EDV?

[craigr]

I'd strongly urge you to use funds that hold only Treasuries. If we get a repeat of 2008 (or the 1930s) you'll be in a far better position owning Treasury bonds. I'd use TLT over EDV unless there is some mitigating factor that requires the extra volatility that zeroes will have. If you can buy the bonds directly that is best of all.

[SmallPotatoes]

SmallPotatoes, what's your thinking behind BSV? Though the performance has been quite good, what kind of bothers me is the makeup. According to the Barclays FactSheet (if I have the correct one, "U.S. Government-Credit Index Factsheet" of Aggregate/Bond Indices, see link below) in 2009 it was
- 46.3% Treasury
- 22.1% Government related
- 31.5% Corporate

So less than half in treasuries.

What about Vanguard Short-Term Government Bond ETF (VGSH)? I can't find out though how much is in treasuries for this one...
Update: Maybe it's "U.S. Government Index Factsheet" of Aggregate/Bond Indices in this list? https://ecommerce.barcap.com/indices/pa ... =9&collar=
In that case it's 72.2% Treasury and 27.8% U.S. Agency.

After reviewing both it seems that VGSH is the lesser evil, but VFISX is probably the best bet. Really, I'm looking to lower expenses without adding unnecessary risk. On that note, I might pursue VGSH, but I'll definately drop EDV in favor of TLT.

[Jan Van]

Craigr: for long term bonds I totally agree.
For the cash equivalent though... I'm now using my emergency fund for the cash portion of the PP. But it's about twice what I need for the PP. So what I was thinking was, if I use VGSH instead of SHY/VFISX, I still have the correct percentage in treasuries, but the added agency parts might boost returns a little bit. BTW, I also have a "first-line" emergency fund in a savings account, apart from the PP.

SmallPotatoes: yes, vfisx/shy would be the safe bet. I do hold some EDV in addition to TLT just to make things a bit spicier. I'll blame that part on MediumTex though 

[craigr]

...but the added agency parts might boost returns a little bit. BTW, I also have a "first-line" emergency fund in a savings account, apart from the PP.

I'm not a yield chaser because it causes problems more often than not. If you are holding cash because you want an emergency fund or other buffer then I'd just buy the safest I can get because you want that stability. If you want to reach for more return, then carve off a section of your money for a variable portfolio and put in some more likely to appreciate assets like stocks. But I wouldn't go around speculating on my bond/cash portion. It's a low return gamble and usually not worth the additional risk.

[craigr]

BTW. I just saw that the 10 year returns for Barclay's 1-5 Year Treasury Index is 6.00%. The Barclay's 1-5 Year Government Index (which includes Agency bonds) is 5.11%! So investors took on more risk, but got lower return than Treasuries the past 10 years for instance.

I've seen this in many other bond funds that supposedly would provide higher yield (like corporate bond funds) over Treasuries. The Barclay's 1-5 Year Investment Grade Corporate bond Index has a 5.92% return over the past 10 years. Again, worse than Treasuries.

Just remember that when the markets are going screwy, people want Treasury bonds above all others. It's a nice theory that riskier bonds should pay better over time, but in a diversified portfolio with stocks it just doesn't work that way. To quote the great Yogi Berra: "In theory, there is no difference between theory and practice. But in practice, there is."

[Jan Van]

Ha, got to love the Yogi Berra quote...

I can't really find any 1-5 year bond ETFs or funds. Closest might be ITE, SPDR Barclays Capital Interm Term Treasury. Most others seem to be either 1-3 years or 5-10 years. And 5-10 years feels a bit too long to me, for this purpose.

[craigr]

Oh I just mentioned the 1-5 years because that's a commonly available index for comparison. For cash you want to use T-Bills, then if you have a good enough amount for short-term needs you could consider maybe using 1-3 year Treasury funds. But that's an optional thing and not what Browne suggested.

[Jan Van]

Yes, but I thought it was a good suggestion. I'm using a combination of VFISX/VWSTX/VMLTX (ST Treasury/ST TaxExempt/LimTerm TaxExempt) now for my emergency fund/PP cash allocation. Vanguard doesn't have a limited term treasury fund I think. But ITE might be just in my sweet spot...

[SmallPotatoes]

I'm going to look into the LT Treasuries at Vanguard. Since I'm still accumulating, still DCA'ing, I'm not sure if buying them is the best cost option (I'll double check).  I also think VG has minimum bond purchases, but I'll do my homework.

For now, VUSTX+EDV 50/50 seems to be a reasonable alternative.  

UPDATE: So, here's what I'm seeing at VG Bond Desk.

       Coupon      Duration.     Cost Each.   Fee.          Total          
4.625 29.57 yr 111.125 $75.00 $4,285.15

So if I liquidate my EDV I can buy about 43 30-year bonds at the rates listed above. Simple enough. My next question is: how do I rebalance that? Anyone used VG Bond service to know if the value of bond holdings is shown?  I'm not opposed to going this route as long as rebalancing is easy enough.

[SD]

I'm going to look into the LT Treasuries at Vanguard. Since I'm still accumulating, still DCA'ing, I'm not sure if buying them is the best cost option (I'll double check).  I also think VG has minimum bond purchases, but I'll do my homework.

For now, VUSTX+EDV 50/50 seems to be a reasonable alternative.  

UPDATE: So, here's what I'm seeing at VG Bond Desk.

       Coupon      Duration.     Cost Each.   Fee.          Total          
4.625 29.57 yr 111.125 $75.00 $4,285.15

So if I liquidate my EDV I can buy about 43 30-year bonds at the rates listed above. Simple enough. My next question is: how do I rebalance that? Anyone used VG Bond service to know if the value of bond holdings is shown?  I'm not opposed to going this route as long as rebalancing is easy enough.

Here is Vanguard's fee schedule:
http://www.vanguard.com/us/whatweoffer/ ... ommissions

Security type
New Issues
Existing Issues




U.S. Treasury securities

• Online rate for auction orders: Standard : $10; all others: commission-free
• Associate assistance rate for auction orders: Standard: $25; Voyager and Voyager Select: $15; Flagship: commission-free

• Online: Standard, Voyager, and Voyager Select: $0.75 per $1,000 face amount, $40 min.–$75 max.; Flagship: commission-free
• Associate assistance: Standard, Voyager, and Voyager Select: $1 per $1,000 face amount, $50 min.–$125 max.; Flagship: $20

I'm not sure where you're getting $75 fee. It should be $0.75*4.3=$3.23 if the fees are calculated on the aggregate purchase, or $0.75*43=$32.25 if the fees are calculated on each purchase individually. Both of these are lower than the $40 minimum, so you should be paying $40.

If you are really paying this much, there must be something I'm missing.


By the way, when buying, it makes sense to buy bonds from auction (either through Vanguard or TreasuryDirect) as this incurs much lower costs. I think the above fee schedule also applies to selling bonds, but I'm not sure.

[MCSquared]

Ha, got to love the Yogi Berra quote...

I can't really find any 1-5 year bond ETFs or funds. Closest might be ITE, SPDR Barclays Capital Interm Term Treasury. Most others seem to be either 1-3 years or 5-10 years. And 5-10 years feels a bit too long to me, for this purpose.

jmourik, I have used FSBAX (Fidelity Spartan Short Term Treasury).  It tracks the Barclay's 1-5 year Treasury Index. 

http://personal.fidelity.com/global/sea ... %20spartan

[Jan Van]

jmourik, I have used FSBAX (Fidelity Spartan Short Term Treasury).  It tracks the Barclay's 1-5 year Treasury Index. 

http://personal.fidelity.com/global/sea ... %20spartan

Thanks MCSquared!
Reminds me of M-C-S-A-R...

[SmallPotatoes]

I'm going to look into the LT Treasuries at Vanguard. Since I'm still accumulating, still DCA'ing, I'm not sure if buying them is the best cost option (I'll double check).  I also think VG has minimum bond purchases, but I'll do my homework.

For now, VUSTX+EDV 50/50 seems to be a reasonable alternative.  

UPDATE: So, here's what I'm seeing at VG Bond Desk.

       Coupon      Duration.     Cost Each.   Fee.          Total          
4.625 29.57 yr 111.125 $75.00 $4,285.15

So if I liquidate my EDV I can buy about 43 30-year bonds at the rates listed above. Simple enough. My next question is: how do I rebalance that? Anyone used VG Bond service to know if the value of bond holdings is shown?  I'm not opposed to going this route as long as rebalancing is easy enough.

Here is Vanguard's fee schedule:
http://www.vanguard.com/us/whatweoffer/ ... ommissions

Security type
New Issues
Existing Issues




U.S. Treasury securities

• Online rate for auction orders: Standard : $10; all others: commission-free
• Associate assistance rate for auction orders: Standard: $25; Voyager and Voyager Select: $15; Flagship: commission-free

• Online: Standard, Voyager, and Voyager Select: $0.75 per $1,000 face amount, $40 min.–$75 max.; Flagship: commission-free
• Associate assistance: Standard, Voyager, and Voyager Select: $1 per $1,000 face amount, $50 min.–$125 max.; Flagship: $20

I'm not sure where you're getting $75 fee. It should be $0.75*4.3=$3.23 if the fees are calculated on the aggregate purchase, or $0.75*43=$32.25 if the fees are calculated on each purchase individually. Both of these are lower than the $40 minimum, so you should be paying $40.

If you are really paying this much, there must be something I'm missing.


By the way, when buying, it makes sense to buy bonds from auction (either through Vanguard or TreasuryDirect) as this incurs much lower costs. I think the above fee schedule also applies to selling bonds, but I'm not sure.

Well, I checked the bond desk again and got the $40 figure this time, so whatever happened the first time blame it on user error. 

I will wait until 2011 before I consider purchasing individual bonds primarily due to costs.  At this time, I have only $5K tax sheltered and 50/50 VUSTX+EDV on $5K is $10 per year at .20% avg between both funds.  I'll wait and buy 30-years at auction from VG to avoid any commissions.  My only gripe is that the 30-year bonds won't count towards my Voyager status. 

Perhaps as I get older I'll fully transition to a traditional PP with paper bonds and 25% of my savings in bullion, but in daily affairs I prefer to have funds I can monitor and transact on with ease.  I do hold some 30-year paper bonds and some bullion, but just don't feel secure keeping large amounts of either in my house.  Youth?

[PPGroupie]

I don't see much difference in volatilities between our 50 year and 30 year durations


There may be a cut-off point when long is long no matter if its 30, 40 or 50 years.

Clive, I have not looked at the British gilts but generally the longer the duration (weighted average term to maturity of the bond cash flow) the more price volatility relative to interest rate movements.  Zero coupon bonds do not issue interest payments but mature at par so duration and maturity are the same.  For comparison purposes, look at long treasury ETF TLT.  It's weighted average maturity is roughly 28 years but it's duration is 15 years (it's bonds pay interest semi-annually).  Then look at treasury zero coupon ETF EDV.  It has a average maturity/duration of roughly 26 years.  In 2008, EDV was up 57% versus 31% for TLT.  That knife cuts both ways though as EDV was down 48% in 2009 while TLT was "only" down 26%.

The Treasury non-callable longer duration is what gives you the "juice" you are looking for in a deflationary environment.

When looking at EDV's chart, I happened to notice that there was a big drop in late 2009 - this can be attributed to a $11.11 dividend. If you happen to use yahoo finance adjusted prices (which accounts for dividends, splits, etc.), these are the numbers I get:

TLT:
2008  +29.21%  (unadjusted +26.46%)
2009  -20.32%  (unadjusted -22.70%)

EDV:
2008  +54.21%  (unadjusted +49.0%)
2009  -31.95%  (unadjusted -42.04%)

Perhaps EDV might not be so bad after-all (assuming my cold medication hasn't kicked-in yet and I calculated %ages correctly)...

[steve]

I just listened to the podcast about Bonds for the pemanent portfolio and was wondering if the Pimco ETF ZROZ could be used?
Does anyone have an opinion about using ZROZ instead of TLT or use it as a proxy for tax loss harvesting?
ZROZ pays quarterly dividends

http://www.pimcoetfs.com/FundInfo/Docum ... easury.pdf

[foglifter]

Craigr and MediumTex: if you don't mind I'd like to resurrect this thread and discuss the suitability of LT options for PP.

Craigr, in your December 12th podcast on bonds you recommended TLT, FLBIX and VUSTX. I understand the downsides of VUSTX which is not a pure LT Treasuries fund. I was wondering why you haven't mentioned EDV at all. Is it a higher volatility or something else?

Thanks!

[goldfinger]

It's totally commission free to buy treasury bonds from Fidelity, no need to wait till next auction day.

http://personal.fidelity.com/products/t ... efpr=brk10

And I have a question about EDV, where does its dividend come from, since it is zero coupon?

[LC475]

And I have a question about EDV, where does its dividend come from, since it is zero coupon?

It comes from zero-coupon bonds maturing, is my understanding.  The fund itself is ongoing, and so some percentage of the bonds need to mature each year, and new ones be bought to take their place.  In this way the whole thing is perpetual.

In contrast, funds like American Century Investments Zero Coupon 2025 Fund Investor Class (BTTRX) buy a whole lump of zero-coupon bonds at the beginning of the creation of the fund, don't pay anything out for the whole time, and then in the end all the bonds mature and the fund pays everyone and closes.  With that model, there's a start and an end to the fund.  The whole fund "matures," one could say.

[Kriegsspiel]

I was trying to understand the dividend too. If they have constantly maturing and new zeros, and the average maturity of the fund is 25 years, I would assume the longest zero is a 50 year duration, right? I couldn't find out if this was the case.

[Kriegsspiel]

Actually, I just looked at the fund page (durrrr), and they all mature in decades. Where does the dividend come from? And shouldn't it be interest?

[ochotona]

I was trying to understand the dividend too. If they have constantly maturing and new zeros, and the average maturity of the fund is 25 years, I would assume the longest zero is a 50 year duration, right? I couldn't find out if this was the case.

Zeroes don't pay interest. All of your gain is from the capital gain. Of course... a fund of zeroes could be set up any way they please, but the zeros themselves pay no interest.

But you STILL have to pay IRS every year on the imputed income! It's a pain! That's why I'll never own them in a taxable account.

[economicsjunkie]

But you STILL have to pay IRS every year on the imputed income! It's a pain! That's why I'll never own them in a taxable account.

I believe was the main reason that led HB to discard Zeroes categorically as an option for PP investors.