I must feel I’m aging or something. For the first time I added a bond ETF to my portfolio as a mainstay. I’ve always focused on stocks (and their derivatives) as my only asset class outside of cash. The more I mature as an investor, the more I understand diversification means more than just buying stocks in different sectors and industries. With this being a step outside of my usual line of thought, I’m taking a small position to start with. After we didn’t see any big surprise from today’s treasury auction I changed my lower limit order I’ve had sitting in place for more than a week to a market order and bought 100 shares of BND at $78.989 and paid $7,908.89 with commissions.
I considered some other bond ETFs, such as Vanguard’s long-term bond ETF (BLV), but decided I’d give up a little yield for a little more stability. That’s not to say my next bond addition isn’t going to be a long-term bond ETF, but for now I’m taking it slowly. This purchase puts my bond allocation to almost 10% of my portfolio. I’ll probably add another 10% in bonds next month or the following month. If this rally continues through the end of the year without a decent correction I might go as high as 30% in bonds since I’ll be even more nervous about a New Year’s correction after the pros stop trying to chase performance before they end the year lagging the indexes. If we get a big enough correction I might dump the bonds temporarily to overload in stocks/options. Although, if I work it right and use options correctly, I won’t have to sell my bond shares as the options’ leverage lets me do both at the same time.
BND has an expense ratio of only 0.14%. Its annual dividend is $3.13 which makes its annual yield 3.96%. That doesn’t include any capital gains I might get as a bonus as BND inches higher. At a rough look back since inception, BND averages around 2% per year in growth. Looking back at 2008, I wish I had been wise enough to have been invested in bonds partially. I don’t plan to repeat that mistake for the next recession.
That leaves me with $1,576.21 in cash. I still have 2900 shares of PVI too. That’s worth $72,500. I’m just using it as my holding place for cash (like a money market) when my naked puts aren’t assigned and I don’t need the cash to buy anything. The trouble with PVI these days is that the yield is less than 1% with short term rates so low right now. It’s still better than no yield and PVI is good about staying at $25.00+ month to month. It’s doing its job for me – not losing money with a little tax free dividend in the meantime.
If anyone has some other bond ETFs you are invested in now or have been in the past, please share your ideas for everyone to consider. What should I consider for my next bond ETF purchase?
Suggest you consider the PIMCO family of bond funds such as PCK, PHK, PCQ, PGP, PTY all of which I have taken a long position. They have also just added STPZ, LTPZ, TIPZ & TUZ to cover the US Treas sector. I’m not sure about them yet. After listeniing to Julian Robertson today I’m looking at the idea of shorting the US Treas via TLT, IEFF & TIP.
Regards, M. Dougherty
Just curious, but what measure of stability did you mean re: BND vs BLV? Comparisons of 52-week highs and lows? (BND: $79.24-$72.67; BLV: $79.89-$65.39) I’m asking because the yield difference (since inception: 6.79% vs. 8.03%; 1 year: 10.56% vs 18.36%) seems reasonably large to me.
@ Maurice – I should’ve thought to check PIMCO initially. I’ll dig deeper before my next purchase.
@ Davmp – Yes, volatility would have been a better word. I see BND as being less volatile since the maturity dates are shorter than with BLV. BLV is affected more my changes in interest rates and at some point rates are going up which will push bonds prices down.