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Hi Guys,

Interesting article addressing the age-old argument!


Contrary to popular belief, both bond funds and laddered individual bond portfolios have identical risk.

A common misconception is that bond funds are more exposed to interest-rate risk than laddered individual bond portfolios. The truth is that they have identical exposure.

The logic for the standard view basically starts and ends with the observation that an investor can hold individual bonds to maturity while bond funds don't necessarily hold all bonds until they mature. Most bond fund managers trade their assets periodically.


http://www.usatoday.com/story/money/business/2014/02/23/indi...

rk (hold indiv. bonds, and bond funds)
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The logic for the standard view basically starts and ends with the observation that an investor can hold individual bonds to maturity while bond funds don't necessarily hold all bonds until they mature. Most bond fund managers trade their assets periodically.

In the end, that's actually what it comes down to. An individual bond investor can choose not to buy when bonds are overpriced or sell when conditions are not favorable. Unless he puts a lot of money into the junk bonds of companies that go bust, he should come out ahead of the bond manager who doesn't have the same freedoms.
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<< The logic for the standard view basically starts and ends with the observation that an investor can hold individual bonds to maturity while bond funds don't necessarily hold all bonds until they mature. Most bond fund managers trade their assets periodically.>>

In the end, that's actually what it comes down to. An individual bond investor can choose not to buy when bonds are overpriced or sell when conditions are not favorable. Unless he puts a lot of money into the junk bonds of companies that go bust, he should come out ahead of the bond manager who doesn't have the same freedoms.


It's not only that ... an individual bond owner can choose to make his own decisions, a bond fund owner doesn't have that luxury. If the fund has a billion dollars and people redeem half of that, the fund manager MUST sell half the holdings right then, regardless of market conditions. This obviously doesn't apply to closed-end funds.
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This analysis is really comparing a bond fund to - well a bond fund. He rebalances and matches the duration and convexity every year. He just rebalances by selling bonds in the "fund" and redeeming them in the "ladder". Rocket Science....

And investor in a ladder can increase or decrease the duration as they see fit. A fund has limits...

(Duration)/dT
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An investor in a ladder can increase or decrease the duration as they see fit. A fund has limits...

Exactly! An individual investor makes his/her own choices and presuming rational decision-making will make "good" choices. But an investor in a bond fund isn't making his own decisions, and I am not referring to handing the decision-making over to the fund manager (who is more experienced and savvy than the individual bond owner). I am referring to the fact that the fund manager (of an open-ended fund) is "forced" to make decisions based on the flow of funds. If lots of money is invested when bond aren't at attractive prices, the manager is forced to buy bonds at unattractive prices. If lots of redemptions occur when prices are low, the manager is forced to sell when prices are low. Not so for the [rational] individual bond owner.
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Hi Guys,

an individual bond owner can choose to make his own decisions, a bond fund owner doesn't have that luxury

Can be good, can be bad. The 'fund owner' can hire the likes of Bill Gross!


If the fund has a billion dollars and people redeem half of that, the fund manager MUST sell half the holdings right then, regardless of market conditions. This obviously doesn't apply to closed-end funds.

Also, like the CEF, one can purchase the ETF versions, and avoid the 'forced sale' of the MF. Especially an 'active ETF' like Pimco's (BOND), which is managed by Bill Gross.

rk
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Kind of a silly article. The author assumes that the bond fund invests in exactly the same way as the individual bond holder and then says there is no difference in result. Duh!!
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Also, like the CEF, one can purchase the ETF versions, and avoid the 'forced sale' of the MF. Especially an 'active ETF' like Pimco's (BOND), which is managed by Bill Gross.

Bingo. My largest single exposure to debentures is via HYLD, an ETF which is actively managed -- with considerable latitude! -- and focuses on junk bonds.

My second largest is with a Nuveen CEF (also actively managed) focused mostly on high quality California munis -- with modest leverage.

I've given up on trading individual bond issues -- to get enough diversification you end up trying to own so many that trading friction and illiquidity kill you. The bond market is much less friendly to individual investors than the stock market (where ETFs and CEFs also trade) -- unless you go for Treasuries, where Treasury Direct is fine (but I'm eschewing US Treasuries at present -- corporate, munis, and a few foreign exposure, are my current choices for my debentures).
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Just two quick notes....you can no longer sell bonds in TreasuryDirect. So, for me anyways, treasurydirect is not so great. You can buy them and transfer them to a broker account for selling if needed, but I found it to be a pain.

And just glanced through an interesting bullish opinion on treasuries.
The 10-year is presently yielding quite a bit more than other developed countries' 10-year bonds. A graph showing yield of Germany 10-yr yield minus US treas 10-year yield shows a bottom.

The article considers the $ to be stable.

I just thought it was interesting. I'm not going to run out and buy a bunch of 10-year notes...but I'm sure not going to short them, either.
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