would get 5+ year CDs and treasuries if I were to hold them individually until maturity, especially if one is far from retirement; the cut in yield to make bonds "risk-less" is just not worth it over long periods where you cannot do anything with the money otherwise. It is not "risk-less" when the reinvestment risk is very high and real yields are very poor. Personally, almost all my "bond-like" investments are 3+ years as a minimum (most are 5+ years when purchased).

I do not see how individual bonds are better for liquidity; I imagine Vanguard's ETFs and funds (and even iShares ETFs) for short-term/intermediate treasuries are really liquid. Unless rolling returns and tax swaps are part of the strategy (or holding to maturity), I see no point in holding individual bonds (not for liquidity at least).

The emergency fund is exempt. Having liquidity I can agree with.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Topic Author
guppyguy
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by guppyguy »

secondopinion-
Yeah I agree. My EF would only be about 3-5% of a combined portfolio so it is simpler just to think of it separate and remove the immediate liquidity angle. What's left is only holding treasuries (I have no interest in corporate) and I don't mind the ER for the convenience of an ETF vs a ladder. (I don't have access to any low cost government mutual funds with Schwab). CDs may one day yield more (probably not with Schwab's brokered, however) so I may look at them again. It "looks" like any potential "haircut" in ETF prices is less for treasury ETFs than something like BND. So that puts me back where I started - 100% VGIT for the bond side of the retirement portfolio.

Thanks for the ear!!

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

Post by bogswenbern »

Long thread, and was wondering if SCHP, VTIP, and/or VGIT are "safe" since they are trading treasuries which are more liquid than corporate bonds? Also, is any of the thinking changed considering that bond and stock ETF's are not moving in opposite directions in a rising interest rate environment and bond ETF's may fall in price more than stock ETF's in a semi-bad state of the world going forward?
rockstar
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by rockstar »

The problem with bond funds is that duration is fixed, so if you're selling to spend, then liquidity matters. And interest rate is fixed. If you're holding bonds to maturity, then liquidity doesn't matter since you're only buying never selling. But what you do know is the cash flow from the bond since this doesn't change like a fund would change. You also know what you'll get at maturity. Lots more certainty.

Now, bonds other than treasuries can be difficult to buy such as foreign government bonds. In that case a fund might be your only option. The same goes for securitizations. It's very difficult to buy these as a retail investor, so your only option might be a fund.
alex_686
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Re: Are bond ETF's "safe" (Bernstein) - sounding board please

Post by alex_686 »

bogswenbern wrote: Wed Jun 22, 2022 11:51 am Long thread, and was wondering if SCHP, VTIP, and/or VGIT are "safe" since they are trading treasuries which are more liquid than corporate bonds?
These are all highly safe for multiple reasons. Indexes only chose highly liquid bonds for their index. As a point of fact, total bond indexes only cover about 20% of the actual market. Next, and most importantly, trading costs are born by the Authorized Participants (APs), not by the fund's shareholders.
bogswenbern wrote: Wed Jun 22, 2022 11:51 am Also, is any of the thinking changed considering that bond and stock ETF's are not moving in opposite directions in a rising interest rate environment and bond ETF's may fall in price more than stock ETF's in a semi-bad state of the world going forward?
Why is this a concern? O.K., I acknowledge that during times of market stress people tend to have free floating anxieties of what is going on. Should you do something different? What does your Investment Policy Statement say? The plan you wrote during times of calm.

Stocks and bond often move in the same direction. A low correlation is not the same as a negative correlation. Yes, the bond market is dragging down the equity market. This has nothing to do with the ETF fund wrapper and is just what the market does and is pretty standard. This may be a lesson learned and require a rewrite of your IPS.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
bogswenbern
Posts: 52
Joined: Tue May 05, 2020 7:20 am

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

Post by bogswenbern »

alex_686 wrote: Wed Jun 22, 2022 12:40 pm
bogswenbern wrote: Wed Jun 22, 2022 11:51 am Long thread, and was wondering if SCHP, VTIP, and/or VGIT are "safe" since they are trading treasuries which are more liquid than corporate bonds?
These are all highly safe for multiple reasons. Indexes only chose highly liquid bonds for their index. As a point of fact, total bond indexes only cover about 20% of the actual market. Next, and most importantly, trading costs are born by the Authorized Participants (APs), not by the fund's shareholders.

:happy Has Dr. Bernstein stated that these are safe in a "bad state of the world"? I also see there is GOVT which is similar to VGIT but has 10X AUM. Is this therefore safer in the bad state?
bogswenbern wrote: Wed Jun 22, 2022 11:51 am Also, is any of the thinking changed considering that bond and stock ETF's are not moving in opposite directions in a rising interest rate environment and bond ETF's may fall in price more than stock ETF's in a semi-bad state of the world going forward?
Why is this a concern? O.K., I acknowledge that during times of market stress people tend to have free floating anxieties of what is going on. Should you do something different? What does your Investment Policy Statement say? The plan you wrote during times of calm.

Stocks and bond often move in the same direction. A low correlation is not the same as a negative correlation. Yes, the bond market is dragging down the equity market. This has nothing to do with the ETF fund wrapper and is just what the market does and is pretty standard. This may be a lesson learned and require a rewrite of your IPS.
:happy My question does pertain to the "wrapper". This thread is about choosing between bond ETF vs. mutual fund. Dr. Bernstein's warning about bond ETFs came out many years ago, and with references to 2008. I think that he has maintained his warning recently, although as White Coat Investor has remarked, we don't know how strong the warning is for treasury or tips bonds ETFs. Also, the bad state of the world scenario today seems very different than 2008. Now we have the spectre of stagflation, Fed raising rates and Quantitative Tightening.
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