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So the suggestion is to use MINT, with an SEC yield of 0.64%, bid/ask spread and price volatility, instead of an FDIC-insured bank account at somewhere like Ally Bank (0.99% APY), Synchrony Bank (1.00% APY), etc.?
Sure, with a bank getting access to your money via ACH might take a couple of days, but selling an ETF takes three days to settle. And if you need cash, some of these banks give you access via ATM. Or you could splurge and wire funds into your brokerage.
Regarding MINT's yield - the 0.71% quoted in the article is for the trailing twelve months. While that does reflect the amount of dividends paid out, it omits two important factors:
- that the portfolio holds bonds today, with today's yields, and not last year's yields; and
- it ignores any decrease in value (from owning premium bonds) or increase in value (from owning discount bonds), independent of market interest rate changes
I was going to switch my retirement buckets 0 and 1, or part of them, from cash to FLRN, FLOT, BSCF, and BOND, commissionfree, but the extra money difference does not look that all that compelling even for significant sums.
That's my point. Not only is there more risk, but the yields are less than banks. Using David's ETFs as examples (SEC yield/trailing twelve month yield): FLRN (0.50%, 0.53%), FLOT (0.46%, 0.44%), BSCF (0.48%, 0.88%), BOND (1.13%, 4.20%).
I can't really comment on the PIMCO ETF (given management change, given PIMCO's extensive use of derivatives, etc.), but the first two are about as expected. The third - the Guggenheim Bulletshares - raises an interesting possibility.
This is a series of target date corporate bond funds. The idea is that they track indexes of bonds through the bonds' maturities. Assuming the funds execute well (they replicate the performance of the indexes sometimes with actual replication of the portfolio, but sometimes with substitutions), there is a price phenomenon that one might take advantage of.
Think of an individual bond, two years to maturity, whose coupon equals the current market rate. (Trying to make things simple here.) After a year, it's a one year bond. Its coupon hasn't shrunk, but (assuming rate curves haven't moved), it is now paying above market interest, because one year bonds generally yield less than two year bonds.
So its price will have risen. It's now a discount bond. As it gets closer and closer to maturity, that discount may initially continue to increase, but will ultimately shrink and then vanish to zero at maturity. So there's a window where, just by aging, bonds increase in price.
It's often too costly to trade individual bonds to take advantage of this behavior, but not so for ETFs. One could buy a 2-3 year bullet ETF, and sell it in a year. One would invest at the going rate for 2 or 3 year bonds, and pick up price appreciation. That price appreciation would seem to cover or at least substantially mitigate price depreciation due to rising interest rates. (Here I'm assuming rates don't go up by more than 1/2% over a year, and the duration is 2-3 years.)
One other thing to note about these ETFs - as the bonds in the portfolio mature, the funds go to cash (which pays nothing). So they seem to be pretty useless in their final year, and that could affect their pricing in other years. I haven't thought this through yet.
This isn't quite a cash strategy, but seems like a way to take advantage not of the 2015 target ETF, but of the 2017 BSCH, with 1.18% SEC yield and 1.58% trailing twelve month. May still not be worth the risk, but it does seem to be a way to boost expected return above bank yields (1%) while mitigating interest rate risk with price appreciation.
Shorter term doesn't seem to pay off, and longer term seems to have too much interest rate risk (longer duration). If you believe fully in the efficient market, this strategy is already built into the pricing, and on a risk-adjusted basis, you'll break even.
@davidrmoran Agree. The dip seemed right, and I put $1K into ARTFX simply because I wanted to commit to Bryan Krug a.s.a.p. But I've not added to any HY for over 2 years, and I'll probably turn off the AIP into ARTFX soon. The recovery has been too fast and rather confused. I don't get it. "Going naked" with HY is now, once again. too pricey.
@msf I couldn't agree more. For each of the past 3 years, I've refocused on this short space and crunched the numbers, believing if I just tried harder I could come up with something. I can't make the digits work. Last Fall, I had to really torture the numbers just to make them only as senseless as the previous year. Low duration/"ultra-short" have such high turnover and higher e.r.'s that when one adds in the invisible trading costs it is no wonder their returns are uninspiring. As @Edmond noted in a long comment recently, the short end is a very crowded trade; with so many on that side of the boat, and given how long the financial repression has continued, I think the short end may be spring-loaded and could pop up a little more than people expect, at the first tightening. And I certainly don't want to be there (and esp. not in an ETF) if that were to happen.
Comments
Sure, with a bank getting access to your money via ACH might take a couple of days, but selling an ETF takes three days to settle. And if you need cash, some of these banks give you access via ATM. Or you could splurge and wire funds into your brokerage.
Regarding MINT's yield - the 0.71% quoted in the article is for the trailing twelve months. While that does reflect the amount of dividends paid out, it omits two important factors:
- that the portfolio holds bonds today, with today's yields, and not last year's yields; and
- it ignores any decrease in value (from owning premium bonds) or increase in value (from owning discount bonds), independent of market interest rate changes
FLRN (0.50%, 0.53%), FLOT (0.46%, 0.44%), BSCF (0.48%, 0.88%), BOND (1.13%, 4.20%).
I can't really comment on the PIMCO ETF (given management change, given PIMCO's extensive use of derivatives, etc.), but the first two are about as expected. The third - the Guggenheim Bulletshares - raises an interesting possibility.
This is a series of target date corporate bond funds. The idea is that they track indexes of bonds through the bonds' maturities. Assuming the funds execute well (they replicate the performance of the indexes sometimes with actual replication of the portfolio, but sometimes with substitutions), there is a price phenomenon that one might take advantage of.
Think of an individual bond, two years to maturity, whose coupon equals the current market rate. (Trying to make things simple here.) After a year, it's a one year bond. Its coupon hasn't shrunk, but (assuming rate curves haven't moved), it is now paying above market interest, because one year bonds generally yield less than two year bonds.
So its price will have risen. It's now a discount bond. As it gets closer and closer to maturity, that discount may initially continue to increase, but will ultimately shrink and then vanish to zero at maturity. So there's a window where, just by aging, bonds increase in price.
It's often too costly to trade individual bonds to take advantage of this behavior, but not so for ETFs. One could buy a 2-3 year bullet ETF, and sell it in a year. One would invest at the going rate for 2 or 3 year bonds, and pick up price appreciation. That price appreciation would seem to cover or at least substantially mitigate price depreciation due to rising interest rates. (Here I'm assuming rates don't go up by more than 1/2% over a year, and the duration is 2-3 years.)
One other thing to note about these ETFs - as the bonds in the portfolio mature, the funds go to cash (which pays nothing). So they seem to be pretty useless in their final year, and that could affect their pricing in other years. I haven't thought this through yet.
This isn't quite a cash strategy, but seems like a way to take advantage not of the 2015 target ETF, but of the 2017 BSCH, with 1.18% SEC yield and 1.58% trailing twelve month. May still not be worth the risk, but it does seem to be a way to boost expected return above bank yields (1%) while mitigating interest rate risk with price appreciation.
Shorter term doesn't seem to pay off, and longer term seems to have too much interest rate risk (longer duration). If you believe fully in the efficient market, this strategy is already built into the pricing, and on a risk-adjusted basis, you'll break even.
Maybe some combo of BOND and PFF I will try; I am pretty chary no matter what.
@msf I couldn't agree more. For each of the past 3 years, I've refocused on this short space and crunched the numbers, believing if I just tried harder I could come up with something. I can't make the digits work. Last Fall, I had to really torture the numbers just to make them only as senseless as the previous year. Low duration/"ultra-short" have such high turnover and higher e.r.'s that when one adds in the invisible trading costs it is no wonder their returns are uninspiring. As @Edmond noted in a long comment recently, the short end is a very crowded trade; with so many on that side of the boat, and given how long the financial repression has continued, I think the short end may be spring-loaded and could pop up a little more than people expect, at the first tightening. And I certainly don't want to be there (and esp. not in an ETF) if that were to happen.