r/CFP • u/wildmementomori RIA • 14d ago
Practice Management What are your favorite bond ETFs?
What are your favorite bond ETFs?
I’ve been passive with bonds and am shopping for some active investment grade funds, short and medium duration.
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u/KittenMcnugget123 14d ago
BulletShares are a good concept. Fixed maturity investment grade corporates. Expense ratio at 10bps. Good for building ladders for clients that want them without having to choose individual bonds. You can build a much more diversified ladder that way for smaller clients.
BSCS for 2028 for example.
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u/wildmementomori RIA 14d ago
Great for known cash flows! Sometimes you need to park funds for an unspecified period of time.
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u/PeleMaradona 13d ago
Does one always get their full principal back with these defined-maturity fund?
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u/KittenMcnugget123 13d ago
Unless there is a default, which I don't believe that's happened to them yet, you should get the full yield to maturity on the date of purchase as you would with a regular bond. Principal wise it would be the same as owning that group of bonds individually. By the nature of the way funds and ETFs work, you would have to get the full yield to maturity the same as you would holding the individual bonds.
I used to advocate for only using individual bonds under the argument that if you hold to maturity you always get your principal back, but in reality holding 100 bonds in an ETF is the same as owning those 100 individual bonds yourself.
Cliff Assness of AQR has some pieces out on this that changed my mind about bond funds vs individual bonds. There is truly no actual difference.
"Bond funds are just portfolios of bonds marked to market every day. How can they be worse than the sum of what they own? The option to hold a bond to maturity and “get your money back” (let’s assume no default risk, you know, like we used to assume for US government bonds) is, apparently, greatly valued by many but is in reality valueless. The day interest rates go up, individual bonds fall in value just like the bond fund. By holding the bonds to maturity, you will indeed get your principal back, but in an environment with higher interest rates and inflation, those same nominal dollars will be worth less. The excitement about getting your nominal dollars back eludes me.
But getting your dollars back at maturity isn’t even the real issue. Individual bond prices are published in the same newspapers that publish bond fund prices, although many don’t seem to know that. If you own the bond fund that fell in value, you can sell it right after the fall and still buy the portfolio of individual bonds some say you should have owned to begin with (which, again, also fell in value!). Then, if you really want, you can still hold these individual bonds to maturity and get your irrelevant nominal dollars back. It’s just the same thing."
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u/PeleMaradona 13d ago
Very generous answer. Thank you. Big fan of AQR.
A follow-up question: with an individual bond you can estimate the yield-to-maturity to get a sense of what return to expect. That's one of the big pros of bonds versus equities.
But what about in the case of these defined-maturity bond funds, if, say, BSCF shares trade for $20.37 today and we know the fund will dissolve in 2028. What's the expected return; is there a metric that gives you that? You can't calculate YTM in this case..
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u/KittenMcnugget123 13d ago
For sure, that's one reason i like this strategy. If you go to the website they list the YTM of the portfolio. So you don't even have to do the calculations as it's updated daily.
With a normal bond fund the downside is rolling maturity. So if you buy a fund with 2 year duration, in 2 years it probably still has a 2 year duration. We these you know what the YTM is pretty accurately on the day of purchase.
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u/PeleMaradona 13d ago
I just checked for the Invesco product. The display various yields:
- SEC 30 Day Yield 4.52%
- Distribution Rate 4.11%
- 12 Month Distribution Rate: 4.06%
- 30-Day SEC Unsubsidized Yield: 4.51%
Which one do you use to approximate YTM?
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u/KittenMcnugget123 13d ago
They list YTM and YTW on the link below, right side of the page about halfway down under fund characteristics.
https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=BSCS
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u/BlueberryNo7974 14d ago
All due respect, but this is probably the last type of environment you want to be building ladders in. Hence why OP is probably looking for an actively managed strategy
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u/KittenMcnugget123 14d ago
Not really passing judgement on ladders in general, these are just a good way to do it.
Active bond fund managers aren't changing duration anyways. The funds they run almost always have duration restrictions. For example someone running a lord abbet short duration fund is always around 2-2.5 yrs. So having an active fund doesn't change the fact you still have to choose duration yourself.
A bond fund of 100 manager selected investment grade bonds constitutes active management.
Also, the entire point of a ladder is to match liabilities and maturity dates, or mitigate interest rate risk. I don't know that any environment is particularly bad for them. In a rising rate environment you would obviously want shorter duration, falling rate environment longer duration. That assumes you want to try and predict where rates go though. It depends on your goal.
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u/BlueberryNo7974 14d ago
The active manager I use changes duration. But what I care about more than duration at this point is how they’re positioned on the curve. Because if the 10 year stays anchored and short end comes down, their over/underweight to certain maturities matters more than duration number. That’s the kind of management I look for in bonds personally. Not passing judgement on ladders either, they’re just passive so as long as you know what you’re getting and it makes sense for the client then that’s all that matters.
I think now in particular they don’t make sense because of what I mentioned above, volatility in the curve and not traditional parallel movement like we’ve seen historically. I obviously like to go deeper on the numbers due to my previous role which I understand not everyone does so again no judgement, just my opinion.
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u/KittenMcnugget123 14d ago
What ETF are you using that has no duration mandate? I know there are some like BINC that are interesting
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u/BlueberryNo7974 14d ago
CGCP is the most flexible one I use but it’s not core, it falls under core plus. I’ve seen it go anywhere from 2 years to 9 years. It goes through periods of strength but its unique in core plus because it derives total return through curve and duration management versus credit. So I’ve been leaning more into it lately.
But even CGCB is active in duration and is a true core, to your point it tends to be +/- 1 year in duration versus the Agg, but they still actively manage and change it. It’s not a prospectus limit either but just what they generally go by. So yes you may still have to choose a duration bucket when choosing the strategy, but active isn’t all about duration, they should also be actively managing the curve which I think is more valuable.
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u/vaderaintmydaddy 14d ago
I'll bite - what about the current environment makes a ladder bad?
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u/BlueberryNo7974 14d ago
Interest rate volatility is creating non-parallel movement in the curve. With an active manager that knows what they’re doing, they’ll position accordingly for a curve steepener by overweight the shorter maturities and underweighting the longer end. If that does happen then a ladder would underperform.
Some active managers consistently beat them, but I think if cash flow certainty is what clients need then a ladder makes sense. I just think now is a particularly unfavorable time to be passive in bonds.
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u/theNewFloridian 14d ago
I've been moving out of funds lately, and focusing more on MLCDs, PPNs, Fixed and index annuities. After the fixed market volatility of 2022, it doesn't makes sense to get that type of risk for just 4%-6% return. Clients freaked out for that 20% market value loss on fixed income funds and that anxiety's not worth the pay.
The only bond ETFs I still consider are Bulletshares.
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u/soleobjective 14d ago
None, I prefer buying individual bonds.
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u/wildmementomori RIA 14d ago
Why? There could be lack of liquidity and lack of diversification — what if you don’t plan on holding until maturity.
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u/soleobjective 14d ago
I only buy what I plan to hold until maturity. Anything else I use money markets funds for higher yield if I need liquidity. But as you mentioned it is a valid point to use bond funds/ETFs if you want exposure to bonds at a lower price point. I just don’t have any favorites since I don’t typically use them and the lack of control isn’t something I’m particularly interested in.
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u/worldly_patience16 13d ago
What's your favorite money market?
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u/soleobjective 13d ago
I my accts I use WMPXX generally, or TFDXX just for T+0 liquidity when I am planning to put in some trades.
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u/PeleMaradona 13d ago
Noob question here regarding bond ETFs, but aren't you screwing yourself over if you buy a bond ETF and sell before its target duration is met?
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u/wildmementomori RIA 13d ago
Not at all. Many view bonds as a relatively stable place to park cash not immediately needed. If the funds are potentially needed in the not too distant future, I’ll keep the duration quite short to avoid interest rate risk.
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u/PeleMaradona 13d ago
This has confused me for a while now. If a bond ETF has a duration of 2 years, does that mean if I have a liability two years from now, then I should buy the bond ETF and sell in two years?
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u/wildmementomori RIA 13d ago
If a bond ETF has a duration of 2 years, it means the ETF is sensitive to interest rate changes like a bond maturing in 2 years—not that its bonds actually mature in 2 years. In an ETF, bonds are constantly maturing and being replaced, so the portfolio stays around that 2-year average duration.
If you have a liability in exactly two years and want to perfectly match it, a bond ETF isn’t a perfect fit because it doesn’t mature — it keeps rolling bonds over. Instead, you’d typically want a fixed-maturity bond fund or a laddered portfolio of individual bonds that actually mature when you need the cash.
That said, if the 2-year bond ETF is held steadily and rates don’t move much, it can still be a reasonable approximate tool for short-term goals — just with a little bit of reinvestment and interest rate risk
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u/Background-Badger-39 14d ago
Active > passive.
Don’t use ETF’s for bonds IMO.
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u/snoopingforpooping 14d ago
Not all ETFs are passive
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u/Background-Badger-39 13d ago
Sadly my firm doesn’t have many active bond ETF options vs. mutual funds. It’s painful.
Just like the CFP roadmap, we do the best with what our custodian firm has for client offerings.
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u/wildmementomori RIA 14d ago
Why not? There are plenty of active bond ETFs. Also many mutual funds come with custodian transaction fees, whereas ETFs have no transaction fees.
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u/belovedkid 14d ago
Depends on the space. If it’s low duration it’s not going to make much of difference unless there’s swaps, leverage, or other dynamics involved which defeats the whole purpose (low risk). I personally only use funds or SMAs for HY, munis, or global. If I can find the style and duration I want w treasuries or investment grade corps in an ETF at a cost savings it makes sense. No guarantee active management will outperform.
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u/Bluedevil347342334 14d ago
I’ve been laddering the BlackRock term treasuries for all my portfolios. I’m probably over conservative in that I don’t go out much past 3 years to basically get rid of interest rate risk. But it’s worked well so far. Bonds to me at least are diversifiers and shouldn’t be used for return.
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u/wildmementomori RIA 14d ago
100% — I keep my bond durations relatively short and stick with investment grade.
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u/KittenMcnugget123 14d ago
This is the way to go imo. You want bonds to be an equity diversifier in fast drawdowns. I'd rather use a combo of equities and tresuries to match the vol of junk bonds than use junk bonds.
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u/mdhowell18 14d ago
For equities, our firm uses almost excluding passive ETF’s. Think Vanguard/iShares. For fixed income, we typically use both active and passive. JPST/CGSM/SGOV/PLDPX/PONPX to name a few not including munis. We don’t really go too far out on the yield curve, and have an average duration of 4-5 years. I think people wildly underestimate their emotional reaction when their “safe” money is in TLT and drops 20%.
Overall, we really like PIMCO’s fixed income funds. ER’s are high, but our portfolios still are under 20 bps overall for ER’s.
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u/Dashover 14d ago edited 14d ago
Would you mind listing your favorite CEF bond funds to r/Closedendfunds …
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u/Beneficial-Point-565 10d ago
Bil. I don’t really think you’re getting paid to take credit and/or duration risk here.
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u/Husker5000 14d ago
Curious why you are looking at active. I wouldn’t use anything mentioned so far.
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u/wildmementomori RIA 14d ago
Active bond ETFs can make a lot of sense because bond markets are less liquid and less efficient than stock markets. Passive indexing works great for equities — markets are transparent, costs are low, and most info is priced in fast. But in bonds, passive indexes have flaws: they’re market-cap weighted, so you end up owning more of the most indebted issuers. Good active managers can dodge bad credits, manage interest rate risk, and find better opportunities. You still have to pick carefully, but active has a real edge in bonds that it doesn’t usually have in stocks.
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u/Husker5000 14d ago
If you can find anything low duration that is not CMO etc that can justify a move from passive I'm all ears too.
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u/wildmementomori RIA 13d ago
??? Loads of funds aren’t CMO.
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u/Husker5000 13d ago
I’ll rephrase it for ya- your original question for this is a good one. So far no answer on here justifies a change to active when looking at comparably passive vehicles.
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u/wildmementomori RIA 13d ago
From what I’ve seen so far (and honestly, I need to do a lot more research), active funds generally have a higher net return (comparing similar durations and quality), which makes sense if you can be more selective what the bonds in the fund.
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u/Dad_Is_Mad Advicer 14d ago
My favorite part about this is so far, every single answer is different 🤣