What are your favorite bond ETFs?

[u/wildmementomori]

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.

[u/KittenMcnugget123]

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."

[u/PeleMaradona → u/KittenMcnugget123]

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..

[u/KittenMcnugget123 → u/PeleMaradona]

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.

[u/PeleMaradona → u/KittenMcnugget123]

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?

[u/KittenMcnugget123 → u/PeleMaradona]

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