Gyroscopic Investing

I'm glad I have some EDV, but I'm noticing that large buy/sell spread. If you've looked into owning zeros directly, what have you found?

I've wondered the same thing since buying a thinly-traded ETF is something with which I have no experience. I've looked at Fidelity's long term Treasury STRIPS and they have a spread of about 1.6% which is quite a bit more than the EDV spread at the moment which is less than 0.5%

On the other hand, with an ER of 0.14% on EDV, compared to holding a STRIP for 10 years, it seems like the total cost comes out to about the same.

To me Because EDV actually pays quarterly dividends not phantom it is easier for me to deal with if I have to pay tax on income I want to receive the dividend before I pay the tax on it .

A reason I would consider this is if I was concerned that EDV would hold stuff in their funds which could blow up (ie not holding the STRIPS, but lending them out or holding something which approximates the STRIPS...btw this is allowed, per the prospectus).

However, looking at the most recent annual & semi-annual reports, they are not using approximations for STRIPS as these reports indicate the specific STRIPS held...which add up to close to 100%.

It seems like I have no reason to be concerned.

If you're going to hold individual bonds/notes issued by the treasury, then what advantage is there to use zeros rather than 30 year bonds?

I can understand using EDV over TLT if you have a VG brokerage and want free trades on EDV then using it as a proxy for TLT would be reasonable, but if you're buying individual issues from treasury anyway, why not use the "real" thing HB suggested?

TripleB wrote:If you're going to hold individual bonds/notes issued by the treasury, then what advantage is there to use zeros rather than 30 year bonds?

More volatility.  No reinvestment risk.

WildAboutHarry wrote:

TripleB wrote:If you're going to hold individual bonds/notes issued by the treasury, then what advantage is there to use zeros rather than 30 year bonds?

More volatility.  No reinvestment risk.

Please explain the term "reinvestment risk"

Also, if you hold the zeros, do you sell them and buy new ones at a certain point like you would with 30 year treasury bonds (buy at 30 years, hold until 20 years, sell and buy new 30s)? (I'm going to guess your term reinvestment risk may have something to do with this strategy of 30 year bonds but I'm curious to know)

Triple B wrote:Please explain the term "reinvestment risk"

If you are collecting coupon payments on a long bond you have no assurance that those payments can be reinvested at the same rate as the bond is paying (i.e., prevailing interest rates could be lower than the bond's yield).  Your return would be lower if rates fall. 

Of course, with the HBPP you would be selling LTTs at 20 years, so if rates had fallen you would likely collect capital gains.  Conversely, if rates rise you would be reinvesting coupon payments at a higher rate but would likely take a capital loss upon sale. 

With zeros, the return is "baked into" the bond.  Same with bank CDs if they allow the interest to be added to the CDs balance.  Same with Savings Bonds (on a real return basis with I-Bonds).

Thanks for the clarification. How do you ladder STRIPS individually? Are they sold in 30 year maturity to par and do you sell them at the 20 year mark in order to follow PP guidelines for LTTs?

The last time I bought zeros was 1987.  I sold them for a nice profit since "interest rates had nowhere to go but up"

In the context of the HBPP, since zeros are more volatile than LTTs, presumably you could hold the zeros a bit longer.

Zeros are derivatives and they are not created by the treasury, so there is counter-party risk involved. 

Also, if held in taxable you must pay tax on the imputed interest in the zeros each year.

EDV (in a tax-deferred account) seems like a better deal if you want a bit more volatility in the LTT component.

WildAboutHarry wrote: Zeros are derivatives and they are not created by the treasury, so there is counter-party risk involved. 

Also, if held in taxable you must pay tax on the imputed interest in the zeros each year.

EDV (in a tax-deferred account) seems like a better deal if you want a bit more volatility in the LTT component.

Why would EDV be preferred to individual zeros in tax-deferred, if it's tax-deferred there's no imputed interest to pay taxes on, and there's an additional layer between you and your money when using an ETF. Extra room for shenanigans to occur.

I'm wondering whether a small amount of individual zeros would be good to use in my VP where it's very stock heavy and subject to the whims of the stock market. Perhaps if I put 10% of my VP into individual zeros, I'd get less volatility on back stock market days. Or maybe 5% of my VP in EDV and 5% in individual zeros for ease of rebalancing since VG offers free trades on EDV. There's also free trades on zeros probably, but fractionally it will be easier to rebalance EDV.

TripleB wrote:Why would EDV be preferred to individual zeros in tax-deferred, if it's tax-deferred there's no imputed interest to pay taxes on, and there's an additional layer between you and your money when using an ETF. Extra room for shenanigans to occur.

EDV maintains a relatively constant long-term duration on the fund, so it simplifies management somewhat (fewer buy/sell events for the individual's portfolio).  I trust Vanguard to be a better watchdog on any counter party shenanigans than I could be.  But you are right, it does add another layer, and since EDV is thinly traded there are bid/ask, premium/discount issues to worry about.

I'm with you in wanting to hold assets as close to the actual item as possible, and there is no good reason (other than convenience) to hold pure treasuries in a fund.  But zeros are a different animal.

Full disclosure, I own neither EDV or treasury zeros.

TripleB wrote:

WildAboutHarry wrote: Zeros are derivatives and they are not created by the treasury, so there is counter-party risk involved. 

Also, if held in taxable you must pay tax on the imputed interest in the zeros each year.

EDV (in a tax-deferred account) seems like a better deal if you want a bit more volatility in the LTT component.

Why would EDV be preferred to individual zeros in tax-deferred, if it's tax-deferred there's no imputed interest to pay taxes on, and there's an additional layer between you and your money when using an ETF. Extra room for shenanigans to occur.

I'm wondering whether a small amount of individual zeros would be good to use in my VP where it's very stock heavy and subject to the whims of the stock market. Perhaps if I put 10% of my VP into individual zeros, I'd get less volatility on back stock market days. Or maybe 5% of my VP in EDV and 5% in individual zeros for ease of rebalancing since VG offers free trades on EDV. There's also free trades on zeros probably, but fractionally it will be easier to rebalance EDV.

One interesting idea discussed a while back was to buy the miners in the form of gdx or gdxj and then add some edv. 

I've done some serious thinking about this and I prefer EDV.

The spread in EDV is irrelevant as you can take advantage of Limit On Open, Market On Open, and Market On Close orders (which execute as a "single-price auction" rather than a two-sided bid/ask market) to effectively  eliminate the spread and get the same filled price as every other market participant including the market makers. You can also use standard Limit orders to buy closer to the Bid and sell closer to the Ask - not eliminating the spread but in this case reducing it.

None of these are available with direct bond trades. With bonds you are forced to pay for the spread.

More info
http://usequities.nyx.com/markets/nyse- ... s/auctions

I hold a combination of TLT (60%), BTTRX (20%) and EDV (20%).  I do dislike the spread that is associated with EDV, but I like the volatility.