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Bond ETFs


DCG
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I know next to nothing about investing in bonds, but am looking to put a portion of my portfolios in bonds.

 

 

Are there certain Fixed Income bond ETFs I should look at (I like the idea of keeping the money somewhat liquid by using an ETF, but am I wrong with that line of thinking)?

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I see you are in the US. What are your goals for investing in bonds? I would encourage you to consider the following alternatives:

 

1. Inflation linked Savings bonds (i-bonds): $10K/year, locked up for 1 year, redemption penalty in years 1-5, pays you inflation rate tax deffered

 

2. GE capital 5 yr CD's (or CD's of another FDIC insured entity) 2.25%. Early redemption penalty of 1.7%.

 

No bonds will beat these on a risk adjusted (very limited duration and 0 credit risk, unless FDIC collapses in which case you'll have worse problems) basis.

 

The yields on spread product are still quite low in an absolute sense and you aren't really getting paid much to go further out on the curve and take on duration.

 

If you are investing in bonds to make a higher return than that offered by these, I would recommend not investing in bonds, or looking at BDC's and mREIT's where you'll take loads of credit/duration risk, but at least get paid a hefty yield for the high risks., but then you'd probably be better off in equity land.

 

 

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I see you are in the US. What are your goals for investing in bonds?

 

 

Good question (and it's possible bonds aren't even the best vehicle for what I'm looking for).

 

 

I am looking to generate interest/income on cash (ideally at least 3%) at a very low risk, rather than having it just sitting in a bank account it minimum interest. I'd prefer to have the money easily accessible if I want to be able to move it into equities. I'm about 70% in equities at the moment, but want a way for the currently un-invested cash to still be making money.

 

 

 

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3% is very difficult, if not impossible, without sacrificing something (accessibility/penalty free liquidity, or taking on some risk).

 

If you think the stock market is efficient, try the bond market. It is very difficult to earn above market returns on large amounts of capital w/o taking more risk.

 

Even the Vanguard Intermediate Term Investment Grade Fund yields a meager 2.7% and that's with a duration of 5 and average maturity of 6 years. So you have to take a moderate amount of duration (more than I would be comfy with my "quasi cash" pile, which this is) and some tail credit risk.

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honestly the thing that i can think of that most suits what you want is a high yield savings account (Amex or GE or whatever) that you can hope to get 75-100 bps out of and be better off than 0%. Or building out laddered CD's and i-savings bonds over team.

 

No free lunch in bonds =  no 3% safe yields with no duration or credit risk and immediate penalty free liquidity.

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Agree with thepupil.  Earning 3% is extremely difficult if not impossible without some risk on this.  So you can either go high yield savings account, or just stick it in a Vanguard bond fund.

 

If this is emergency cash I'd just resign yourself to the fact that you'll be losing money (inflation vs interest) and accept it.  Maybe one day we'll have real rates, but it's unknown.  I'm sure the Japanese have been thinking the same thing for decades.

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No. That is not cash-like. To make 1.4% more than a high yield savings account you are taking on duration near 6. If rates unexpectedly blew out by 200 bps you'd lose 10% (roughly, since your duration would fall because of convexity, you wouldn't lose 12%).

 

Bond indices are weighted by size of issuer so they are full of treasuries. You wouldn't buy the 10 yr at 2% to make a little more than a savings account, would you?

 

Average effective maturity 7.8 years

Average duration               5.7 years

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