Mirroring individual bond returns with rolling bond funds

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Topic Author
Ocado
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Joined: Tue May 07, 2024 3:15 pm

Mirroring individual bond returns with rolling bond funds

Post by Ocado »

I’m looking to mirror the returns profile of individual bonds with rolling bond funds. Essentially, I would like to ensure that I achieve the current YTM of a rolling bond fund (excluding fees) with a 6-year duration over my bond investment horizon of 6 years. Is there a way to achieve this?

Reading through previous posts, my understanding is that I’d need to hold the 6-year duration rolling bond fund for a maximum of 2x duration (i.e. 12 years) to ensure that I achieve the current YTM (in the unlikely scenario of continually rising interest rates). I would like to achieve the current YTM within my 6-year horizon rather than potentially having to hold the investment for longer. Could I perhaps achieve this by reducing the weighted average duration of my bond funds over time (e.g. every year) through selling the 6-year duration fund and buying shorter duration funds? Would this enable me to achieve the current YTM of the 6-year fund within my 6-year horizon even if I'm forced to sell my holdings at a loss when rebalancing the durations?

I am very averse to losing any principal in my bond investments over my 6-year horizon. I’m not keen on buying individual bonds as I would like to mix government and corporate bonds. I would find this difficult to do if investing in individual bonds. I’ve seen in previous posts that fixed maturity bond funds can be a way to guarantee yield to maturity over a certain horizon. However, fixed maturity bond funds are not widely available in my jurisdiction.

Thank you in advance for any views
Topic Author
Ocado
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Joined: Tue May 07, 2024 3:15 pm

Re: Mirroring individual bond returns with rolling bond funds

Post by Ocado »

Bumping this up in case any views
aristotelian
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Re: Mirroring individual bond returns with rolling bond funds

Post by aristotelian »

You could buy bonds funds of varying durations but then you are going to risk principal loss. I don't see a way to have your cake and eat it too.
Topic Author
Ocado
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Joined: Tue May 07, 2024 3:15 pm

Re: Mirroring individual bond returns with rolling bond funds

Post by Ocado »

aristotelian wrote: Tue May 14, 2024 5:10 pm You could buy bonds funds of varying durations but then you are going to risk principal loss. I don't see a way to have your cake and eat it too.
Not hugely surprised to hear but good to know I'm not missing something obvious. Thank you :happy
cbs2002
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Re: Mirroring individual bond returns with rolling bond funds

Post by cbs2002 »

Your proposed approach contradicts your desire for principal protection. You either invest in bond funds and accept that you are taking more risk for more reward, or you can buy a 5-year Treasury and take what you get in five years.

If I had uninvested cash and I knew I needed it ALL back in less than six years, I'd likely buy a 5-year government bond or maybe split among a high-yield MM and bonds. But if you don't need all the money in six years, then I would take more risk.
BirdFood
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Re: Mirroring individual bond returns with rolling bond funds

Post by BirdFood »

Ocado wrote: Tue May 07, 2024 4:57 pm to ensure that I achieve the current YTM
I don’t think there is any “ensure” at any period of time. I think it’s just a matter of increasing odds.
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Cocoa Beach Bum
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Re: Mirroring individual bond returns with rolling bond funds

Post by Cocoa Beach Bum »

Maybe this is what you're looking for:
https://www.ishares.com/us/strategies/b ... nd-ladders
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BrooklynInvest
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Re: Mirroring individual bond returns with rolling bond funds

Post by BrooklynInvest »

Cocoa Beach Bum wrote: Wed May 15, 2024 11:52 am Maybe this is what you're looking for:
https://www.ishares.com/us/strategies/b ... nd-ladders
I don't understand the need but given the parameters this is exactly what I'd do. Fund-like diversification + individual bond-like fixed maturity date with a low ER.
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HanSolo
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Re: Mirroring individual bond returns with rolling bond funds

Post by HanSolo »

I did a search on the forum with these search terms: "bond funds" ladders approximate

I found threads with titles like "Bond funds are not riskier than bond ladders" and "Individual Bond (Rolling ladder) vs Bond Fund". Perhaps there's something relevant to your question there.

search.php?keywords=%22bond+funds%22+la ... mit=Search
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aristotelian
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Re: Mirroring individual bond returns with rolling bond funds

Post by aristotelian »

Cocoa Beach Bum wrote: Wed May 15, 2024 11:52 am Maybe this is what you're looking for:
https://www.ishares.com/us/strategies/b ... nd-ladders
These are traded like ETF's so the market value could go up and down, and OP would need to buy a different fund for each maturity. So all the complexity of a bond ladder with no benefit.
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