SPHD instead of bonds

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ZachFinch76
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SPHD instead of bonds

Post by ZachFinch76 »

Hi

For religous reasonds I do not want to hold any bonds. So I either hold cash, gold, or have a very aggressive all stock allocation. I am not a fan of cash or gold, other than an emergency fund. So I figure I either go all in on total market stock holdings, or I look for some other type of income producing stock fund. I have looked at SPHD and it seems like it has low volatity. Any thoughts on holding it for income and stability in lieu of bonds? Again I would just hold bonds but I am choosing not to for religous reasons. So the question is not whether or not this fund would be better than a broad based index fund for growth, i know it would not for growth. But rather is it a decent idea for incoome AND some stabilization to my AA since bonds are off limits? The other option I am considering is SCHD to get income and growth but it will be more volatile so I wonder in that case why I would not just put it all into my primary equity allocations in VTI/VXUS.
petulant
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Re: SPHD instead of bonds

Post by petulant »

SPHD is not going to be appreciably lower volatility than VTI. Since 2013, for example, it has had a standard deviation of 14.23% compared to VTI's 14.63% and BND's 3.87%. The maximum drawdown for SPHD has been a whopping 30.92% during the 2020 drawdown compared to VTI's drawdown of 21.32% this year (and BND's drawdown of 12.23% this year as well). Here is my data source for these claims:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

If you are unwilling to invest in bonds but want to try something other than cash or gold within a portfolio of securities, the only thing I could think would be to use options to simulate lower-risk positions. For example, if you have a portfolio of VTI, you could sell call options tied to some portion of it, capping your upside, and use that to buy put options, capping your downside. This could be done with as much or as little risk reduction as you would like--you could make it where it cuts all exposure to the stock volatility to zero (but is still exposed to dividend payments), or you could be exposed to some price movements like -8% to 5% plus dividends (the actual range depends on prevailing option premiums).

EDIT:

For example, let's consider the ETF SPY, which tends to have a more liquid options market with tighter bid/ask spreads than other broad-based index ETFs. I'm going to review option quotes on cboe's website using the Quote Dashboard. There, I see that SPY is currently trading at about 410.62. A 5% upside would be around the strike price 430 (410.62*1.05=431.151). If I sold a call option for SPY with the June 16, 2023 expiration date and strike price 430, I would receive 27.38 as premium (the bid, not multiplying by 100 per the contract), less any commissions (which will tend to be small for this transaction). I could then use that premium to buy a put option protecting my downside. I see that with the same expiration date, I could pay 26.40 (the ask) at a strike price of 395. This would limit my loss on SPY until June 2023 to about 3.81%, while still collecting the difference in premiums less commissions/fees, probably around 20 bps, plus dividends. With a dividend yield around 1.6%, this would probably end up yielding about 1.8% with annual standard deviation around 3-5% similar to a bond fund (but correlated with stocks, unlike a bond fund).

Of course, if exercise of the call options gets assigned, I would have to sell my SPY shares and possibly realize capital gains. If this strategy is a replacement for bonds, though, well--you already signed up for realizing some income. And you would have to study your ability to select tax lots to minimize the tax cost of assignment. So it's not ideal.
Last edited by petulant on Fri Aug 05, 2022 11:09 am, edited 3 times in total.
grok87
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Re: SPHD instead of bonds

Post by grok87 »

ZachFinch76 wrote: Fri Aug 05, 2022 10:26 am Hi

For religous reasonds I do not want to hold any bonds. So I either hold cash, gold, or have a very aggressive all stock allocation. I am not a fan of cash or gold, other than an emergency fund. So I figure I either go all in on total market stock holdings, or I look for some other type of income producing stock fund. I have looked at SPHD and it seems like it has low volatity. Any thoughts on holding it for income and stability in lieu of bonds? Again I would just hold bonds but I am choosing not to for religous reasons. So the question is not whether or not this fund would be better than a broad based index fund for growth, i know it would not for growth. But rather is it a decent idea for incoome AND some stabilization to my AA since bonds are off limits? The other option I am considering is SCHD to get income and growth but it will be more volatile so I wonder in that case why I would not just put it all into my primary equity allocations in VTI/VXUS.
Hi Zach,
you will probably get more responses if you explain the ticker symbols.
SPHD = Invesco S&P 500 High Div Low Volatility ETF
SCHD = Schwab US Dividend Equity ETF

i would probably just hold cash as a bond substitute.
you might also consider direct real estate. for example the TIAA real estate annuity if you have access
https://www.tiaa.org/public/pdf/e/eligi ... ternal.pdf
cheers,
grok
RIP Mr. Bogle.
DonIce
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Re: SPHD instead of bonds

Post by DonIce »

You could look into "preferred stock", with ETFs such as PFF. Preferred stock is stock, but acts more like a bond.
jebmke
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Re: SPHD instead of bonds

Post by jebmke »

an annuity may or may not make sense but more info needed
When you discover that you are riding a dead horse, the best strategy is to dismount.
Topic Author
ZachFinch76
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Re: SPHD instead of bonds

Post by ZachFinch76 »

DonIce wrote: Fri Aug 05, 2022 10:56 am You could look into "preferred stock", with ETFs such as PFF. Preferred stock is stock, but acts more like a bond.
Preferreds do not seem to be much less volatile than regulat stock dividend focused ETFs.
Topic Author
ZachFinch76
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Re: SPHD instead of bonds

Post by ZachFinch76 »

petulant wrote: Fri Aug 05, 2022 10:50 am SPHD is not going to be appreciably lower volatility than VTI. Since 2013, for example, it has had a standard deviation of 14.23% compared to VTI's 14.63% and BND's 3.87%. The maximum drawdown for SPHD has been a whopping 30.92% during the 2020 drawdown compared to VTI's drawdown of 21.32% this year (and BND's drawdown of 12.23% this year as well). Here is my data source for these claims:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

If you are unwilling to invest in bonds but want to try something other than cash or gold within a portfolio of securities, the only thing I could think would be to use options to simulate lower-risk positions. For example, if you have a portfolio of VTI, you could sell call options tied to some portion of it, capping your upside, and use that to buy put options, capping your downside. This could be done with as much or as little risk reduction as you would like--you could make it where it cuts all exposure to the stock volatility to zero (but is still exposed to dividend payments), or you could be exposed to some price movements like -8% to 5% plus dividends (the actual range depends on prevailing option premiums).
Thank you for the data! That is definitely eye opening. This makes me feel like just going all in to VTI/VXUS (my US/INTL ratio is 70/30)
petulant
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Re: SPHD instead of bonds

Post by petulant »

ZachFinch76 wrote: Fri Aug 05, 2022 11:02 am
petulant wrote: Fri Aug 05, 2022 10:50 am SPHD is not going to be appreciably lower volatility than VTI. Since 2013, for example, it has had a standard deviation of 14.23% compared to VTI's 14.63% and BND's 3.87%. The maximum drawdown for SPHD has been a whopping 30.92% during the 2020 drawdown compared to VTI's drawdown of 21.32% this year (and BND's drawdown of 12.23% this year as well). Here is my data source for these claims:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

If you are unwilling to invest in bonds but want to try something other than cash or gold within a portfolio of securities, the only thing I could think would be to use options to simulate lower-risk positions. For example, if you have a portfolio of VTI, you could sell call options tied to some portion of it, capping your upside, and use that to buy put options, capping your downside. This could be done with as much or as little risk reduction as you would like--you could make it where it cuts all exposure to the stock volatility to zero (but is still exposed to dividend payments), or you could be exposed to some price movements like -8% to 5% plus dividends (the actual range depends on prevailing option premiums).
Thank you for the data! That is definitely eye opening. This makes me feel like just going all in to VTI/VXUS (my US/INTL ratio is 70/30)
Check my post again...I edited to show a specific example of how it could work.
AnEngineer
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Re: SPHD instead of bonds

Post by AnEngineer »

Bonds are no, but is cash in an interest bearing account okay? What about CDs?
hnd
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Re: SPHD instead of bonds

Post by hnd »

not for nothing but owning bonds or bond funds personally or being a stock holder (owner) of companies that issue/hold bonds/borrow money seems to be one in the same.
jfave33
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Re: SPHD instead of bonds

Post by jfave33 »

I'd just load up on cash in a high interest account or cds. And have a higher equity allocation as much as you can handle.

But as another has said if you own stocks you own companies that own bonds so are basically owning bonds yourself even if you don't see it.

Some religions cater for their beliefs with special funds that take care of the issues for you. eg Shariah funds You may want to explore these either from your own religion or use one from another that would be acceptable for your own use.
Escapevelocity
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Re: SPHD instead of bonds

Post by Escapevelocity »

EPD is a terrific source of steady income yielding above 7% and has raised distribution for 24 consecutive years with outstanding management team.
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spdoublebass
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Re: SPHD instead of bonds

Post by spdoublebass »

What about CD's?

If you are ok with stock, then would you be ok with Corporate bonds?
I'm trying to think, but nothing happens
Topic Author
ZachFinch76
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Re: SPHD instead of bonds

Post by ZachFinch76 »

jfave33 wrote: Fri Aug 05, 2022 11:37 am I'd just load up on cash in a high interest account or cds. And have a higher equity allocation as much as you can handle.

But as another has said if you own stocks you own companies that own bonds so are basically owning bonds yourself even if you don't see it.

Some religions cater for their beliefs with special funds that take care of the issues for you. eg Shariah funds You may want to explore these either from your own religion or use one from another that would be acceptable for your own use.
Yeah I am aware of this as well. It is a long conversation but the short of it is I am just focusing on not directly owning debt that requires gauranteed interest payments.
Topic Author
ZachFinch76
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Re: SPHD instead of bonds

Post by ZachFinch76 »

grok87 wrote: Fri Aug 05, 2022 10:52 am
ZachFinch76 wrote: Fri Aug 05, 2022 10:26 am Hi

For religous reasonds I do not want to hold any bonds. So I either hold cash, gold, or have a very aggressive all stock allocation. I am not a fan of cash or gold, other than an emergency fund. So I figure I either go all in on total market stock holdings, or I look for some other type of income producing stock fund. I have looked at SPHD and it seems like it has low volatity. Any thoughts on holding it for income and stability in lieu of bonds? Again I would just hold bonds but I am choosing not to for religous reasons. So the question is not whether or not this fund would be better than a broad based index fund for growth, i know it would not for growth. But rather is it a decent idea for incoome AND some stabilization to my AA since bonds are off limits? The other option I am considering is SCHD to get income and growth but it will be more volatile so I wonder in that case why I would not just put it all into my primary equity allocations in VTI/VXUS.
Hi Zach,
you will probably get more responses if you explain the ticker symbols.
SPHD = Invesco S&P 500 High Div Low Volatility ETF
SCHD = Schwab US Dividend Equity ETF

i would probably just hold cash as a bond substitute.
you might also consider direct real estate. for example the TIAA real estate annuity if you have access
https://www.tiaa.org/public/pdf/e/eligi ... ternal.pdf
cheers,
grok
Does the TIAA direct rea estate annuity need to be in an IRA or can it be a regular taxable account?
gougou
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Re: SPHD instead of bonds

Post by gougou »

SPHD seems to have 0.3% expense ratio which is too high. You should just buy a low cost index fund.
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nisiprius
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Re: SPHD instead of bonds

Post by nisiprius »

Stocks are not bonds.

In particular, "low volatility" stocks are not bonds. They are low volatility "stocks." And they are only low volatility in comparison to other stocks. All stocks are high volatility compared to bonds.

A simple plot should make the point. Without looking at the identifications of the funds, please look at the red line.

Image

Is the red line more like the blue line?
Or is it more like the yellow line?

One of the three is the "straight" stock fund, VTI. One is the "low volatility" stock fund, SPHD. One of them is bonds, BND. Can you guess which is which?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
texasfight
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Re: SPHD instead of bonds

Post by texasfight »

No

next question
Topic Author
ZachFinch76
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Re: SPHD instead of bonds

Post by ZachFinch76 »

How about a structured annuity? Like this one from Nationwide, seems I can choose a floor of 5 or 10% max loss and 80 or 90% yield against the index with a 1 or 3 year period.

https://client-tool.definedprotection.c ... protection
invest2bfree
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Re: SPHD instead of bonds

Post by invest2bfree »

ZachFinch76 wrote: Fri Aug 05, 2022 10:26 am Hi

For religous reasonds I do not want to hold any bonds. So I either hold cash, gold, or have a very aggressive all stock allocation. I am not a fan of cash or gold, other than an emergency fund. So I figure I either go all in on total market stock holdings, or I look for some other type of income producing stock fund. I have looked at SPHD and it seems like it has low volatity. Any thoughts on holding it for income and stability in lieu of bonds? Again I would just hold bonds but I am choosing not to for religous reasons. So the question is not whether or not this fund would be better than a broad based index fund for growth, i know it would not for growth. But rather is it a decent idea for incoome AND some stabilization to my AA since bonds are off limits? The other option I am considering is SCHD to get income and growth but it will be more volatile so I wonder in that case why I would not just put it all into my primary equity allocations in VTI/VXUS.
Have you looked at corporate bonds.

There is a great selection at Fidelity.


I get 6% and get your principle back in 25 years.

I recommend it in a IRA or 401k.

Taxable if you want to tilt towards dividends then vti\vxus\vym\vymi
petulant
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Re: SPHD instead of bonds

Post by petulant »

ZachFinch76 wrote: Fri Aug 05, 2022 2:39 pm How about a structured annuity? Like this one from Nationwide, seems I can choose a floor of 5 or 10% max loss and 80 or 90% yield against the index with a 1 or 3 year period.

https://client-tool.definedprotection.c ... protection
The link you provided doesn't have any information without filling out the form. If you added information, it didn't stay populated from copying and pasting the link.

Generally, you can look at those, but the fees/drag compared to alternatives will be high. We would typically compare them unfavorably to traditional portfolios of stocks and bonds. To get more in the weeds of evaluation, we could identify a specific strategy (like one-year, S&P 500, 5% downside protection) and try to construct an equivalent with SPY options to see how the pricing works, but that can be complicated and inexact. Note that even if the gross numbers start to look acceptable, the tax treatment of the annuity will be ordinary income that you would then try to defer through 1035 rollovers, whereas holding stock ETFs results in capital gains taxed at lower rates.
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retiredjg
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Re: SPHD instead of bonds

Post by retiredjg »

ZachFinch76 wrote: Fri Aug 05, 2022 2:39 pm How about a structured annuity? Like this one from Nationwide, seems I can choose a floor of 5 or 10% max loss and 80 or 90% yield against the index with a 1 or 3 year period.

https://client-tool.definedprotection.c ... protection
I believe that a structured annuity is a product that has been created to make money for advisors and the annuity creators. Things like this are not created because they benefit the customer. :(
grok87
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Re: SPHD instead of bonds

Post by grok87 »

ZachFinch76 wrote: Fri Aug 05, 2022 12:06 pm
grok87 wrote: Fri Aug 05, 2022 10:52 am
ZachFinch76 wrote: Fri Aug 05, 2022 10:26 am Hi

For religous reasonds I do not want to hold any bonds. So I either hold cash, gold, or have a very aggressive all stock allocation. I am not a fan of cash or gold, other than an emergency fund. So I figure I either go all in on total market stock holdings, or I look for some other type of income producing stock fund. I have looked at SPHD and it seems like it has low volatity. Any thoughts on holding it for income and stability in lieu of bonds? Again I would just hold bonds but I am choosing not to for religous reasons. So the question is not whether or not this fund would be better than a broad based index fund for growth, i know it would not for growth. But rather is it a decent idea for incoome AND some stabilization to my AA since bonds are off limits? The other option I am considering is SCHD to get income and growth but it will be more volatile so I wonder in that case why I would not just put it all into my primary equity allocations in VTI/VXUS.
Hi Zach,
you will probably get more responses if you explain the ticker symbols.
SPHD = Invesco S&P 500 High Div Low Volatility ETF
SCHD = Schwab US Dividend Equity ETF

i would probably just hold cash as a bond substitute.
you might also consider direct real estate. for example the TIAA real estate annuity if you have access
https://www.tiaa.org/public/pdf/e/eligi ... ternal.pdf
cheers,
grok
Does the TIAA direct rea estate annuity need to be in an IRA or can it be a regular taxable account?
not sure.
RIP Mr. Bogle.
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ruralavalon
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Re: SPHD instead of bonds

Post by ruralavalon »

ZachFinch76 wrote: Fri Aug 05, 2022 10:26 am Hi

For religous reasonds I do not want to hold any bonds. So I either hold cash, gold, or have a very aggressive all stock allocation. I am not a fan of cash or gold, other than an emergency fund. . . . . . Again I would just hold bonds but I am choosing not to for religous reasons. . . . . .
In my opinion precious metals are your best choice to reduce portfolio volatility, given the religious limitations.
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ruud
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Re: SPHD instead of bonds

Post by ruud »

ZachFinch76 wrote: Fri Aug 05, 2022 11:59 am It is a long conversation but the short of it is I am just focusing on not directly owning debt that requires gauranteed interest payments.
What about I bonds with a 0% fixed rate? The return you get is just the inflation adjustment.
.
illumination
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Re: SPHD instead of bonds

Post by illumination »

There's just no equity substitute for bonds. To me, any sort of annuity contract/product that has a guarantee seems to be just another form of an interest contract, but I have no idea what the "rules" are in your particular situation and it's probably not something that should be explored here.

Do you want the cash flow of dividends or are you just trying to buy securities you think are "safer"?

I purchased a few low volatility funds in the past (like USMV) in hindsight, they largely just track a total market index, except they don't have as good a total rate of return on a longer time line. I can maybe see a case in a retirement account in the later years when someone wants more equity exposure instead of being heavy in bonds, but that doesn't really line up with the philosophy here. I do like SCHD (Schwab US Dividend) in my retirement accounts. It largely keeps up with a total market fund and seems to weather downturns better. But it's not a bond substitute.
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Re: SPHD instead of bonds

Post by muffins14 »

Probably generally participating in capitalism is equally as bad as charging interest in something, yeah? Would the religious organization be OK with underpaying workers and getting wealthy from share buybacks, but not OK with interest on debt?

Companies aren’t really people, so maybe it’s OK to charge interest to a company but not on a human?

What about just government bonds? That way you arent really directly charging interest to either a person or a company.
35% VTI, 25% AVUV, 15% IXUS, 15% AVDV, 10% VWO
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