New: Robo-investing in bonds

Investment Analysis Clubs Macro Economic Trends and Risks
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Like many bond investors, I have a “ladder” of bonds which mature sequentially over time. I have to keep track of their maturity dates. If they are CDs, I have to make sure they don’t automatically roll over on maturity – I like to think about what I want to do with the money.

The bond ladder is less liquid than a bond mutual fund or ETF but I know that I will get my principal returned in full at maturity regardless of what interest rates are doing in the market. Bond mutual funds and ETFs do not have a maturity date. Their NAV (Net Asset Value) falls when yields rise.

The Federal Reserve’s program of raising yields has caused many investors to become interested in bonds. The bond market is fragmented and taking care of a bond ladder is time-consuming. A new service has arisen to provide help.

https://www.wsj.com/articles/buying-bonds-is-hard-heres-a-way-to-let-a-robot-do-it-70a4587b?mod=markets_lead_pos4

Bond Investing Gets the Robo-Adviser Treatment

Wealthfront is offering an automatic portfolio just for bonds in response to surging interest in fixed income

By Imani Moise, The Wall Street Journal, June 7, 2023

…
Wealthfront, the robo-advisory firm, will offer customers an automatic portfolio made up of only bonds starting Wednesday. …

Wealthfront said this is the company’s first robo adviser product to automatically allocate customer funds across a mix of Treasury and corporate bond exchange-traded funds based on factors such as personal income, location and tax-filing status. The portfolio is managed by the company’s algorithms, which automate tax-loss harvesting.

With a current standardized yield of 5.48%, the new account type offers higher returns than most high-yield savings accounts, but is more liquid than certificates of deposit or I bonds. The advertised yield is after deducting Wealthfront’s standard 0.25% fee. It requires an initial investment of at least $500… [end quote]

I never heard of Wealthfront before. They have an algorithm that constructs and automatically balances accounts based on the risk preference of the investor.

Wealthfront gets a high grade from Investopedia.

Wendy

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I am confused a bit by your transition.

You start off by talking about building a bond ladder and holding such to maturity and that you don’t prefer mutual funds or ETFs for various reasons, but then move onto Wealthfront which is a fee-based program based on ETFs.

Is 25 basis points worth auto-rebalancing and auto loss harvesting (on taxable accounts) worth it? Very well could be. So few investors have any awareness around loss harvesting in my experience. That being stated, I would hope that for the foreseeable future, NAV losses on bonds will be nonexistent. The best opportunity to take them was largely over by the end of last year and early this year.

One thing I could not tell from their site is whether or not they use proprietary ETFs, publicly traded ETFs, and/or institutional ETFs (i.e. requiring a much larger investment than available to investors). The fee is one thing but the internal operating expense isn’t disclosed and that could make a big difference in a bond portfolio.

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I’ve been avoiding regular CDs because of this. Instead I buy brokerage CDs that never roll over by default (I think!).

In fact, lately the yields on treasury bills have been better than CDs, so I just buy T-bills every week instead. I’m keeping under a year or two, I don’t like the rates beyond two years. But I do have a few TIPS and I-bonds longer than 2 years of course.

If you ladder it properly, then it is usually liquid enough. At this point, for my fixed income, I am so laddered that there is stuff maturing every week, even twice a week because of how treasury bills are scheduled. For example, I have bills maturing 6/1, 6/6, 6/8, 6/13, 6/15, 6/20, 6/22, 6/29, and that’s just this month. So if I happen to need excess cash one week, I simply skip buying a new bill that week (and that will leave a hole in 8-weeks, 13-weeks, 17-weeks, 26-weeks from now on the ladder).

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Wealthfront blows.

Let’s say you have a portfolio of $1 MM (I assume most METARs are in this range). Wealthfront would charge you 0.25% of AUM to do their robo-thing, which translates to $2,500/year. But you can only deduct $3,000 of losses, so there is no way Wealthfront can be cost effective.

Ah, but isn’t it a pain to do the tax loss harvest thing? Not really. With a large-ish portfolio, it is dead easy to come up with $3,000 in losses. Daily fluctuations can be way more than that.

@Hawkwin points out that not many people understand tax loss harvesting. Fair enough, but you can meet with a tax accountant for an hour or two each year and go over tax strategy far cheaper than using Wealthfront.

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Unless you assume that someone wants to work for free, they all “blow”.

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That will be true if inflation declines to < 2.5% in the near term and stays there for 10 years, as predicted by the market. If inflation surprises durably to the upside (which it did in the 1970s) the bond market will eventually adjust by increasing yields.

I agree with your hope but I don’t think it’s 100% probability.

Wendy

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There is also a new ETF family that manages rollovers in governments/treasuries for us so we don’t have to buy Treasuries individually. Every maturity from 6 months to 30 years. https://www.ustreasuryetf.com/

I’ve bought XBIL, OBIL and UTEN.

No 3rd party (Wealthfront, Betterment, etc.) or TreasuryDirect account required.

FC

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XBIL - 0.15% expense ratio
OBIL - 0.15% expense ratio
UTEN - 0.15% expense ratio

One, you are dealing with a 3rd party, AND you are paying them for their services. Two, 0.15% to manage rollovers is quite a hefty fee. For example, in UTEN, they are taking nearly 5% of your income for this service! Rolling over treasury bonds is trivially easy and takes almost no time at all.

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Absolutely, suit yourselves!