EDV

[moda0306]

So if EDV most closely tracks a 30-year LT treasury bond by having a longer average duration, why, in posts I've read, should we consider anything less than 100% EDV, and have TLT instead?  I thought HB suggested keeping the duration as long as possible.

This is irrespective of skepticism of ETF's... but more applicable to the holdings of the fund itself.

I love what I see with EDV... seems to me if you're going to hold 25% gold, looking at longer LT bonds as "too risky" considering gold's past single-year losses and stretches of losses is a little excessive.

Thanks, in advance, Medium Tex, Craigr, and Clive... among others of course.

I love this board by the way... amazing how you can learn more about investing off of a board where people get no direct financial benefit out of sharing their own ideas, when we have a trillion-some dollar financial services industry doing a piss poor job managing that activity for their clients.

[moda0306]

...probably should have put this on the other EDV thread... my apologies... feel free to move it over, Craig.

[MediumTex]

I love this board by the way... amazing how you can learn more about investing off of a board where people get no direct financial benefit out of sharing their own ideas, when we have a trillion-some dollar financial services industry doing a piss poor job managing that activity for their clients.

Any time someone is offering advice without a profit motive, I think the chances of getting closer to the truth are much higher (assuming the person offering the advice knows what he/she is talking about).  That's why I love the internet forum format as a knowledge sharing platform.  It allows people with similar interests to dig into a topic in a way that no other approach that I am aware of can.  The fact that it is anonymous is, to me, an additional benefit because it facilitates the honest and open exchange of ideas (assuming you have a group of fair and well-mannered people participating in the discussion).

The financial services industry is selling a dream and taking a cut of the dream in advance for themselves.  The problem with many of them is that they have convinced themselves that the rainbow stew they are serving is actually real, which makes the deception and delusion embedded in their messages even more dangerous.

Unlike the natural sciences, where the scientific method can be used to arrive at firm conclusions about the nature of a system, economics and finance are closer to the voodoo end of the spectrum.  This voodoo, however, is trotted out in a lab coat and presented as if it were scientific, with reliable cause and effect relationships that any investor can use to his benefit, which is simply absurd.

One of the many sad and troubling problems with our financial institutions is that they are populated with VERY smart people who are VERY skilled at separating investors from their money.  Think about how much more good they could do for humanity (and themselves) if that intellectual horsepower was applied to solving some of the real problems of the world.

***

To your questions about EDV, I like it and use it myself.  In theory, if should allow you to lighten your LT bond exposure, but one of the problems with this approach is that it will reduce the amount of income thrown off by the whole portfolio, which creates a new set of problems to be concerned about.

For the Vanguard fans, splitting between VUSTX and EDV for the LT bond portion is something to think about.

[moda0306]

Why not 100% EDV, as it most closely tracks a Long-as-possible term holding of long-term bonds?

Is it because it's also an ETF and the inherant risks of another layer of market activity come into play?

[moda0306]

You're right MT, the brain power going to waste is mind-boggling.  It goes to the core of my struggle with the role of government in controlling this behavior.  

Some argue that the shadiness in private industry creates a legitimate role for government to regulate it, and I can't disagree with that.  If we had enough of the right minds in government to streamline and regulate industries without being oppressive I'd probably be for it.

But others claim that due to the same errors in human nature, government won't properly regulate said private enterprise, so to try to convince people that they are, and to pull money from those who are smart enough to self-regulate (purchase quality, safe, reliable products, financial or consumer) to pay for the mis-guided regulation is simply allowing the problem to be enabled, and to have higher inefficiencies, taxes, etc in the market to boot.

Lesson: Human nature plays us down to the lowest common denominator to compete, whether we're a beaurocrat in Washington or a derivatives trader (or is it "traitor"?) on Wall Street,  and it's those that avoid this behavior, as difficult as it may seem, that you want to associate with, trust, and model your behavior after.

There are three types of people out there (not really, but it helps put things in perspective): salesmen, suckers, and scientists.  The first two groups spend a lot of time with each other, and that's what makes the salesmen wealthy, but the latter tend to stick only within their own group, and that's what makes the scientists wealthy.

[moda0306]

Is EDV more expensive than TLT?  I didn't realize that if that's the case.

I probably will someday get into the buying/selling direct, but I'm starting out simple

[MediumTex]

Some argue that the shadiness in private industry creates a legitimate role for government to regulate it, and I can't disagree with that.  If we had enough of the right minds in government to streamline and regulate industries without being oppressive I'd probably be for it.

Much of the shadiness is created by the manipulation of overly complex and ill-considered laws and regulations in the first place.

I understand that political systems simply evolve in this fashion, and it's nothing to be outraged about (i.e., it would be similar to being outraged because it rained on a day you wanted to do something outside).

One of the interesting assumptions built into the argument for more government regulation is that the bureaucrats will be less shady than the banksters and other private sector hooligans.  If you ask anyone who has lived in a completely state-run economy whether this is actually the case in practice, however, they might tell you to beware of the statists as well.

[moda0306]

I agree on government beaurocrats having just as much ability to be shady, but I don't think government, for the most part, CAUSES most of the private sector unethical behavior.  Beaurocracy begins to happen as soon as more than one person tries to organize activities... hell a marriage has beaurocracy.

Think of a used car salesman... the stereotype "shady salesman" that so many in the real estate & financial industry are just an extension of.  If not for government, they'd be just as shady, as the market doesn't effectively/efficiently weed them out.  It's difficult for people to be "educated consumers" when buying a used car.

This is the same reason I can understand a problem with a for-profit health insurance/service industry... government or not (and I know there is TONS of government influence), you would have insurance companies, and, to some degree, practitioners giving you advice, mostly good, but like financial services, tweaked to what would make them the most money.  The consumer of the product is maybe quite sick, and in no position to evaluate their options like we do every day on this board.  I don't think the absence of government would improve this much.  That said, government run healthcare has its own problems and is an assault on liberty.

[KevinW]

So if EDV most closely tracks a 30-year LT treasury bond by having a longer average duration, why, in posts I've read, should we consider anything less than 100% EDV, and have TLT instead?

EDV holds zero-coupon bonds; TLT holds nominal bonds.  As you probably know nominal bonds pay interest every 6 months over their entire lifetime, while zero-coupon bonds' interest is not realized until maturity.  As a result, zero-coupon bonds are more sensitive to interest rate fluctuations and thus more volatile.

For the last couple months I've been tracking two PPs in Morningstar, one with EDV and one with TLT.  Sadly I haven't been recording the results, but anecdotally, VTI, TLT, and IAU usually fluctuate 0-1% per day and occasionally as much as 1.5%.  EDV fluctuates in the same direction as TLT, but can swing 1.5-3% in a day.  EDV is stronger sauce than the other three ETFs and can overpower them, resulting in an overall portfolio that is more volatile w.r.t. interest rates.

You could choose to just accept that.  Or, make your target allocation to EDV smaller than 25%.  Or seek out stock and gold vehicles that are more volatile than VTI and IAU.  On balance, it seems like it'd be better to just pay the commission to buy TLT or individual bonds.

[foglifter]

Is EDV more expensive than TLT?  I didn't realize that if that's the case.

I probably will someday get into the buying/selling direct, but I'm starting out simple

EDV is cheaper than TLT, in fact recently the ER dropped from 0.14 to 0.13. But the premium, at least now, is higher: 0.28 vs. 0.03 for TLT. Of course, for a long-term purchase this doesn't matter. Perhaps the premium will gradually shrink as the assets grow and the trading volume increase.

[murphy_p_t]

from MediumTex: "To your questions about EDV, I like it and use it myself.  In theory, if should allow you to lighten your LT bond exposure, but one of the problems with this approach is that it will reduce the amount of income thrown off by the whole portfolio, which creates a new set of problems to be concerned about."

i see the need for LT treasuries to protect from another 2008-type crash, so i do need to do something for that portion. i'm reluctant to put the full 25% allocation into LT bonds, however.

i would like to identify the added risks of using EDV (a lightened allocation) in lieu of owning bonds directly or TLT

the following is what occurs to me (i'm sure this is incomplete, so please help me to fill in the holes)

Advantages of EDV:

-more volatile that LT bonds or TLT...allows me to reduce required holding from 25%  ?
-frees up capital to allocate to the variable portfolio
-trades like a stock (as opposed to direct bond ownership)
-commission free trades at vanguard, useful when rebalancing
-less income (MediumTex - is this significant?; i list this as a possible advantage as income is taxed higher than long-term capital gains)


Wash:

-call risk
-default risk / credit risk
-throws off regular dividends


Disadvantages for EDV:

-lack of direct ownership (vs owning LT bond directly)
-risk of potential gaming by ETF administrator (vs. direct ownership) (can i rate this as the same with VTI or TLT?)
-less income (MediumTex - is this amount significant?)
-expense ratio (vs. direct ownership)
-???


my bias is that the bond portion is a form of insurance against market crash -- maybe a likely event?

However, i have a strong bias against the management by the US gov't & the FED to manage the Fed Res Notes. it seems there is advantage of freeing up money by reducing my "insurance allocation" & moving it to the Variable portfolio (where i can gamble on hard assets )

i recall seeing statement on other thread that EDV is 50% more volatile than TLT...based on that, i would consider reducing the LT bond allocation by a proportionate amount, in the form of EDV.

is this logic sound?

also, did Harry Browne comment on or evaluate something similar? wondering if something like EDV was available when the PP was conceived


thanks in advance for any insight!

p

[rickb]

also, did Harry Browne comment on or evaluate something similar? wondering if something like EDV was available when the PP was conceived

See http://www.bogleheads.org/forum/viewtop ... c&start=88 from the massive bogleheads thread.

[MediumTex]

also, did Harry Browne comment on or evaluate something similar? wondering if something like EDV was available when the PP was conceived

See http://www.bogleheads.org/forum/viewtop ... c&start=88 from the massive bogleheads thread.

That cdgoldin fellow knew a lot about the PP.  I'm surprised he didn't participate in the discussion as it developed.