Gyroscopic Investing

As a private investor, would it be possible to get reasonably close to SHY's STT returns and hopefully to better them a smidge by not paying the management fee and buying your bond/bill holdings direct? Has anyone attempted this? If so, successful or not?

Tks

At Vanguard you can start your 3 year ladder at .5%, .58%, and .7%.

SHY yields .61% with a .15% ER, plus whatever you pay in commissions.

Too bad you didn't set it up back in early January

Essentially "yes." You can buy individual Treasury bills, either through Treasury Direct or through a brokerage with free T-bill trades. This approach has the benefit of avoiding the counterparty risk from a fund.

The problem is that small retail investors pay a hidden transaction cost in the bid-ask spread on T-bill transactions. Institutional investors, such as ETF or mutual fund sponsors, bypass that due to their volume. IIRC the drag from these costs is roughly the same as an ETF expense ratio, so this ends up being a wash.

My preference is to keep it simple and just use a T-bill focused money market mutual fund.

KevinW wrote:Essentially "yes." You can buy individual Treasury bills, either through Treasury Direct or through a brokerage with free T-bill trades. This approach has the benefit of avoiding the counterparty risk from a fund.

The problem is that small retail investors pay a hidden transaction cost in the bid-ask spread on T-bill transactions. Institutional investors, such as ETF or mutual fund sponsors, bypass that due to their volume. IIRC the drag from these costs is roughly the same as an ETF expense ratio, so this ends up being a wash.

My preference is to keep it simple and just use a T-bill focused money market mutual fund.

The difference in yield at Vanguard vs. the Treasury's site is .7% vs .71%, so that bid/ask cost is only 10 cents right? $993 vs $992.90. And if you hold it to maturity, then that's the only cost. Whereas a .15% ER on $993 is $1.49/year, or $4.47 over 3 years.

Is that the way to think about it?

Or you are looking at the bid/ask spread on Vanguard's site?

bid $1,026.79
ask $1,027.34

$0.55 difference, which looks about the same with all of the bills, still coming out ahead of the ETF. The amounts are pretty small though. If you pay commissions it might start to skew pretty hard.

Unfortunately the markup is not so easy to find:
http://www.forbes.com/2009/02/26/munis- ... okers.html

Generally, a 1% to 2% markup is acceptable for retail buyers. Unfortunately, exaggerated markups (over 5%) occur more often with uninformed investors.

Even on the low side, a 1% markup ends up being expensive for PP cash. A well-organized ladder might only buy one bill per year, and let bills mature instead of selling them, so you only pay 1% expenses per year. Still this is a lot more than a mutual fund or ETF expense ratio.

The markup might be more acceptable for PP bonds, though, since you can often get away with transacting less than once per year.

What is the 1% markup in? The yield?

I'm getting pretty close to the same rates from InteractiveBrokers where you can see the ask yield. I'm probably not doing the calcs right, but looking at SHY they are showing an SEC yield of .6 and I get a .592 avg yield 2019/18/17 bonds divided by three. Less commissions of 2 bps and that makes it .572. It doesn't currently seem to be worth the hassle and SHY is more cost effective to boot.

Did I do anything wrong here?

Kriegsspiel wrote:What is the 1% markup in? The yield?

Please see the article I linked. When you buy a bond through a broker, the broker buys it from someone else and then sells it to you at a higher price. That markup is usually undisclosed, so it's difficult to know what exactly it is.

KevinW wrote:Essentially "yes." You can buy individual Treasury bills, either through Treasury Direct or through a brokerage with free T-bill trades. This approach has the benefit of avoiding the counterparty risk from a fund.

The problem is that small retail investors pay a hidden transaction cost in the bid-ask spread on T-bill transactions. Institutional investors, such as ETF or mutual fund sponsors, bypass that due to their volume. IIRC the drag from these costs is roughly the same as an ETF expense ratio, so this ends up being a wash.

My preference is to keep it simple and just use a T-bill focused money market mutual fund.

Couldn't you just avoid that by only buying on the run issues?

And CD's bought direct probably don't have the markup either.

.15% is a lot in this day and age of pathetic yields. Just look at what a disaster PRTBX is.

As far as I can tell, if you're running a PP in an IRA and want to buy individual bonds or CDs, there's no escaping the "bond desk" and the concomitant fees, commissions, and mark-ups, which are criminally high, even at Vanguard.

Hey Kevin, sorry, I must have just skipped that first paragraph or something. I checked the mark up on the only note I have left. BTW, it's not through that Investing In Bonds site... that's just a click through to Morningstar where you can input your CUSIP. Now anyways, according to them, the last trade (on the day I bought it for 100.74) was 100.72. The day before it was 100.62, so it probably was trading between 100.62 and 100.72 when I bought it, for a markup somewhere between .02% and .12%. Maybe I just got lucky, and the markups are usually higher?

Like you said it doesn't look like much difference either way. But if you aren't getting free trades, commissions look like they seriously eat into your cash unless you buy large chunks at one time.

Are you guys on Fidelity, and trading SHY with no commissions?

There is a big advantage with a 3 year treasury bond ladder over SHY that might make it worthwhile. If you keep money evenly distributed, at any one time about 1/3 of your cash will mature in less than one year. So if you need to sell and the interest rates have gone up, you'll incur less of a loss than if you had to sell SHY. Maintaining the ladder is a pain though, as you can't use the autoroll feature, which otherwise can usefully mimic a money market fund.

Waiting for dualstow to chime in as he does the 3 year bond ladder.

Kriegsspiel wrote:BTW, it's not through that Investing In Bonds site... that's just a click through to Morningstar where you can input your CUSIP. Now anyways, according to them, the last trade (on the day I bought it for 100.74) was 100.72. The day before it was 100.62, so it probably was trading between 100.62 and 100.72 when I bought it, for a markup somewhere between .02% and .12%. Maybe I just got lucky, and the markups are usually higher?

Sorry about that. Yes it sounds like you got a good deal on a small markup, but from what I've read it's usually higher.

MachineGhost wrote: Couldn't you just avoid that by only buying on the run issues?

AFAIK yes, but I don't know whether any brokers allow you to buy bills at auction commission free. You can buy auction bills through Treasury Direct but that's taxable only. Also there's the issue of what you do with idle cash in between the auctions, it has to go somewhere.

MachineGhost wrote: And CD's bought direct probably don't have the markup either.

CDs are not the same thing as T-bills. If one is comfortable with the heightened risk of FDIC-issued bank securities then they can save themselves a lot of trouble and use an online high yield savings account.

KevinW wrote:

Kriegsspiel wrote:BTW, it's not through that Investing In Bonds site... that's just a click through to Morningstar where you can input your CUSIP. Now anyways, according to them, the last trade (on the day I bought it for 100.74) was 100.72. The day before it was 100.62, so it probably was trading between 100.62 and 100.72 when I bought it, for a markup somewhere between .02% and .12%. Maybe I just got lucky, and the markups are usually higher?

Sorry about that. Yes it sounds like you got a good deal on a small markup, but from what I've read it's usually higher.

I think the big mark ups are more commercial and muni bond related. A decent broker should have pretty good spreads on treasuries (or I'd go somewhere else).

Thanks for all the input. I think it looks like breakeven to maybe even a bit more expensive to do the ladder vs. SHY given my likely trade size. And certainly SHY wins in the hassle factor category.

Kbg wrote:I think it looks like breakeven to maybe even a bit more expensive to do the ladder vs. SHY given my likely trade size. And certainly SHY wins in the hassle factor category.

Yeah, that's my feeling. The ladder works and people who use it are not wrong, but for me it's not worth the hassle.

KevinW wrote:AFAIK yes, but I don't know whether any brokers allow you to buy bills at auction commission free. You can buy auction bills through Treasury Direct but that's taxable only. Also there's the issue of what you do with idle cash in between the auctions, it has to go somewhere.

Several brokers do ineed let you buy Treasuries for free including at auction as well as on the secondary market. Fidelity comes to mind. But none offer autoinvest. I'm willing to pay for that as I have better things to do and I don't like seeing gains or losses when I login to place a manual trade.