TLT vs EDV vs ZROZ

[ppnewbie]

Has anyone used zero coupon bonds in the PP? Doing some back testing on portfoliovisualizer based on some previous responses to a question. It seems like EDV has a slightly higher return than TLT and has a low expense ratio of .07. It also seems less correlated with the US stock market.

(In a tax deferred account)
Thanks!

[pmward]

Has anyone used zero coupon bonds in the PP? Doing some back testing on portfoliovisualizer based on some previous responses to a question. It seems like EDV has a slightly higher return than TLT and has a low expense ratio of .07. It also seems less correlated with the US stock market.

(In a tax deferred account)
Thanks!

Of course they have backtested better, we are at the tail end of a 30 year bull market in bonds and they are more volatile than normal LTT's. We don't know what the future holds though. Whenever inflation returns and/or yields rise that volatility of zeros will cut both ways and take more of a beating. Harry really only recommended zeros for those with a lot of leveraged real estate investments as the extra volatility can help hedge their mortgages in a deflation. Zeros can be a double edged sword, so one needs to ask now much risk they want to take on the bond side. A lot of people are afraid of zeros, but then again a lot of people (even people on this board) are afraid of LTT's as well.

[ppnewbie]

Thanks that is a very helpful perspective.

[boglerdude]

volatility is better for rebalancing?

[sophie]

I bought one in a retirement account alongside standard 30 year bonds just to see how it would perform. It is definitely more volatile but it's not a huge effect.

The only real issue with using these is that the bid-ask spreads on zeros tend to be higher, so it will cost a bit extra to sell. Not that much of a big deal though, when it's spread out over 10 years of ownership. You also get to decide whether you want the cash that's spun off of regular bonds, which you then have to think about reinvesting. With a zero, you get reinvesting automatically.

[FarmerD]

I've used EDV for the past 8 years for all my long bonds. Keep in mind EDV is about 50% more volatile than TLT so you need less of it to balance out your stock holdings. Craig, Tex and others have discussed before so review the older posts in the bond section.

[dualstow]

I bought some, very little, in tax deferred.
I have some EDV in a Roth IRA.

I’m glad you said tax deferred for real zeroes, OP, as I wouldn’t want to mess with imputed interest(?)

[Maddy]

Craig & MT say in their book that the managers of TLT have recently begun to lend shares. I have not heard the same about EDV.

[ochotona]

TLT is so overbought the last few days, if you buy it now you're a sucker in the short-term. There will be regrets. Someone is going to steal from you.

[Kbg]

Holding period...are we trading or investing?

[ochotona]

Holding period...are we trading or investing?

If you "buy to invest" but get shaken out of your position when it goes against you then you are a closet trader

[pmward]

Yeah, short term it's possible, likely even, that bonds will pull back. A high percentage of breakouts retest the breakout level. Over the next 1-2 years however, I personally am not worried about bonds at this point. I have many more worries about stocks and cash than I do about bonds. Bonds and gold do not concern me at all at the present moment for anyone holding for any decent amount of time.

[jalanlong]

I've used EDV for the past 8 years for all my long bonds. Keep in mind EDV is about 50% more volatile than TLT so you need less of it to balance out your stock holdings. Craig, Tex and others have discussed before so review the older posts in the bond section.

Can you explain why the volatility needs to be balanced out? None of the 4 components has the exact same volatility. If I backtest on portfolio visualizer I see that EDV is closer in Standard Deviation to stocks (I used small and mid cap in my PP) than TLT is. And don't I want the most volatility to get the most from rebalancing? What am I missing?

[Tyler]

If I backtest on portfolio visualizer I see that EDV is closer in Standard Deviation to stocks (I used small and mid cap in my PP) than TLT is.

Be careful about using historical volatility data like that. Bond volatility increases as rates fall, so calculating standard deviation using historical numbers won't necessarily accurately describe asset behavior today.