EDV?

[kka]

How does Vanguard's EDV compare to TLT for the long bond portion of PP?  It seems to be longer duration and more volatile, which might be truer to what HB recommended?  It also now has the advantage of commission-free trades for Vanguard account holders.  Thanks.

[MediumTex]

EDV offers 1.5 times the volatility of TLT.

I wouldn't commit the entire LT treasury piece of the PP to EDV (that might produce TOO much volatility relative to the other PP assets), but I own some and I like the protection it offers when everything else goes haywire.

[MCSquared]

EDV offers 1.5 times the volatility of TLT.

I wouldn't commit the entire LT treasury piece of the PP to EDV (that might produce TOO much volatility relative to the other PP assets), but I own some and I like the protection it offers when everything else goes haywire.

MT, there is also the fairly new Pimco sponsored ZROZ that is even longer on the curve than EDV (29 years versus 26).  The ER is a slightly higher (.15 but going to .20) than EDV (.14) but it should be even more volatile. 

[MCSquared]

I don't see much difference in volatilities between our 50 year and 30 year durations


There may be a cut-off point when long is long no matter if its 30, 40 or 50 years.

Clive, I have not looked at the British gilts but generally the longer the duration (weighted average term to maturity of the bond cash flow) the more price volatility relative to interest rate movements.  Zero coupon bonds do not issue interest payments but mature at par so duration and maturity are the same.  For comparison purposes, look at long treasury ETF TLT.  It's weighted average maturity is roughly 28 years but it's duration is 15 years (it's bonds pay interest semi-annually).  Then look at treasury zero coupon ETF EDV.  It has a average maturity/duration of roughly 26 years.  In 2008, EDV was up 57% versus 31% for TLT.  That knife cuts both ways though as EDV was down 48% in 2009 while TLT was "only" down 26%.

The Treasury non-callable longer duration is what gives you the "juice" you are looking for in a deflationary environment.

[kka]

EDV offers 1.5 times the volatility of TLT.

I wouldn't commit the entire LT treasury piece of the PP to EDV (that might produce TOO much volatility relative to the other PP assets), but I own some and I like the protection it offers when everything else goes haywire.

So maybe half VUSTX and half EDV?

[MediumTex]

EDV offers 1.5 times the volatility of TLT.

I wouldn't commit the entire LT treasury piece of the PP to EDV (that might produce TOO much volatility relative to the other PP assets), but I own some and I like the protection it offers when everything else goes haywire.

So maybe half VUSTX and half EDV?

That's a very perceptive suggestion.

I think that would work fine, and it would potentially keep you from ever having to pay any commissions (if you are with Vanguard) while still more or less following the PP recipe.

(There is a little junk in the trunk of VUSTX, so do you due diligence.)

You could just rebalance VUSTX and EDV to 50/50 when you rebalance the rest of the portfolio.

[pplooker]

Seconded.  That's... a damn good idea, pardon my French.

[foglifter]

EDV offers 1.5 times the volatility of TLT.

I wouldn't commit the entire LT treasury piece of the PP to EDV (that might produce TOO much volatility relative to the other PP assets), but I own some and I like the protection it offers when everything else goes haywire.

MediumTex, could you elaborate a bit more on why you use EDV and what other LT options you invest in? 
True, EDV jumps higher than TLT or VUSTX, but it also tanks lower. Is it a similar to the reason PRPFX uses aggressive growth stocks - using the most aggressive option in a particular PP asset class?

[MCSquared]

Clive, I have not looked at the British gilts but generally the longer the duration (weighted average term to maturity of the bond cash flow) the more price volatility relative to interest rate movements.  Zero coupon bonds do not issue interest payments but mature at par so duration and maturity are the same.  For comparison purposes, look at long treasury ETF TLT.  It's weighted average maturity is roughly 28 years but it's duration is 15 years (it's bonds pay interest semi-annually).  Then look at treasury zero coupon ETF EDV.  It has a average maturity/duration of roughly 26 years.  In 2008, EDV was up 57% versus 31% for TLT.  That knife cuts both ways though as EDV was down 48% in 2009 while TLT was "only" down 26%.

The Treasury non-callable longer duration is what gives you the "juice" you are looking for in a deflationary environment.

Hi MC2
Using the 2008/9 financial crisis period as a template I would have expected the UK 15-25 year Gilts to have behaved something around the same as TLT - they didn't, despite the UK FT100 index moving more or less in lock-step with the Dow

My guess is that TLT took more of the flight-to-safety buy-in i.e. the US Dollar and LT's being seen as the safest haven.

When I pull up a the GBP vs USD currency chart that spans that period



As a non-US based PP investor, whilst I had considered that our Gilts provided the LT type characteristics, I'm now having doubts and starting to think that perhaps 1/3rd of the LT component might be best invested in each of 30 year Gilts (UK), TLT and EDV.  Frankly however that's not good from a taxation angle.

I appreciate that this induces additional currency based issues, but 16% USD is an acceptable level of exposure IMO.

But then that's breaking the classic PP mould.

What do you/others think?

EDIT/UPDATE :

DOH !  Not thinking straight - of course the Gold component would have kicked in and produced a higher counter-balance gain relative to the UK Pound to compensate for the less of a counter-balance effect from the LT's (Gilts).  From a casual scan it looks like between September 2008 and Jan 2009 the UK pound declined around 20% relative to the dollar, so gold in UK pounds might reasonably have been expected to have gained 20% more than in terms of US Dollars, which is around the difference between Gilts and TLT gains i.e. around the same overall in total PP value terms.

Fascinating to see how the PP in different markets combines different combinations of blend component moves to produce a similar overall total outcome.  Instils thoughts of whether such a model could be used for arbitrage opportunities.  e.g. given the UK and US PP set combined with the GBP/USD value, any one change might be used to estimate fair values in each of the others and potentially buy in (or sell) before the rest.

2nd EDIT

From a quickie arb like calculation using GBP/USD, IAU (Gold), Dow/FTSE, TLT/Gilts (but not cash)



It does look like the two PP sets hold together pretty well.  The UK is the more volatile and allowing for that results in reasonably close alignment but periodic deviance.  More recently (May 6th end date) that deviance implies the UK PP is relatively high compared to the US by around 5.9%, so either the UK's PP may relatively under-perform, the US relatively out-perform, or a combination of both (i.e. hold off buying a UK PP at present until better valued perhaps).

Clive, the UST was THE safe haven play so yields really took a dive.  You raise an interesting perspective on any arb opportunity.  Methinks I will stick to the boring HB styled PP as all my $$$$$ are precious to me....    

[MediumTex]

EDV offers 1.5 times the volatility of TLT.

I wouldn't commit the entire LT treasury piece of the PP to EDV (that might produce TOO much volatility relative to the other PP assets), but I own some and I like the protection it offers when everything else goes haywire.

MediumTex, could you elaborate a bit more on why you use EDV and what other LT options you invest in?  
True, EDV jumps higher than TLT or VUSTX, but it also tanks lower. Is it a similar to the reason PRPFX uses aggressive growth stocks - using the most aggressive option in a particular PP asset class?

I don't have a good explanation, other than it sort of evolved.

I own some PRPFX, some individual LT treasury bonds, some VUSTX and some EDV.  I have pasted the whole thing together so that the LT treasury piece of my PP behaves similarly to TLT, but I get a little better tax situation by using PRPFX for a portion of the taxable accounts.  

It's probably more complicated than it needs to be, but I have grown accustomed to it and I understand how it works.

I encourage anyone who uses the PP approach (and who is into this sort of thing) to track the performance of your PP against PRPFX (PRPFX is a lot more volatile than many people realize) and if you do something like the VUSTX/EDV approach do a comparison with TLT in the LT treasury position as well.  It's fascinating to me to observe the way slightly different PP configurations perform relative to one another.  (I am speaking more as a PP hobbyist here than an investor.)

[SmallPotatoes]

I finally decided ETFs are A-OK and I've taken the plunge into an ETF PP. Of couse, I'm using VTi, EDV, GLD, and VFISX (though I'm considering BSV as an alternative).

I would like to keep EDV as the 007 portion of the PP, but I read that it's not recommended. TLT isn't any more expensive except for the commission ($7.00), so I'll go with that. I also like BSV though there's some AGENCY holdings that add more risk to the PP.  Should this be avoided in favor of SHY?

I would prefer using VG funds as much as possible for lower costs as well as their reliability to track their target indices.  Would it be terrible if I kept EDV and BSV, and considered their added risk the VP allotment of my PP?

[Jan Van]

SmallPotatoes, what's your thinking behind BSV? Though the performance has been quite good, what kind of bothers me is the makeup. According to the Barclays FactSheet (if I have the correct one, "U.S. Government-Credit Index Factsheet" of Aggregate/Bond Indices, see link below) in 2009 it was
- 46.3% Treasury
- 22.1% Government related
- 31.5% Corporate

So less than half in treasuries.

What about Vanguard Short-Term Government Bond ETF (VGSH)? I can't find out though how much is in treasuries for this one...
Update: Maybe it's "U.S. Government Index Factsheet" of Aggregate/Bond Indices in this list? https://ecommerce.barcap.com/indices/pa ... =9&collar=
In that case it's 72.2% Treasury and 27.8% U.S. Agency.

[craigr]

I'd strongly urge you to use funds that hold only Treasuries. If we get a repeat of 2008 (or the 1930s) you'll be in a far better position owning Treasury bonds. I'd use TLT over EDV unless there is some mitigating factor that requires the extra volatility that zeroes will have. If you can buy the bonds directly that is best of all.

[SmallPotatoes]

SmallPotatoes, what's your thinking behind BSV? Though the performance has been quite good, what kind of bothers me is the makeup. According to the Barclays FactSheet (if I have the correct one, "U.S. Government-Credit Index Factsheet" of Aggregate/Bond Indices, see link below) in 2009 it was
- 46.3% Treasury
- 22.1% Government related
- 31.5% Corporate

So less than half in treasuries.

What about Vanguard Short-Term Government Bond ETF (VGSH)? I can't find out though how much is in treasuries for this one...
Update: Maybe it's "U.S. Government Index Factsheet" of Aggregate/Bond Indices in this list? https://ecommerce.barcap.com/indices/pa ... =9&collar=
In that case it's 72.2% Treasury and 27.8% U.S. Agency.

After reviewing both it seems that VGSH is the lesser evil, but VFISX is probably the best bet. Really, I'm looking to lower expenses without adding unnecessary risk. On that note, I might pursue VGSH, but I'll definately drop EDV in favor of TLT.

[Jan Van]

Craigr: for long term bonds I totally agree.
For the cash equivalent though... I'm now using my emergency fund for the cash portion of the PP. But it's about twice what I need for the PP. So what I was thinking was, if I use VGSH instead of SHY/VFISX, I still have the correct percentage in treasuries, but the added agency parts might boost returns a little bit. BTW, I also have a "first-line" emergency fund in a savings account, apart from the PP.

SmallPotatoes: yes, vfisx/shy would be the safe bet. I do hold some EDV in addition to TLT just to make things a bit spicier. I'll blame that part on MediumTex though 

[craigr]

...but the added agency parts might boost returns a little bit. BTW, I also have a "first-line" emergency fund in a savings account, apart from the PP.

I'm not a yield chaser because it causes problems more often than not. If you are holding cash because you want an emergency fund or other buffer then I'd just buy the safest I can get because you want that stability. If you want to reach for more return, then carve off a section of your money for a variable portfolio and put in some more likely to appreciate assets like stocks. But I wouldn't go around speculating on my bond/cash portion. It's a low return gamble and usually not worth the additional risk.

[craigr]

BTW. I just saw that the 10 year returns for Barclay's 1-5 Year Treasury Index is 6.00%. The Barclay's 1-5 Year Government Index (which includes Agency bonds) is 5.11%! So investors took on more risk, but got lower return than Treasuries the past 10 years for instance.

I've seen this in many other bond funds that supposedly would provide higher yield (like corporate bond funds) over Treasuries. The Barclay's 1-5 Year Investment Grade Corporate bond Index has a 5.92% return over the past 10 years. Again, worse than Treasuries.

Just remember that when the markets are going screwy, people want Treasury bonds above all others. It's a nice theory that riskier bonds should pay better over time, but in a diversified portfolio with stocks it just doesn't work that way. To quote the great Yogi Berra: "In theory, there is no difference between theory and practice. But in practice, there is."

[Jan Van]

Ha, got to love the Yogi Berra quote...

I can't really find any 1-5 year bond ETFs or funds. Closest might be ITE, SPDR Barclays Capital Interm Term Treasury. Most others seem to be either 1-3 years or 5-10 years. And 5-10 years feels a bit too long to me, for this purpose.

[craigr]

Oh I just mentioned the 1-5 years because that's a commonly available index for comparison. For cash you want to use T-Bills, then if you have a good enough amount for short-term needs you could consider maybe using 1-3 year Treasury funds. But that's an optional thing and not what Browne suggested.

[Jan Van]

Yes, but I thought it was a good suggestion. I'm using a combination of VFISX/VWSTX/VMLTX (ST Treasury/ST TaxExempt/LimTerm TaxExempt) now for my emergency fund/PP cash allocation. Vanguard doesn't have a limited term treasury fund I think. But ITE might be just in my sweet spot...

[SmallPotatoes]

I'm going to look into the LT Treasuries at Vanguard. Since I'm still accumulating, still DCA'ing, I'm not sure if buying them is the best cost option (I'll double check).  I also think VG has minimum bond purchases, but I'll do my homework.

For now, VUSTX+EDV 50/50 seems to be a reasonable alternative.  

UPDATE: So, here's what I'm seeing at VG Bond Desk.

       Coupon      Duration.     Cost Each.   Fee.          Total          
4.625 29.57 yr 111.125 $75.00 $4,285.15

So if I liquidate my EDV I can buy about 43 30-year bonds at the rates listed above. Simple enough. My next question is: how do I rebalance that? Anyone used VG Bond service to know if the value of bond holdings is shown?  I'm not opposed to going this route as long as rebalancing is easy enough.

[SD]

I'm going to look into the LT Treasuries at Vanguard. Since I'm still accumulating, still DCA'ing, I'm not sure if buying them is the best cost option (I'll double check).  I also think VG has minimum bond purchases, but I'll do my homework.

For now, VUSTX+EDV 50/50 seems to be a reasonable alternative.  

UPDATE: So, here's what I'm seeing at VG Bond Desk.

       Coupon      Duration.     Cost Each.   Fee.          Total          
4.625 29.57 yr 111.125 $75.00 $4,285.15

So if I liquidate my EDV I can buy about 43 30-year bonds at the rates listed above. Simple enough. My next question is: how do I rebalance that? Anyone used VG Bond service to know if the value of bond holdings is shown?  I'm not opposed to going this route as long as rebalancing is easy enough.

Here is Vanguard's fee schedule:
http://www.vanguard.com/us/whatweoffer/ ... ommissions

Security type
New Issues
Existing Issues




U.S. Treasury securities

• Online rate for auction orders: Standard : $10; all others: commission-free
• Associate assistance rate for auction orders: Standard: $25; Voyager and Voyager Select: $15; Flagship: commission-free

• Online: Standard, Voyager, and Voyager Select: $0.75 per $1,000 face amount, $40 min.–$75 max.; Flagship: commission-free
• Associate assistance: Standard, Voyager, and Voyager Select: $1 per $1,000 face amount, $50 min.–$125 max.; Flagship: $20

I'm not sure where you're getting $75 fee. It should be $0.75*4.3=$3.23 if the fees are calculated on the aggregate purchase, or $0.75*43=$32.25 if the fees are calculated on each purchase individually. Both of these are lower than the $40 minimum, so you should be paying $40.

If you are really paying this much, there must be something I'm missing.


By the way, when buying, it makes sense to buy bonds from auction (either through Vanguard or TreasuryDirect) as this incurs much lower costs. I think the above fee schedule also applies to selling bonds, but I'm not sure.

[MCSquared]

Ha, got to love the Yogi Berra quote...

I can't really find any 1-5 year bond ETFs or funds. Closest might be ITE, SPDR Barclays Capital Interm Term Treasury. Most others seem to be either 1-3 years or 5-10 years. And 5-10 years feels a bit too long to me, for this purpose.

jmourik, I have used FSBAX (Fidelity Spartan Short Term Treasury).  It tracks the Barclay's 1-5 year Treasury Index. 

http://personal.fidelity.com/global/sea ... %20spartan

[Jan Van]

jmourik, I have used FSBAX (Fidelity Spartan Short Term Treasury).  It tracks the Barclay's 1-5 year Treasury Index. 

http://personal.fidelity.com/global/sea ... %20spartan

Thanks MCSquared!
Reminds me of M-C-S-A-R...

[SmallPotatoes]

I'm going to look into the LT Treasuries at Vanguard. Since I'm still accumulating, still DCA'ing, I'm not sure if buying them is the best cost option (I'll double check).  I also think VG has minimum bond purchases, but I'll do my homework.

For now, VUSTX+EDV 50/50 seems to be a reasonable alternative.  

UPDATE: So, here's what I'm seeing at VG Bond Desk.

       Coupon      Duration.     Cost Each.   Fee.          Total          
4.625 29.57 yr 111.125 $75.00 $4,285.15

So if I liquidate my EDV I can buy about 43 30-year bonds at the rates listed above. Simple enough. My next question is: how do I rebalance that? Anyone used VG Bond service to know if the value of bond holdings is shown?  I'm not opposed to going this route as long as rebalancing is easy enough.

Here is Vanguard's fee schedule:
http://www.vanguard.com/us/whatweoffer/ ... ommissions

Security type
New Issues
Existing Issues




U.S. Treasury securities

• Online rate for auction orders: Standard : $10; all others: commission-free
• Associate assistance rate for auction orders: Standard: $25; Voyager and Voyager Select: $15; Flagship: commission-free

• Online: Standard, Voyager, and Voyager Select: $0.75 per $1,000 face amount, $40 min.–$75 max.; Flagship: commission-free
• Associate assistance: Standard, Voyager, and Voyager Select: $1 per $1,000 face amount, $50 min.–$125 max.; Flagship: $20

I'm not sure where you're getting $75 fee. It should be $0.75*4.3=$3.23 if the fees are calculated on the aggregate purchase, or $0.75*43=$32.25 if the fees are calculated on each purchase individually. Both of these are lower than the $40 minimum, so you should be paying $40.

If you are really paying this much, there must be something I'm missing.


By the way, when buying, it makes sense to buy bonds from auction (either through Vanguard or TreasuryDirect) as this incurs much lower costs. I think the above fee schedule also applies to selling bonds, but I'm not sure.

Well, I checked the bond desk again and got the $40 figure this time, so whatever happened the first time blame it on user error. 

I will wait until 2011 before I consider purchasing individual bonds primarily due to costs.  At this time, I have only $5K tax sheltered and 50/50 VUSTX+EDV on $5K is $10 per year at .20% avg between both funds.  I'll wait and buy 30-years at auction from VG to avoid any commissions.  My only gripe is that the 30-year bonds won't count towards my Voyager status. 

Perhaps as I get older I'll fully transition to a traditional PP with paper bonds and 25% of my savings in bullion, but in daily affairs I prefer to have funds I can monitor and transact on with ease.  I do hold some 30-year paper bonds and some bullion, but just don't feel secure keeping large amounts of either in my house.  Youth?