What are the acceptable Bond ETFs for the Permanent Portfolio?
In particular, are VGLT, TLO, and TLT all satisfactory holdings? Are there any others?
And what about replacing the cumulative position of 25% Cash, 25% Long Term Treasury with 50% Intermediate Term Treasuries?
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Thank you,
---Robert
Acceptable Bond ETFs
Moderator: Global Moderator
Re: Acceptable Bond ETFs
TLT seems to be the most popular around here.
I tend to prefer Mutual Funds over ETFs, so I use VUSTX, which is all Long Term Treasury (VGLT is NOT all Treasury, so isn't a top choice.)
TLT has a slightly longer duration than VGLT (17.2 vs 16.5), so has a little more oomph (in both directions.)
TLT: http://www.etf.com/TLT
VUSTX: http://portfolios.morningstar.com/fund/ ... ture=en_US
I think orthodoxy says 20yr duration, but many doing fine with the above.
Average duration of 50/50 is a little over 8 is using he above, 10+ if have 20+year treasuries.
Some hold Short Term Treasuries instead of T-Bills for the 'Cash' portion (especially in IRAs), which brings up the average duration a bit..
Others go with all intermediates vs 50/50 Long/Cash.
Vanguards intermediate term treasury duration is under 6, so pay attention to duration. Won't be as volatile -- won't zig as much when the market zags, but also won't loose as much in the other direction.... Just ensure that you know what you have -- other funds / ETFs have higher duration, but others would need to comment.
I tend to prefer Mutual Funds over ETFs, so I use VUSTX, which is all Long Term Treasury (VGLT is NOT all Treasury, so isn't a top choice.)
TLT has a slightly longer duration than VGLT (17.2 vs 16.5), so has a little more oomph (in both directions.)
TLT: http://www.etf.com/TLT
VUSTX: http://portfolios.morningstar.com/fund/ ... ture=en_US
I think orthodoxy says 20yr duration, but many doing fine with the above.
Average duration of 50/50 is a little over 8 is using he above, 10+ if have 20+year treasuries.
Some hold Short Term Treasuries instead of T-Bills for the 'Cash' portion (especially in IRAs), which brings up the average duration a bit..
Others go with all intermediates vs 50/50 Long/Cash.
Vanguards intermediate term treasury duration is under 6, so pay attention to duration. Won't be as volatile -- won't zig as much when the market zags, but also won't loose as much in the other direction.... Just ensure that you know what you have -- other funds / ETFs have higher duration, but others would need to comment.
Re: Acceptable Bond ETFs
When comparing TLT to VGLT, there are some other important factors to consider aside from duration and composition.
What is the expense ratio? TLT = .15% vs. VGLT = .10%
What is the average % spread? TLT = .01% vs. VGLT = .11%
What is the median premium/discount? TLT = .02% vs. VGLT = .07%
What is the max. premium/discount? TLT = 0.69% / -0.60% vs. VGLT = 0.68% / -0.13%
What is the Median Tracking Difference? TLT = -0.10% vs. VGLT = -.12%
What is the Max. Upside/Downside Tracking Difference? TLT = .01% / -.13% vs. VGLT = .60% / -.89%
These numbers (especially the last item) mean that on the average you are more likely to purchase or sell TLT at a fair & correct price than VGLT.
Furthermore the potential error working against you with VGLT is quite a bit larger than the expense ratio advantage that VGLT offers. (Of course you could get lucky and encounter an error that works to your advantage).
You can find these statistics (and lots of other interesting things about these ETFs) on www.etf.com:
http://www.etf.com/TLT
http://www.etf.com/VGLT
Hover your mouse over any of the terms and a pop-up will appear which explains it.
What is the expense ratio? TLT = .15% vs. VGLT = .10%
What is the average % spread? TLT = .01% vs. VGLT = .11%
What is the median premium/discount? TLT = .02% vs. VGLT = .07%
What is the max. premium/discount? TLT = 0.69% / -0.60% vs. VGLT = 0.68% / -0.13%
What is the Median Tracking Difference? TLT = -0.10% vs. VGLT = -.12%
What is the Max. Upside/Downside Tracking Difference? TLT = .01% / -.13% vs. VGLT = .60% / -.89%
These numbers (especially the last item) mean that on the average you are more likely to purchase or sell TLT at a fair & correct price than VGLT.
Furthermore the potential error working against you with VGLT is quite a bit larger than the expense ratio advantage that VGLT offers. (Of course you could get lucky and encounter an error that works to your advantage).
You can find these statistics (and lots of other interesting things about these ETFs) on www.etf.com:
http://www.etf.com/TLT
http://www.etf.com/VGLT
Hover your mouse over any of the terms and a pop-up will appear which explains it.
Re: Acceptable Bond ETFs
Quick terminology recap:
Maturity is simply the amount of time remaining before a bond matures.
Duration is a more complex measure of how sensitive a bond is to interest rate changes. It is a function of maturity and several other factors.
http://www.investopedia.com/terms/m/maturity.asp
http://www.investopedia.com/terms/d/duration.asp
The orthodox policy is to buy treasury bonds at 30 years' maturity, and sell them at 20 years' maturity, so that the maturities of bonds in the portfolio range from 20-30 years.
AFAIK, the only fund that follows precisely this 20-30 year policy is TLT (current duration=17.67 years).
There are other low-cost funds that follow a similar strategy. VUSTX "is expected to maintain a dollar-weighted average maturity of 15 to 30 years." VGLT and TLO hold 10-30 year bonds. FLBAX maintains "a dollar-weighted average maturity of 10 years or more." In the current economic environment, all of these funds' effective duration is practically identical to TLT's. However, there is always some risk that conditions will change in a way that makes these funds behave significantly differently from the orthodox policy.
Lumping cash and bonds together into one 50% component has been discussed before; search for "barbell" and "bullet." Executive summary: in theory the bullet is equivalent, and backtesting makes it look equivalent in practice, but again there is a nagging concern that some extreme circumstance could cause it to behave differently.
My take is that TLT is the only ETF that happens to implement the PP policy perfectly, and its expenses and volume are reasonable, so KISS and just use that. But, if you have some pressing reason to use VUSTX, VGLT, TLO, or FLBAX, they are good options too. (You might have limited options in a 401k, or be ruthlessly minimizing commission costs, for example.) The "bullet" seems like it's bending rules too far, but if it's that or nothing (e.g. a PP-hostile 401k), it's acceptable.
Maturity is simply the amount of time remaining before a bond matures.
Duration is a more complex measure of how sensitive a bond is to interest rate changes. It is a function of maturity and several other factors.
http://www.investopedia.com/terms/m/maturity.asp
http://www.investopedia.com/terms/d/duration.asp
The orthodox policy is to buy treasury bonds at 30 years' maturity, and sell them at 20 years' maturity, so that the maturities of bonds in the portfolio range from 20-30 years.
AFAIK, the only fund that follows precisely this 20-30 year policy is TLT (current duration=17.67 years).
There are other low-cost funds that follow a similar strategy. VUSTX "is expected to maintain a dollar-weighted average maturity of 15 to 30 years." VGLT and TLO hold 10-30 year bonds. FLBAX maintains "a dollar-weighted average maturity of 10 years or more." In the current economic environment, all of these funds' effective duration is practically identical to TLT's. However, there is always some risk that conditions will change in a way that makes these funds behave significantly differently from the orthodox policy.
Lumping cash and bonds together into one 50% component has been discussed before; search for "barbell" and "bullet." Executive summary: in theory the bullet is equivalent, and backtesting makes it look equivalent in practice, but again there is a nagging concern that some extreme circumstance could cause it to behave differently.
My take is that TLT is the only ETF that happens to implement the PP policy perfectly, and its expenses and volume are reasonable, so KISS and just use that. But, if you have some pressing reason to use VUSTX, VGLT, TLO, or FLBAX, they are good options too. (You might have limited options in a 401k, or be ruthlessly minimizing commission costs, for example.) The "bullet" seems like it's bending rules too far, but if it's that or nothing (e.g. a PP-hostile 401k), it's acceptable.
Re: Acceptable Bond ETFs
Thanks, all!