Big Problem with Bond ETFs!!! DO NOT Buy TIPS ETFs?
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- Опубліковано 22 жов 2022
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You pointed out the problem with investing in bonds in a rising interest rate environment. You are right that holding a bond directly from IPO to maturity is better vs holding the bond ETF in a rising interest rate environment, but if the opposite is true, a decreasing interest environment, then you would be better off investing in the bond ETF. The reason the bond ETF would be best in a decreasing interest environment is because the ETF bonds are appreciating in value and the bond owned directly will mature at it's face value (no appreciation). All in all, if you invest long-term into a diversified mix of bonds directly, then the return performance should not be much different than investing in an index that is similar to those bonds. So, if you believe interest rates are peaking, then long-term bond ETFs will perform better than their recent history. Also, if you think inflation is peaking, then any investment in TIPS will perform poorly in the near term. Not sure you touched on it (I didn't hear it mentioned, possibly I was distracted), but TIPS behave differently than normal treasury bonds. TIPS value increases as inflation increases, which means TIPS interest rates also increase with inflation. However, the market prices in what is expected to happen and not what is currently happening or what happened in the past. So, if TIPS are down, it means the market is expecting in the future either that inflation will decrease and thus TIPS will earn less in interest or that the economy is improving and thus investors are selling TIPS to invest more in riskier assets.
That was an extremely well explained comment. And I believe you are correct with the different scenarios.
Thank you for pointing this out!
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What a superb videos. It has explained what I was thinking about ETF bonds and cleared me I was right and my mathematics assumptions were what you have shown. Thanks & subscribed
Thanks Jimmy really great video.
2nd 🥈 !! Love the informative videos! Would you be able to do a follow-up series where you revalue stocks on previous videos?
Glad my comment on the previous video motivated this one. I have reached the same conclusion... the hard way. Great video as always.
Good to know.
Hello
I recently found your channel. Truly amazing. Can you please do a similar video on bond mutual fund using vanguard bond fund as an example? Thanks
Thank you for this video I was asking myself the exact same question recently so your video was well timed.
me too
You're right, but what about short term Tips etfs? Since it is short term, the underlying assets mature faster than 5-7 year etfs, thus new bonds with new interest rates are purchase more often.
When u say total return in the early part of the video does that include the dividends?
Would be awesome if you do a reanalyse of BABA, since you have a position on it, talking about whether it’s a buy or not at these levels, thanks Jimmy!
Well. If you hold the indvidual bond, with each year you hold it the duration comes down. Of course when in the last year of holding the bond there is a sharp rise in interest rates, the individual bond that has only a duration of 1 left will not fall as much as the bond fund that keeps it's duration at a stable level by constantly trading the bonds it holds to match a certain duration profile.
I wish I knew this a year ago. I bought SCHP, another TIPS ETF, near the peak thinking it would be a "safe" way to counter inflation. Now it's down 20%. The question now is, hold or sell and reinvest elsewhere?
sorry to hear your story. So, bond ETFs are not the "safe" investment.
Hold but not a financial advisor
wouldn't the bonds inside the ETF adjust higher at maturity? Also the yield would increase with inflation. Th real risk is if fed funds exceeds CPI. That seems very rare, like US government default which is a nuclear scenario anyway.
Excellent description of the problem. The ETF/Fund set up is one where there is constant purchases and liquidations. Thus, in the bond fund scenario, you are guaranteed to sustain a capital loss due to the turnover within the fund. It is counterproductive to the "safety" aspect of a bond fund. It seems that risk is a relative term.
Could you analyze BK, Bank of New York Mellon? Thank you for your work.
the first minute was duplicated
He just wanted to make sure that we REALLY get it ;-)
Lol, I’m so sorry about that, that was my fault, I just tried to crop down the first minute on UA-cam, hopefully that kicks in soon
Hey Jimmy, you once did a video about the dogs of the dow, I think you should review that strategy again, there might be a lot of value for your fan base.
You’re the man, Jimmy.
I never understood why people claimed that Bond ETFs are "safe". The idea that I could lose money if interest rates rise was always a no go for me. Shame that it isn't easy to buy individual bonds in Germany
Great video, had been looking at bond ETFs recently but didn't understand them enough to go through with buying, now I think it makes sense! Looks like we could be approaching a good buying opportunity for bond ETFs, depending on how much further interest rates are expected to rise?
Watch inflation, to know. Because, the future value of the bond principle returned must be discounted by the rate of inflation during the period of time the bond is held. Because of uncertainty in central bank actions and inflation, predicting fair value is more difficult than are stocks.
Thanks Jimmy! There has been a collective amnesia in the financial services industry on the purpose of bonds in a portfolio. Until about 2000 they were sold / marketed as a means of capital preservation. That’s only true if they are held to maturity. Bond ETFs strip that important feature out and they are simply another “total return” asset. This year has shown that the Emperor has no clothes.
💯 - unlike a bond itself, a bond ETF is just a bet on interest rate moves.
@@jonathanmontgomery5178 so Bonds ETF could be as risky as stocks, right?
TIPS.. yes but with interest rates at a somewhat high level and the unit price now somewhat depressed and paying 6% yield, perhaps tips is a good bet at the moment?
I'm planning to switch to bonds. I have only been doing ¢rypto but I believe bonds have way less volatility. I don't get so much from the videos online🤦♀🤦♀. I'll need some guidance
Volatility is where the money is. why would you want to switch to bonds? You are probably doing something wrong. Since 4 years I started I've been able to complete my mortgage, and buy my dream car. Though I did it with the help of Debra Pace.
Your best bet should be considering getting an expert... If you are trying to learn to do things yourself you'll end up making mistakes.
Lol. There are people that are making a lot of money from either of them. "Switching" won't do a lot, Fella.
@@Meme4everm What does it take to work with this Debra? I would need her assistance
Jenine is a really good💯. My gain last month was about $29k. They are actually planning on adding DeFi protocols and facilitators like staking, lending etc. That will be a game changer and I can't wait for that to happen💵
I guess it is important to think about Bond ETFs as a pure capital preservation / income stream? Not as an actual bond. The price return is down but in return, I should be getting higher coupon payments from it which is nice. It wouldn't make sense to sell it now right?
No it doesnt. As far as I know you can check the factsheet of your ETF. The Duration is the time the ETF needs to recover from the drop.
Dude.... Are you serious with this? Of the 5 year vs 3-7 year tracks early on in its life because its basically the same asset. As time goes on it simply is not the same product.
I believe you would be buying these bond ETFs for the next QE cycle, while we are in a QT cycle. Once the FED goes neutral, I believe these bond ETFs will balance out and start expanding when the FED starts buying again. The only reason why you would be buying these ETFs are for their dividends and not what the underlying base prices are. Kind of like a hold and dividend forever strategy.
so, buying bond ETFs, you have to Time the Interest Rate, which may be easier than Timing the Market?
Jimmy, thank you so much for explaining the difference between Bond and Bond ETF. This is some I have been puzzling for a long time. My understanding now is that Bond is not meant to be traded, but Bond ETFs are often being traded and you may not get the return the original Bonds promised. By the way, can Bond itself be traded if you wish to? so, buying bond ETFs, you have to Time the Interest Rate, which may be easier than Timing the Market?
Factz..this is the time to buy a bond etf and hold on for the interest rate to gradually go down but I’m not a financial advisor I’m not telling you what you should do
I still don't get if this under performance of ETF vs individual bond is due to the interest rates rising sharply, or would it also happen if rates rise slowly? Also, if the interest rates fall sharply, would an ETF outperform an individual bond?
Yes the ETF would outperform in a decreasing rate environment
@@Maxknell yes but ETFs will sell at a premium to the NAV. I personally prefer to stick with actual bonds because the goal is not to have outsized returns, it is to have consistent returns.
Thank you. I was wanting to buy SCHP. I won't now since you explained to me what I'd be getting into.
yeah i put some money into schp in 2021. Not so proud of that decision.
The problem is most people consider CPI as a real indication for inflation !
Inflation by definition is the expansion of money supply ( or how much currency is debased) and it is much higher than CPI ! Easily 15-20%
The CPI is a doctored number. Go study the history of how its calculation methodology has changed over the years.
I’ve been invested in VTIP which is a short duration bond ETF and it is only down 3% in 2022 and that’s just on price action. In the meantime I’ve collected some nice payouts that I have been using to buy undervalued stocks.
VTIP is 3% down this year, but the dividends didn't make up for the inflation in the same period. The point is that they not move along with the underlying asset value in the short term.
@@pabloMM01 jimmy made the point that if you were buying tips to stabilize or for some downside protection TIPS haven’t been the answer. I was making the point that VTIP did just that for me.
@@rodrain2 I understand your point, but I respectfully don't think you are correct. I am also invested in VTIPs and their returns (including dividends) are far below inflation in 2022.
@@pabloMM01 You are not understanding my point. I didn't say the returns kept pace with inflation. I said VTIP mitigated the volatility of my portfolio because it has held up a lot better than stocks.
@@pabloMM01 nothing has kept up with inflation
I always have a hard time when someone picks a specific period of time to show me how horribly something has performed
But thank you. I love your videos, Jimmy
What books do you recommend to start trading?
-Synergistic Trading
-Trading in the Zone
Hi, what about IB01?
Wouldn't that chart say TIPS is a better buy now vs the treasury itself? The chart follows pretty closely until that massive drop...Seems the discount would be much better buying TIPS here vs the treasury even though it was reversely true prior to that?
Holding a single bond or an ETF is the same thing. The ETF is priced daily, so has to show the decreased face value on the open market if rates rise. Holding a single bond is the same, the face value drops in an increasing rate environment, and vice versa. Same with CDs (you just don't see it b/c the face value looks identical) but if that was priced on the open market, it would have a discounted face value. When a bond matures in the ETF, it's rolled into a new bond at the higher rate.
So far in the past few months I’ve slowed down buying to only maybe an IPO or something I already own that has been overly beaten down. Only money I’m consistently putting into the market are through my financial advisor.
Last year a colleague introduced me to a financial advisor Camille Anne Hector. With her help I have been able to diversify by investing in different market and asset classes while also keeping an open eye for attractive stock picks. she is quite known so you can find more about her online.
Please is she readily available? I made the regret of my life tackling this volatile market by myself now it’s been red after red. I would love to get guidance considering how bad I have messed up my portfolio.
Simple, consistent, and easy. I'm up 75% with her managing my portfolio. If you're looking for consistent gains this is an easy and amazing way to do it. As passive or active as you want and all for a great value!
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I just checked out her name online and was able to find her website, her qualification/testimonials seem solid with positive reviews. Is there a minimum amount required for her services?
What about BND ?
BTI is my favorite bond right now. Nothing like some cigs and divs.
There are two thing wrong with this - first one should have bought short time bond not intermediate or long term when fed was increasing rates or move to cash now when they are almost done buy anyone short ,intermediate or long term it’s perfect timing for making profit as it moves from max out red to green.
Found this out the hard way. Put 20k into bond funds summer 2021 and currently down 5500k. Trying to figure out if I should keep them or take the loss and buy cheap stocks. Good video.
Hold.
Hold Hold why would take a loss now Noo..take your emotions out of it and relax grasshopper..be patient..interest rate are going to be going down..
i think that is the game... people want to buy etf bonds because it is cheap now, if interest rates start to go down the etf will go up. The bonds will stay with much more less volatility
NOW is the time to load up on bond etfs, fact of the matter is timing, you don't buy bonds when rates are increasing, you buy when the feds pause then pivot. An etf will out perform a bill. pull up the charts on them between 2016-2018
Apples to oranges comparison. A 5 year bond becomes a 4 year bond after a year, then it becomes a 3 year bond, etc. In a rising rate environment like we're in now, shortening the duration is better which is why the individual bond beats the ETF in your cherry-picked scenario. The ETF on the other hand has to maintain a constant 5-year duration, which loses money while rates rise rapidly; but as soon as rates stabilize or fall, the ETF will outperform. That's because the ETF is currently buying 5 year Treasuries with 4.5-5% yields, while your bond is stuck at 2%. The ETF eventually will be full of Treasuries that yield 4-5%, and once rates fall, those Treasuries will appreciate, beating your individual bond.
Do these problems also hold true for Bond Mutual Funds? I assume yes.
Yes, same problem with mutual funds.
I’d say almost everyone would be better off directly buying bonds at your broker or from treasury direct. It’s super easy to do and you guarantee your returns. “On paper” my bond might go down if I wanted to trade it. But when I hold it I know exactly what I’m getting.
thanks for sharing. So, you CAN trade the bonds from treasury directly? I imagine the trading would be much less convenient than ETFs?
Really good summary, Jimmy. Bond ETFs are for traders. Individual bonds are for investors.
god damn i bought TLT etf
Just buy 3 month and 6 month treasuries. They’re yielding 3-4%.
For now
It's not a problem...it's simply an opportunity. You're only highlighting one side of the yield moves.
That’s a fair point!!! Once the yield heads the other way again, todays problem becomes tomorrows opportunity 😀👍
Good luck I don’t own bond etf.
Never invest in bonds with a longer maturity than you are willing to wait it out!
I’d add another scenario to that - if you have conviction that rates will decrease, invest in bonds then sell after rates went down for capital appreciation
Yes 90 days baby
This is why I own both BOND etfs and actual bonds - at least those I can actually buy, and in my region its mostly corporate ones that are easy to buy :( You Americans are so lucky, Europeans sad🤣
Bravo , finally someone demistifying the myth of ETFs showing their big pitfalls
Bond ETFs are for speculators, not for investors. I was sitting on TBT this year, it was a great ride.