Contrasting Individual Bonds and Bond ETF investing and taxation help please

[robininni]

I see there are basically two ways to represent the 25% long term bond portion of the Permanent Portfolio--buying individual bonds or buying into and ETF such as TLT.

How are each taxed?  Do individual bonds produce short-term gains each month via interest?  If so, can this somehow be automatically reinvested into more bonds (or portions of bonds?) to avoid being hit with short term capital gains?

If individual bonds do cause short term capital gains, is this avoided with ETFs such as TLT?  Can any distributions from ETFs be automatically reinvested to avoid taxation?

Will individual bonds or the same type and duration as an ETF (such as TLT) perform the same or does the ETF get valued differently and react differently since it is a fund?  Please explain any differences if you would be so kind.

Thanks,

Rob

[rickb]

Individual bonds pay dividends every 6 months, taxed as interest income.  Any capital gain/loss is taxed as appropriate based on the difference between what you pay when you buy a bond vs. what you get when you sell it.

Bond funds and ETFs buy and sell frequently, so generally have both the interest income and ongoing capital gains/losses.  With funds (and possibly ETFs, depending on your brokerage) you can generally reinvest dividends, but this doesn't mean the dividends are tax free (you pay the tax on the dividends whether you actually receive the dividends or reinvest). 

The net asset value of a fund changes in essentially the same way as the net asset value of the individual bonds it holds.  Funds hold way more bonds than you would, and buy/sell to maintain a specific duration (or according to the manager's whim). 

Funds, and in particular TLT, can and do loan out the bonds they own.  See http://gyroscopicinvesting.com/forum/bo ... d-harmful/