Fixed Income ETF: Lehman Aggreg. vs GS $ InvestTop Corp Bond

Financial Independence/Retire Early -- Learn How!
Post Reply
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Fixed Income ETF: Lehman Aggreg. vs GS $ InvestTop Corp Bond

Post by peteyperson »

I'm wondering which is better on the US Corporate Bond investing via low cost ETFs.

InvesTop is 0.05% cheaper but Lehman Aggregate is the main US fixed income index used. The InvesTop investing mostly in the lower end rated Corp Bonds with a weighted average maturity of 10.5 years, the Lehman index has 34% in US Govt Treasury with an average maturity of 6.7 years. Then there are the main Lehman US Treasury investment choices from short to long dated from 1-3 years upwards.

If you were considering a mix of US Treasury and Corporate Bonds and were restricted to ETFs in the US market, which would be more attractive and why? What thinking and methodology would you apply to your mix of bonds?

Also, could someone please clarify what Securitized CMBS, ABS and MBS Fixed Rate Bonds are?

iShares GS $ InvesTop Corporate Bond Factsheet
http://www.ishares.com/material_downloa ... et/lqd.pdf

iShares Lehman Aggregate Corporate Bond Factsheet
http://www.ishares.com/material_downloa ... et/agg.pdf

iShares Lehman 1-3 Year Treasury Bond Factsheet
http://www.ishares.com/material_downloa ... et/shy.pdf

iShares Insights Newsletter featuring Lehman Aggregate info
http://www.ishares.com/material_downloa ... s_q203.pdf

Thanks,
Petey
Oliver
* Rookie
Posts: 21
Joined: Wed Dec 04, 2002 4:00 am

Post by Oliver »

Hello Petey,

With bonds one should look at the duration of the bonds instead of the average maturity in order to evaluate interest rate risk. I usually invest in short-term corporate bond funds. However, with the current steepness of the yield curve I have some money in intermediate-term bond funds.

As one does not need any diversification with government bonds, I prefer individual government bonds. For residents of the US, one can purchase gov't bonds at auction through treasury direct or a brokerage for a nominal cost. In fact, owning sovereign debt directly can substantially reduce ones average er.

Oliver

PS I usually look at the very long end with inflation-indexed bonds.
User avatar
Alec
Admin Board Member
Posts: 31
Joined: Wed Sep 10, 2003 4:00 am
Location: Crofton, MD

Petey

Post by Alec »

Here's a link from the Financial Pipeline (http://www.finpipe.com/fixed.htm) website on Mortgage Backed Securities (or MBS):

http://www.finpipe.com/mbs.htm

(note the section on prepayment risk)


Here's a link from E.F. Moody's site on MBS:

http://www.efmoody.com/investments/gnma.html

My problem with funds that include MBS is that when interest rates fall, the duration falls (exactly when you don't want it to), and when interest rates rise, the duration rises (exactly when you don't want it to). So, you don't get the full increase in capital gains (as compared with regular bonds) when rates fall, but you get more than the full decrease when rates rise.

I think ABS is Asset Backed Securities (http://www.finpipe.com/assback.htm)

I suppose if you were to combine ½ and ½ of the Corporate Bond ETF (LQD) with the 7-10 year Treasury ETF (IEF), you'd likely have yourself a intermediate term bond fund with a duration of around 6.40. Also, LQD should have higher bond spreads (which adds to your investment costs - I think the literature said around 0.40% higher than the treasury ETFs) b/c of the lower credit quality bonds.

The Lehman Aggregate Index has a duration b/w 4-5 I believe (and has the MBS risks), but is an easy all in one U.S. investment grade bond fund.

You live outside the U.S., correct? If so, I am curious as to why you want to take currency risk with your fixed income investments. I haven't been able to keep up with all your posts. I think that inflation protected bonds (like TIPS and Gilts) and shorter-term bonds would provide much better diversification with Equities than nominal bonds of longer maturities (intermediate and long). Here are two articles, one on TIPS, and one on TIPS and Gilts:

http://www.ibbotson.com/download/resear ... _Class.pdf

http://www.cades.fr/en/download/a-Flashi03-01.pdf

Are you able to buy gov't bonds (from either U.S. or Great Britain) directly from the issuing agency (Treasury for U.S.) or do you have to go through an intermediary like a broker?

It would be great if Barclay's, or someone else, would come out with and ETF for the Lehman Brothers 1-5 Year Government/Credit Bond Index. I suppose there are just too many indices to choose from.

- Alec
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Re: Petey

Post by peteyperson »

Hi Alec,

I will be looking at buying UK Gilts directly. I have two official PDFs to read on the subject.

Re US Bonds instead of UK. Initially it was because US is cheaper by far to invest relating to bonds. Diversification away from 100% UK currency in bonds is balancing the risks of an overly low interest rate environment much like you have in the States now. Having bonds splt to different currencies mitigates some of that risk. Also I am considering retiring to a foreign country that uses Euros, so balancing out investments in that currency makes sense too.

Petey
Alec wrote: Here's a link from the Financial Pipeline (http://www.finpipe.com/fixed.htm) website on Mortgage Backed Securities (or MBS):

http://www.finpipe.com/mbs.htm

(note the section on prepayment risk)


Here's a link from E.F. Moody's site on MBS:

http://www.efmoody.com/investments/gnma.html

My problem with funds that include MBS is that when interest rates fall, the duration falls (exactly when you don't want it to), and when interest rates rise, the duration rises (exactly when you don't want it to). So, you don't get the full increase in capital gains (as compared with regular bonds) when rates fall, but you get more than the full decrease when rates rise.

I think ABS is Asset Backed Securities (http://www.finpipe.com/assback.htm)

I suppose if you were to combine ½ and ½ of the Corporate Bond ETF (LQD) with the 7-10 year Treasury ETF (IEF), you'd likely have yourself a intermediate term bond fund with a duration of around 6.40. Also, LQD should have higher bond spreads (which adds to your investment costs - I think the literature said around 0.40% higher than the treasury ETFs) b/c of the lower credit quality bonds.

The Lehman Aggregate Index has a duration b/w 4-5 I believe (and has the MBS risks), but is an easy all in one U.S. investment grade bond fund.

You live outside the U.S., correct? If so, I am curious as to why you want to take currency risk with your fixed income investments. I haven't been able to keep up with all your posts. I think that inflation protected bonds (like TIPS and Gilts) and shorter-term bonds would provide much better diversification with Equities than nominal bonds of longer maturities (intermediate and long). Here are two articles, one on TIPS, and one on TIPS and Gilts:

http://www.ibbotson.com/download/resear ... _Class.pdf

http://www.cades.fr/en/download/a-Flashi03-01.pdf

Are you able to buy gov't bonds (from either U.S. or Great Britain) directly from the issuing agency (Treasury for U.S.) or do you have to go through an intermediary like a broker?

It would be great if Barclay's, or someone else, would come out with and ETF for the Lehman Brothers 1-5 Year Government/Credit Bond Index. I suppose there are just too many indices to choose from.

- Alec
User avatar
Alec
Admin Board Member
Posts: 31
Joined: Wed Sep 10, 2003 4:00 am
Location: Crofton, MD

Petey

Post by Alec »

Petey,

If you will be charge a flat fee (as opposed to a % of purchase) each time you make a transaction of buying or selling an ETF, having one U.S. Bond ETF would definitely cut down on the fees paid. This would make me lean more towards the Lehman Bros Aggregate ETF (AGG). No need to rebalance b/w different types of bonds and fewer ETFs would make your portfolio simpler.

I might wait on the AGG to see what the tracking error and spreads are. Both for the other ishares ETF's look to be pretty good.

- Alec
peteyperson
**** Heavy Hitter
Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Re: Petey

Post by peteyperson »

Hey Alec,

Ah, it's nice to see you agree with my thinking on this. It is a recent change, before that I felt bonds were an entirely defensive posture and therefore should be completely domestic.

I agree that the Lehman Bros Aggregate was looking good. I did like the 1-3 yr Treasury too but Lehman had 30% Treasury in there and high grade stuff despite being across the board. I expected it to have some really poor grade high risk stuff too but it didn't seem to even though it was an aggregate fund. Thoughts?

Petey
Alec wrote: Petey,

If you will be charge a flat fee (as opposed to a % of purchase) each time you make a transaction of buying or selling an ETF, having one U.S. Bond ETF would definitely cut down on the fees paid. This would make me lean more towards the Lehman Bros Aggregate ETF (AGG). No need to rebalance b/w different types of bonds and fewer ETFs would make your portfolio simpler.

I might wait on the AGG to see what the tracking error and spreads are. Both for the other ishares ETF's look to be pretty good.

- Alec
User avatar
Alec
Admin Board Member
Posts: 31
Joined: Wed Sep 10, 2003 4:00 am
Location: Crofton, MD

AGG

Post by Alec »

Petey,

The Lehman Bros Aggregate Index measures the performance of all investment grade bonds in the U.S. I think investment grade is something like BBB or higher. Treasuries, Mortgages, and High Grade corporate bonds make up the majority of the index. It doesn't include stuff like high yield (junk) bonds. I think the index has something like 7000+ bonds.

I don't know enough about "bond management"￾ to comment knowledgably on the currency risk/hedging issue.

- Alec
Post Reply