murphy_p_t wrote: is the concern with TLT also applicable to SHY/SHV?
I agree the answer is yes, but if they actually hold 100% cash collateral, marked to market every day, the risk for loans involving the bonds held by SHY/SHV is considerably different because these bonds are so much less volatile than the long term treasuries held by TLT. The main risk we've talked about regarding TLT is that the borrower (who has almost certainly sold the borrowed bonds short) gets caught on the wrong side of a large, sudden downward move in interest rates - and can't afford the cash to mark to the new market price (and then defaults, and all manner of ugliness ensues). The shorter duration of the bonds held by SHY/SHV makes the potential mark to market obligation for these much, much less (at least in percentage terms), so a default based on a price spike would seem to be fairly unlikely (and they pay approximately 0% now anyway, so how much lower can interest rates really go?). On the other hand, one might wonder what form(s) of "cash" the fund considers acceptable as collateral and what the fund does with this cash for the duration of the loan - I mean, they probably don't insist on stacks of dollar bills and then put these dollars in a vault. I'm sure if you called them up they'd be happy to tell you all the gory details - unless of course they're hiding something in which case they either won't tell you or they'll lie to you.WildAboutHarry wrote: Yes
The question boils down to how much do you really trust iShares (BlackRock) to be appropriately managing any risks that might be involved in these sorts of loans, presumably up to and including making these funds "whole" again in the face of any problems that might occur. Are they completely trustworthy, or might they become the next MF Global? If you directly hold long term treasuries (even through a broker), directly hold short term treasuries, and hold physical gold only 25% of your assets are subject to these (presumably remote) sorts of risks. Yes, there are other risks involved - but ask yourself, "what's the worst that can happen"? Part of the genius of Browne's preferred allocation is that not only are the asset classes diversified in a return sense, but they're also so different that they're diversified in a fundamental risk sense. If you hold the assets in the preferred form, any one risk is effectively firewalled to only one asset class.