Performance impact of holding TLT vs bonds directly?

[economicsjunkie]

Does anyone know if there's an impact on PP performance from owning TLT vs buying the 30 yr bonds directly, and if so how much it might be?

[Stewardship]

I believe the difference is the 0.15% expense ratio on TLT, assuming commission-free trading.

That's $150 per yer for a for a $100,000 investment (100,000 * 0.0015) or $15 per year for a $10,000 investment (10,000 * 0.0015).

[mathjak107]

The etf's can be more volatile than the bonds . The funds can be sold short.

Also while etf stock funds do not have much in a premium or discounts to asset value bond etf's can.

You can buy at a premium and sell at a discount and lose more . Of course the flip side is true too

[Xan]

TLT doesn't really have spread issues or volatility issues.

TLT's average bond duration is something like 19 years.  (Somebody please correct me on this.)  So its volatility is significantly less than a 30 year bond you might buy.  Canonical PP wisdom is to buy them at 30 and sell them at 20 (or is it 25?), so TLT is in "probably close enough" territory.

Another significant difference, apart from the expense fee that Stewardship mentioned, is that TLT loans out its assets.  So it's potentially more vulnerable in a SHTF scenario than it otherwise might be.

[mathjak107]

Actually if you check ishares  site tlt certainly has seen a  sizable spread.

It greatest premium has been .375% on  6/19 and its biggest discount minus .56% was on 5/18
Discounts and premiums rarely exist on equity etf's

That is pretty big if you bought at a premium and sold at a discount.

[economicsjunkie]

Actually if you check ishares  site tlt certainly has seen a  sizable spread.

It greatest premium has been .375% on  6/19 and its biggest discount minus .56% was on 5/18
Discounts and premiums rarely exist on equity etf's

That is pretty big if you bought at a premium and sold at a discount.

OK, so there's that but then I suspect there's also less punch in TLT? If I buy a 30 year bond and replace at 25 then I guess over time by avg maturity is 27.5 years. In TLT I'm not sure what the average maturity is but if they hold anything from 20 to 30 years I suspect it's around 25 years? So I'm wondering if during a time of a bond rally those who are direct bond holders experience more performance, in other words if the overall performance premium of a portfolio with direct bonds vs a portfolio with TLT is noticeable in % terms?

[economicsjunkie]

Another significant difference, apart from the expense fee that Stewardship mentioned, is that TLT loans out its assets.  So it's potentially more vulnerable in a SHTF scenario than it otherwise might be.

Interesting, thanks. That's another reason to go direct I guess.

[rickb]

Another significant difference, apart from the expense fee that Stewardship mentioned, is that TLT loans out its assets.  So it's potentially more vulnerable in a SHTF scenario than it otherwise might be.

Interesting, thanks. That's another reason to go direct I guess.

See http://gyroscopicinvesting.com/forum/bo ... d-harmful/

[mathjak107]

Actually if you check ishares  site tlt certainly has seen a  sizable spread.

It greatest premium has been .375% on  6/19 and its biggest discount minus .56% was on 5/18
Discounts and premiums rarely exist on equity etf's

That is pretty big if you bought at a premium and sold at a discount.

OK, so there's that but then I suspect there's also less punch in TLT? If I buy a 30 year bond and replace at 25 then I guess over time by avg maturity is 27.5 years. In TLT I'm not sure what the average maturity is but if they hold anything from 20 to 30 years I suspect it's around 25 years? So I'm wondering if during a time of a bond rally those who are direct bond holders experience more performance, in other words if the overall performance premium of a portfolio with direct bonds vs a portfolio with TLT is noticeable in % terms?

tlt is about 17 years now . in duration .

[mathjak107]

not only do they loan it out but they take commercial paper as  collateral making it not really just  a treasury bond fund.

right from the prospectus

Securities Lending Risk. The Fund may engage in securities lending. Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of the collateral provided for loaned securities or a decline in the value of any investments made with cash collateral. These events could also trigger adverse tax consequences for the Fund.


not for nothing but you guys are worried about banks and  offshore accounts and you want to only use t-bills  for the up most safety  but this is okay ?

i think what it amounts to is few really read prospectus's .

[economicsjunkie]

Oh wow, how can it be 17 years if it only holds bonds with a maturity over 20?

[KevinW]

Duration and maturity are different.

[economicsjunkie]

Duration and maturity are different.

Ah ok, I see, so it's actually pretty close to holding a 30 yr bond directly which seems to be 19.425 based on http://www.wsj.com/mdc/public/page/2_3022-bondmkt.html

[Xan]

Oh, good to know.  I certainly learned something here.

[Tyler]

The weighted average maturity of TLT is 27 years. 

Regarding money -- TLT costs 0.15% a year.  But when used in the PP you also don't have to sell 20 year bonds and purchase new ones, which potentially saves you money when the bonds appreciate.  Maintaining 27 years maturity happens internal to the fund, and generally generates no capital gains.  So in the end the fee may sometimes pay for itself (sometimes not).

[mathjak107]

here is a  little video on TLT  which looks under the hood.

i can't catch which year report they are looking at but i doubt it changes much year to year.

the fund can loan out up to 1/3 of its assets for cash whch can be invested in things other than treasury bonds  as well as being allowed to invest up to 5% in money markets.  that is 38% of assets can be in commercial paper .
this video was from 2012 , they have 36%  invested  in money market paper using the treasuries as collateral


https://www.youtube.com/watch?v=DlUQQRR5DJ8

[mathjak107]

The weighted average maturity of TLT is 27 years. 

Regarding money -- TLT costs 0.15% a year.  But when used in the PP you also don't have to sell 20 year bonds and purchase new ones, which potentially saves you money when the bonds appreciate.  Maintaining 27 years maturity happens internal to the fund, and generally generates no capital gains.  So in the end the fee may sometimes pay for itself (sometimes not).

the average maturity is 27 years but duration is only 17 years  which is where the rubber meets the road. the difference is mostly because of the above and the fund acts as if it is a much shorter type bond fund  because of the lending of assets.

this factor is a big reason you may want to go with individual bond ownership.

on the surface everyone thinks it is an expense issue . once you look under the hood the differences are far more apparent then expenses .

this is something likely done in most treasury bond funds. i have not  read fidelity's prospectus but i see they too have a 27.5 year weighted maturity but only a 17 year duration.  makes you wonder about all of them .


having had a money market i was in go bust in 2008 i can tell you first hand  commercial paper ain't treasury bonds .

[Reub]

mathjak, thank you for what you are doing here! Too many in here refuse to question the tenets of the PP model when it is always healthy to question things this important to our financial future.

[mathjak107]

All I want to do is make people think beyond their noses where they are exposed to folks with the same view as well as  slanted flaws in information thrown about .

[Tyler]

the average maturity is 27 years but duration is only 17 years  which is where the rubber meets the road. the difference is mostly because of the above and the fund acts as if it is a much shorter type bond fund  because of the lending of assets.

Your understanding of duration is factually incorrect.  Duration is a measure of the length of time it will take the bond's cash flows to repay the investor the price he or she paid for the bond. So when rates rise, duration falls.

For a calculation example, a brand new 30-year treasury bond (issued 5/15) purchased on the secondary market (no fund used) has as of right now a 3.0% coupon, a 3.094% yield, and pays semi-annually.  Plug that into the duration calculator here and you get a duration of 19.88 years.  The weighted average maturity of TLT is 27 years, so the duration will be a little lower.  The primary driver of the difference between duration and maturity is not securities lending, but the math behind the basic definitions.

All I want to do is make people think beyond their noses where they are exposed to folks with the same view as well as  slanted flaws in information thrown about .

Your insight on securities lending in TLT is not new here.  Xan mentioned it on page 1, and RickB posted a link to a thread on this forum more than two years old discussing this.  We are not slanted lemmings, and I suggest you step back and read more before preaching or insulting the intelligence of other posters.   

[mathjak107]

the money is going elsewhere . that is fact and that effects the funds duration .

the 30 year bond has a duration just under 20 years today.

[Tyler]

Now you are shifting the goalposts.  You didn't say, "The duration should be 18 years based on average maturity but is 17 because of securities lending."  Your exact quote:  "the average maturity is 27 years but duration is only 17 years... the fund acts as if it is a much shorter type bond fund because of the lending of assets."  In your own subsequent words directed towards people here, your argument contained "slanted flaws".

[Tyler]

Duration and maturity are different.

Yep.  It's definitely a little confusing.  This article helped me.

http://www.investopedia.com/university/ ... dbond5.asp

[Matthew19]

Now you are shifting the goalposts.  You didn't say, "The duration should be 18 years based on average maturity but is 17 because of securities lending."  Your exact quote:  "the average maturity is 27 years but duration is only 17 years... the fund acts as if it is a much shorter type bond fund because of the lending of assets."  In your own subsequent words directed towards people here, your argument contained "slanted flaws".

Nice once Tyler, thanks for clearing things up.

[KevinW]

Duration and maturity are different.

Yep.  It's definitely a little confusing.  This article helped me.

http://www.investopedia.com/university/ ... dbond5.asp

That's a good resource. IMO, the word choices are terrible (duration and maturity sound like they should be synonyms), but the concepts aren't too difficult.