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Bond ladder vs ETF

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  • Bond ladder vs ETF

    Here’s one for you bond gurus. I held all of my fixed income in VWIUX for many years before inheriting a laddered bond portfolio from my now deceased father 6 years ago. I folded VWIUX into that portfolio- managed by PIMCO/ Schwab. Currently 1-12 year, 65 bonds, 24 basis points management. High seven figures. Performance comparisons with VWIUX or VTEB shows the portfolio lagging by .5-1% yearly. The appeal for the ladder was essentially independence from interest rate risk because the bonds are held to maturity. I don’t use the interest for expenses. So this is essentially portfolio ballast. Stay the course with ladders vs VTEB/ VWIUX/MUB?

  • #2
    I think that long term on a hold it doesn't matter so long as you intend to hold the fund at least as long as the average maturity of your bonds. If you have the fund/ETF you will be subject to some short term volatility regarding interest rates. My physician group uses a bond ladder for the bond component of their defined benefit plan, presumably to introduce certainty into the short term returns. I personally only hold leveraged funds ie NTSX for my bonds, but if I were to go all bonds as an individual investor I would go with a bond fund rather than ladder just for simplicity.

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    • #3
      I would be wary your performance comparison statement as comparing portfolio performance is on an apple to apple basis is very difficult. You note one advantage of a bond ladder, the other is the duration/decay is relatively straight forward, whereas a bond mutual fund is usually designed to stay within a given duration, holding type. Some PIMCO bond funds are very broad in their search of alpha return, mismatches in pricing and maybe a bond fund you own outside the ladder. The other nice thing about this bond ladder is its size, so the manager's has decent financial leverage to obtain the bonds sought (as a retail investor) and a 24 bp management fee seems really reasonable. I'm guessing this portfolio served your father well. As it is your's now, the question for you would be; a. what/if anything do you want this portfolio to do for you/your family?, b. folding a bond portfolio of that size into your overall asset allocation? Agree with another poster though, for simplicity a bond fund is a cleaning choice.

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      • #4
        High seven figures. Risk before returns.
        You addressed interest rate risk. The only other is inflation. A sprinkling of IBonds for you, spouse and any beneficiaries (10k is under the gift limit) would be a slow process. It’s something.

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        • #5
          Great analysis from all. Thanks

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          • #6
            In my taxable account I now have Vteax. Which is a diversified index With only 9 basis points. I held VWIUX for many years. I used to have a number of state specific muni bonds but got burned by some in 2008 and decided to diversify bonds into funds. I do not need the income either just the ballast.

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