ETF Risk

Discussion of the Cash portion of the Permanent Portfolio

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jswinner
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ETF Risk

Post by jswinner » Mon May 31, 2010 1:09 pm

First:  This is a great resource as I begin to implement to the PP.  Thanks Craig for all of your effort.

Since the MM options so limited, I have been eying SHY or TUZ for some of the cash component. But checking the Friday TUZ close, the bid/ask spread was 16%, over $8.00.  Since the fund is newer, high spreads are to be expected BUT wow.  I plan to watch it a bit to see how that spread moves. 

That has me thinking that with the additional risk of market pricing, spreads and or premiums, that potential ETF costs are not as attractive as they may seem for the cash portion of the PP, and could be downright painful if you *had* to sell at a specific time and all of these issues were tilted against you.
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craigr
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Re: ETF Risk

Post by craigr » Mon May 31, 2010 2:34 pm

I generally advise that new funds/ETFs be avoided. I also advise against any fund/ETF that has a low market cap or low volume or is too specialized (e.g. funds that focus on value stocks in particular countries or funds that focus on specific industries). Let someone else be the guinea pig.

While cash is best held in a Treasury Money Market Fund, in today's environment they are not open by and large. In that case I'd recommend going to the next option which is a high quality 1-3 year short term Treasury fund as you point out. ETFs are an OK choice but do carry higher trading costs and bid/ask spread issues. I would recommend instead using an open-ended fund for the cash as you won't get clobbered with a lot of transaction fees and bid/ask is not an issue as the deposits and sales are reconciled after the market closes.

Vanguard's Short Term Treasury Fund VFISX is one option, but is not 100% treasuries all the time (minimum is 80% treasuries and 20% agency debt or repurchase agreements at times). However this smaller amount of risk may be worth the convenience. Fidelity's Short Term Treasury Spartan Fund FSBIX is another option and I think is more pure of a treasury fund than Vanguard's offering. Both have very low expense ratios.

If you want to use an ETF though I generally prefer the iShares very short term ETF SHV or 1-3 year treasury ETF SHY.
Last edited by craigr on Mon May 31, 2010 2:48 pm, edited 1 time in total.
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