TLT - Why Is Income from Govt Obligations so LOW?

Discussion of the Bond portion of the Permanent Portfolio

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clacy
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by clacy » Wed Feb 29, 2012 9:56 am

I think I will reduce my TLT to a smaller position, just enough for rebalance purposes and move most of it to actual treasuries.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Gosso » Wed Feb 29, 2012 10:08 am

WildAboutHarry wrote:
Gosso wrote:I'd hate to throw gasoline on the fire but if you're using a margin account then your discount broker can lend out any shares that you own inside that account. 
What about brokerage accounts for IRAs/401(k)s?  No margin there.  Can they lend securities from these accounts?

I'm concerned about the whole ETF/fund thing - broker, I-Shares, et al.  It is a chain forged of potentially very weak links.
As far as I know they cannot lend shares in your IRA/401(k).  The reason they can lend shares in your margin account is because they are giving you the 'privilege' of borrowing cheap money from them to invest on margin.  Otherwise they wouldn't lend you the money at such a low rate.

When you're using a margin account you do not hold claim to any individual shares of the stock/etf you 'think' you own.  You own a certain percentage of the total pooled shares owned by the brokerage.  So a Margin Account is the same as unallocated gold, whereas a Cash Account is more like allocated gold.

It is stuff like this that make me appreciate the 25% in gold.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by WildAboutHarry » Wed Feb 29, 2012 10:26 am

Gosso wrote:So a Margin Account is the same as unallocated gold, whereas a Cash Account is more like allocated gold.
Thanks.  Assuming one has access to brokerage windows in tax-sheltered accounts that gives some coverage.

Although I think all shares, both cash and margin accounts alike, are typically held in street name and thus the cash-account shares are a bit closer to the un-allocated portion of the spectrum.

And I do like the concept of "deep assets".  MediumTex should trademark that before someone else does.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by Gosso » Wed Feb 29, 2012 10:42 am

WildAboutHarry wrote:
Gosso wrote:So a Margin Account is the same as unallocated gold, whereas a Cash Account is more like allocated gold.
Although I think all shares, both cash and margin accounts alike, are typically held in street name and thus the cash-account shares are a bit closer to the un-allocated portion of the spectrum.
You could be right about the shares in the cash-account being in a pool except unable to be lent out -- I only asked my broker about the margin account.  Plus the rules may be different between Canada and the US?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Wed Feb 29, 2012 10:54 am

MediumTex wrote: I've talked about "deep assets" in each PP asset class, and this discussion just reinforces the need for the deep assets in the bond allocation to be actual treasury bonds.

An overall PP's deep assets might look like this:

Stocks: Cheapest S&P 500 fund you can find

Gold: Bullion

Cash: EE and I series savings bonds and t-bills

Bonds: 30 Year treasury bonds

Minor tweak - I would think the stocks should be in a fund, not ETF.  And I wouldn't necessarily go for cheapest but rather most transparent.  If they're cheap they may be cheap for reason (like, oh I don't know, maybe they loan out their securities :) ).
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by moda0306 » Wed Feb 29, 2012 10:57 am

What really makes a mutual fund safer than an ETF?  Couldn't they engage in security lending within a mutual fund?
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by MediumTex » Wed Feb 29, 2012 12:00 pm

rickb wrote:
MediumTex wrote: I've talked about "deep assets" in each PP asset class, and this discussion just reinforces the need for the deep assets in the bond allocation to be actual treasury bonds.

An overall PP's deep assets might look like this:

Stocks: Cheapest S&P 500 fund you can find

Gold: Bullion

Cash: EE and I series savings bonds and t-bills

Bonds: 30 Year treasury bonds

Minor tweak - I would think the stocks should be in a fund, not ETF.  And I wouldn't necessarily go for cheapest but rather most transparent.  If they're cheap they may be cheap for reason (like, oh I don't know, maybe they loan out their securities :) ).
Personally, I think that VTSMX is hard to beat overall for the stock portion, but apparently Vanguard's index ETFs are basically the same as their index mutual funds.

To me, the stock portion of the PP presents fewer obvious "deep asset" applications.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by craigr » Wed Feb 29, 2012 2:16 pm

The reality is that an individual cannot obtain the equal diversification with low costs of a stock index by doing it themselves. The fund is way cheaper, and likely safer in terms of diversification, than building their own portfolio of stocks. The Vanguard funds, as Tex points out, are hybrids. The ETFs they offer are share classes of the fund. If you own the ETF you are linked to the mutual fund itself. Vanguard does this because having the ETF attached to the fund allows them to do better tax management than a fund alone can do. Of all the ETFs, I probably like Vanguard's the most because of this arrangement. But the iShares ETFs and StateStreet ETFs do have good reputations.

As for the other points, it is always best to own the bonds directly if you can. This is always the #1 option. Using a bond fund is a compromise and yes the prospectus allows managers to do things that may not be a benefit to all shareholders all the time. There is no way to control this manager risk other than to be your own manager. That's just the tradeoff for the convenience of a fund. But owning bonds is probably one of the easiest assets to hold. Once you make the purchase, they just sit there and pay you interest twice a year and not make any noise. You don't even need to feed them anything.

In terms of margin, yes this is a risk. I should probably write about this. Investors should not sign margin agreements and should have their accounts be cash only. It may not be perfect, but it eliminates one more risk. But as we all know, the Permanent Portfolio never uses margin investing (even in the Variable Portfolio), so no margin privilege is ever needed. It can only cause trouble.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by rickb » Wed Feb 29, 2012 2:56 pm

moda0306 wrote: What really makes a mutual fund safer than an ETF?   Couldn't they engage in security lending within a mutual fund?
ETFs are much more complicated beasts than mutual funds.  Either can (and many do) engage in security lending, so there's really not much difference on that score - but the indirect linkage between an ETF's market price and the NAV of the underlying assets (maintained by the actions of the authorized participants) is a complication that's simply not there with mutual funds.  

ETFs should theoretically be cheaper since the securities buying and selling is done by APs (who, in return, are able to profit from differences in the ETF's share price and its NAV).  And, indeed, VTI's ER is 0.06% while VTSMX's is 0.17% and VTSAX's (admiral class shares) is 0.07%.  However, the tradeoff is the additional complexity and the fact that the ETF's share price is not simply the NAV of the fund's assets.  For example, how did VTI do during the flash crash?  My recollection is it dropped to essentially $0.00 (maybe it was $0.01) even though the NAV was $50 or so.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by craigr » Wed Feb 29, 2012 3:33 pm

rickb wrote:ETFs should theoretically be cheaper since the securities buying and selling is done by APs (who, in return, are able to profit from differences in the ETF's share price and its NAV).  And, indeed, VTI's ER is 0.06% while VTSMX's is 0.17% and VTSAX's (admiral class shares) is 0.07%.  However, the tradeoff is the additional complexity and the fact that the ETF's share price is not simply the NAV of the fund's assets.  For example, how did VTI do during the flash crash?  My recollection is it dropped to essentially $0.00 (maybe it was $0.01) even though the NAV was $50 or so.
Great points.

Yes the benefit of the fund is you deposit your money and get end of day closing price. No need to worry about bid-ask spreads, commissions, etc. For someone in the Permanent Portfolio there is so little trading that the intra-day pricing of ETFs is not an advantage anyway.

The flash crash problem is there for sure. But this can be eliminated by not using stop limits which prevents getting whipsawed.

With that said, there is a risk of non-Vanguard funds having taxes from large scale redemptions. If a massive panic were to happen the selling of the funds could generate capital gains that get tossed into the laps of the remaining holders. With the Vanguard setup, they use the ETF outlet to manage this outflow by tossing the selling activity directly into the market through the ETFs and not onto the remaining fundholders.

FYI. Vanguard has a patent on this approach which is why nobody else does it in the fund industry.
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by WildAboutHarry » Wed Feb 29, 2012 7:11 pm

CraigR wrote:Yes the benefit of the fund is you deposit your money and get end of day closing price. No need to worry about bid-ask spreads, commissions, etc. For someone in the Permanent Portfolio there is so little trading that the intra-day pricing of ETFs is not an advantage anyway.
I agree and much prefer funds to ETFs for all of the obvious reasons.

One problem with modern investing in general is there are too many damn choices. 

For example, Vanguard came out with free ETFs in their accounts, so off I went to ETFs.  A short time later -- listen to the paranoia creep in -- they offered many of the same funds as Admiral shares at $10K minimums.  So now I am stuck with ETFs when I really want to be in funds.  And it takes three days to unwind an ETF position to get back into funds at Vanguard.

Go figure.
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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Re: TLT - Why Is Income from Govt Obligations so LOW?

Post by murphy_p_t » Wed Feb 29, 2012 10:16 pm

WildAboutHarry wrote:
CraigR wrote:Yes the benefit of the fund is you deposit your money and get end of day closing price. No need to worry about bid-ask spreads, commissions, etc. For someone in the Permanent Portfolio there is so little trading that the intra-day pricing of ETFs is not an advantage anyway.
I agree and much prefer funds to ETFs for all of the obvious reasons.

One problem with modern investing in general is there are too many damn choices. 

For example, Vanguard came out with free ETFs in their accounts, so off I went to ETFs.  A short time later -- listen to the paranoia creep in -- they offered many of the same funds as Admiral shares at $10K minimums.  So now I am stuck with ETFs when I really want to be in funds.  And it takes three days to unwind an ETF position to get back into funds at Vanguard.

Go figure.




learning things like this from folks who have no monetary interest is one thing makes this board so helpful...as always, thanks to all, esp CraigR
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