cash and bonds - ETF vs direct purchase

[Arturo]

Hi all,

i wanted to ask which are the pros and cons about purchasing cash and long term bonds in two different formats: ETFs and direct treasury bonds.

i am seeing that lots of people are following Bogle's formula: following an index for cash and bonds. Obviously, or maybe, its more simple: You just buy & sell like stocks. Regarding to the management fees, are cheap products (normally between 0.12% and 0.40%).

But in other way, buying short and long bonds directly to the treasury (and holding the custody) gives you more security (you avoid the manager, broker, intermediates, etc.) and are almost 0% of management fees.

So from your point of view, why selecting ETFs in stead of direct bonds (T-bills and T-bonds)  or viceversa? Obviously, i am refering to the situation that you are able to purchase/select both of them.

[rickb]

There have been at least a few threads on this already.  See for example

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=9

One difference many people don't seem to be aware of is that the ETFs can, and typically do, loan out the underlying securities to make a little extra profit.

[Arturo]

There have been at least a few threads on this already.  See for example

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=9

One difference many people don't seem to be aware of is that the ETFs can, and typically do, loan out the underlying securities to make a little extra profit.

Hi rickb,

thanks for the advice and sorry for the duplicity.

regards.

[rhymenocerous]

You ask for the pros and cons of holding bonds/cash directly, and then you list all of them!  I choose to hold long term treasuries directly over investing in an ETF or bond fund.

1. Buying and selling treasuries isn't complicated, so why pay an expense ratio to get the same thing you can do for free.
2. When you buy directly, you know exactly what you have.  There are no repurchase agreements or anything behind the scenes that could cause you to pay higher taxes.

For extremely short term cash, I guess it might be simpler to just own a fund.  I don't know if you can auto rollover T-bills once they expire.  It probably wouldn't be too hard to manage a 1-3 year treasury ladder yourself.  One of the things I like about the PP though is that it doesn't require lots of attention.  There's a lot of different ways to handle the cash portion for small investors: bank savings accounts, CDs, I-Bonds, EE-Bonds, etc.  You're also restricted by what you are able to invest in.  Most of my new contributions go into my 401k, with the only bond fund being VG's Total Bond Market.  Since I want to take some interest rate risk over the 0% in money markets, I'm forced to use this instead for my cash holding.

[Arturo]

You ask for the pros and cons of holding bonds/cash directly, and then you list all of them!  I choose to hold long term treasuries directly over investing in an ETF or bond fund.

1. Buying and selling treasuries isn't complicated, so why pay an expense ratio to get the same thing you can do for free.
2. When you buy directly, you know exactly what you have.  There are no repurchase agreements or anything behind the scenes that could cause you to pay higher taxes.

For extremely short term cash, I guess it might be simpler to just own a fund.  I don't know if you can auto rollover T-bills once they expire.  It probably wouldn't be too hard to manage a 1-3 year treasury ladder yourself.  One of the things I like about the PP though is that it doesn't require lots of attention.  There's a lot of different ways to handle the cash portion for small investors: bank savings accounts, CDs, I-Bonds, EE-Bonds, etc.  You're also restricted by what you are able to invest in.  Most of my new contributions go into my 401k, with the only bond fund being VG's Total Bond Market.  Since I want to take some interest rate risk over the 0% in money markets, I'm forced to use this instead for my cash holding.

Hi rhymenocerous,

thanks for your advices. I was just asking because lots of people are using ETFs for PP in USA, when they can acquire bonds directly to the treasury. So i was wondering the principal reason.

[rocketdog]

My take on it is that it's mostly a convenience factor.  ETFs are quicker and easier to buy and sell (at least that's my understanding, since I haven't bought Treasuries directly myself).  There was another post on this forum where the poster said that buying Treasuries directly was easy enough, but he had a difficult time selling them because he couldn't do it directly through the Treasury but had to use a broker to convert them (or something like that) and it took several weeks before he had the cash in his account.  So before buying Treasuries direct you might want to talk to your broker first to make sure you're not going to be delayed in getting your cash back. 

[rickb]

You can buy treasuries directly through TreasuryDirect, in which case to sell you have to transfer them to a broker (when they mature they become cash in a cash account tied to your TreasuryDirect account).  For the "cash" part of the portfolio I don't think this is much of an issue since you'd presumably set up a short term ladder and hold whatever you're buying to maturity.  For long term bonds this creates an extra step when you want to sell.  Note that TreasuryDirect only applies to taxable accounts.

You can also buy treasuries through most brokers.  Neither Fidelity or Vanguard currently charges any transaction fees for buying or selling.  The process is quite simple as well.  Gumby posted a step by step walk-through of the Fidelity process here.