Short-term Bond Funds

Investing Strategies Technical Trader's Sanctuary
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By and large, bond funds are to be avoided as opposed to owning the underlying directly. (Bonds mature. Bond funds don’t.) However, bond funds can be a means to access fixed-income asset classes that don’t readily come onto the secondary market, such as foreign sovereigns. Also, sometimes, as back in '95, the gains can be fabulous, like, 54% in a year’s time for owing AmCent’s fund that held LT Treasury zeros.

Market commentators like to believe that the Fed controls interest rates. It doesn’t. The bond market itself says yea or nay, up or down, by being willing to lend our dear gov’t money by buying its debt or by backing way at the auctions. Right now, T-bills are offering an average of 5.4%, which is what ultrashort bond funds should be offering as well (minus their expense fees).

However, when you pull the ETFs that Morningstar puts into that category, it can be discovered that some of them are offering nearly as much as 14% over the past year --when divs are backed in-- which is SERIOUS MONEY, given how low the volatility of the daily prices are. So, the research question becomes this.

“How much money should be allocated to this trade and how to implement it?”

Give me some time to build some charts and to double-check my numbers, and then I’ll name some tickers that could be considered (or at least what I’ve decided to buy).

Charlie

PS As I mentioned in another thread, or maybe it was in an email to Quill, I’m dropping my involvement with stocks in favor of focusing on ETFs as a way to cut my back-office work down to more reasonable hours. (I’m supposed to be retired, not back to putting in 30+ hour weeks grubbing after money I don’t need.)

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OK. I now own a basket of 15 ultrashort bond ETFs.

Took some scrambling this morning to get fills and a tiny bit of adjusting as to which ones I bought. (FUSI was just too illiquid to fuss with.) In general, I had to use market orders, and since this is just a low-budget experiment (roughly, $100 per position), I didn’t care about trying to get the very best price, and I paid up the penny or two I had to in order to get fills.

Below is what I bought where the second column is my estimate of the 1-yry total gain (price change plus divs paid) and the third is Yahoo’s estimate of the current-yield.

|UYLD|7.19%|6.07%|Angel Oak Ultrashort Income ETF|
|CLOA|8.84%|6.14%|BlackRock AAA CLO ETF|
|ICLO|8.88%|7.94%|Invesco Aaa Clo Floating Rate Note ETF|
|VRIG|7.46%|6.26%|Invesco Variable Rate Investment Grade ETF|
|FLOT|6.84%|5.82%|iShares Floating Rate Bond ETF|
|LQDH|11.86%|8.07%|iShares Interest Rate Hedged Corporate Bond ETF|
|IGBH|13.79%|7.29%|iShares Interest Rate Hedged Long-Term Corporate Bond|
|JAAA|9.12%|6.31%|Janus Henderson AAA CLO ETF|
|CLOX|6.85%|6.00%|Panagram AAA CLO ETF|
|PAAA|7.11%|6.50%|PGIM AAA CLO ETF|
|PULS|6.68%|5.67%|PGIM Ultra Short Bond ETF|
|FLRN|6.70%|5.77%|SPDR® Bloomberg Investment Grade Floating Rate |
|CLOI|9.28%|5.89%|VanEck CLO ETF|
|FLTR|7.84%|6.21%|VanEck IG Floating Rate ETF|
|PULT|6.33%|5.64%|Putnam ESG Ultra Short ETF -|

My thinking is this. T-bills are currently offering around 5.4% for the 4-week though 17-week. When adjusted for my marginal, state tax-rate of 9%, that offers me a yield of about 5.9% for an “investment” without ‘price risk’. That’s mattress money. A 5.9% yield doesn’t keep up with inflation, especially not after the IRS takes their cut. But it’s not money I have to manage. It’s money I don’t have to worry about, and 55% of AUM is parked there.

If you chart any of the 61 ultrashort bond ETFS there are, what you’ll notice is how steady --an unexciting-- their charts are. If you pull standard deviation data on them, you’ll note the same. One day is as good as another to be buying them. Therefore, what matters is the size and regularity of the divs. With a couple of exceptions, I selected for those offering above 6%. (If they offer less, why no buy T-bills instead?) So the diff between the after-tax yield on a ultrashort bond ETF and the after-tax yeild on a T-bill becomes one’s ‘risk-prem’.

The prems are going to be small, because the risks are small. But allocating a few bucks to the project seemed to me worth doing. Over the weekend I’ll dig into the other 3,500 or so ETFs there are and create similar baskets. (I never make focused bets, and I’m comfortable carrying hundreds of positions.)

Charlie

Standard Disclaimers: The preceding is NOT investment advice and any securities mentioned could easily be sold soon.

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OK. I’m now long a small basket of Bank Loan ETFs (TFLR, CLOZ, JBBB, LONZ, MBSF) that offer an avg yld of 8%.

It’s a small money bet (typ., 1 or 2 shares), and the shares will come under risk if the Fed is forced to raise interest rates, which I do expect will happen as the rest of the world increasingly de-dollarizes. Some of the funds can respond to rising rates. Some will get clobbered. It’s going to take further research to figure out which is which, but I wanted to get the position on, because I have another dozen baskets to launch. (Bets on country funds, commodity funds, sector funds, etc., plus I need to put into place hedges on the whole project, which means lining up which inverses and/or options strategies to use.)

Standard Disclaimers: This is a research project for me, not an investing campaign, whose purpose is explore using ETFs to get long or short across the various asset classes against the time --coming soon-- when markets go crazy again, as they’ve done many times before. Do your own Due Diligence.

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Thanks for the posts, always good to see what is out there. My two cents that I’m adding on really belongs on the Fixed Income board, not this one, but I’ll attach it here since I’m referring to a few of the above exchange traded funds (ETF)s.
I noticed that several were named “AAA CLO.” I got a big laught out of this name, because I think is an oxymoron. AAA is the rating, meaning the “bonds” that the ETF holds are extremely safe…very little chance of defaulting. CLO means collateralized loan obligation. Here is one definition of a CLO: “A CLO is a single security backed by a pool of debt, which is typically composed of 150 to 300 leveraged loans. The loans are usually first-lien senior-secured bank loans to companies with below-investment-grade credit ratings.” For anyone that isn’t aware of what happened in 2008, you can just watch the movie “The Big Short” or read the book.
Another term to consider is “ultrashort.” What ultrashort might mean to one person might not be the same as what it means to the ETF managers. (I’m tempted, but I’ll refrain from making any crude jokes here).
As Charlie says, people should do their due diligence before investing in anything (and don’t be fooled by a name, and don’t be fooled by a rating).
What I’ve been doing lately is buying treasury bills or short term certificates of deposits from FDIC insured banks.
And since its Memorial Day week-end, a big thank you to the soldiers and sailors that serve as honor guards at veteran cemetery services. Although you never knew the deceased and you do not know any of the survivors…believe me, you bring a lot of comfort and honor to both the deceased and the survivors.

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Blacktree,

I didn’t post at the Fixed-Income board, nor at the board for ETFs, because both are all but dead. Also, because my mention of ultrashort bond ETFs is just a small part of a larger research project, namely, setting up a method to trade any ETF on an EOD basis, which is part of a still larger project, namely, getting ready for the coming crash.

Yeah, it’s Memorial Day once again and time to think of service members, both past and present. My Dad did anti-sub patrol in the North Atlantic. My daughter saw frontline action in the Gulf. Me? I was a military sub-contractor, repairing war ships. Hopefully, cooler heads will prevail in the current conflicts and the world can move toward settling disputes through diplomacy rather than bombs.

Charlie

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Ticker 		Basis  		      Value		      P/L		Name
CLOI		$105.92 		$105.86 	   -0.06%		VANECK CLO ETF
CLOA		$103.80 		$103.92 		0.12%		BLACKROCK AAA CLO ETF IV
ICLO		$102.54 		$102.64 		0.10%		INVESCO AAA CLO FLTNG RATE ETF
CLOX		$102.28 		$102.42 		0.14%		PANAGRAM AAA CLO ETF
FLOT		$102.12 		$102.20 		0.08%		ISHARES FLOATING RATE BOND ETF
PAAA		$102.04 		$102.13 		0.09%		PGIM AAA CLO ETF
UYLD		$102.04 		$102.10 		0.06%		ANGEL OAK ULTRASHORT INCOME ETF
FLTR		$101.92 		$102.00 		0.08%		VANECK IG FLOATING RATE ETF
JAAA		$101.66 		$101.74 		0.08%		JANUS HENDERSON AAA CLO ETF
PULT		$100.86 		$100.86 		  0%		PUTNAM ESG ULTRA SHORT ETF
VRIG		$100.40 		$100.52 		0.12%		INVSC VARIABLE RT INVSTMNT ETF IV
PULS		$99.38 		     $99.40 		0.02%		PGIM ULTRA SHORT BOND ETF
IGBH		$98.44 		     $98.60 		0.16%		ISHARES INTE RAT HED LNGTRM COR ETF
LQDH		$93.95 		     $94.10 		0.16%		ISHARES INTERST RATE HDGCOR BND ETF
FLRN		$92.49 		     $92.52 		0.03%		SPDR BLOOMBERG INT GRD FLT RT ETF


             $1,509.84 		$1,511.01 		0.08%

I put these 15 positions on Thursday midday, May 23. The P/L is of Friday’s close, May 24. The gain might seem tiny, just 8 basis points. But is it?

Let’s say --for the sake of being conservative-- that the holding period is two market days. In a year’s time, there are roughly 250 market days (due to subtracting weekends and the ten market holidays that happen each year.)

4 bps per market day times 250 market days is 1,000 bps, or a very respectable 10% per year, or about the long-term historical average offered from owing stocks, and the dividends yet to be received haven’t been factored in.

Just as “One swallow does not a summer’s day make”, a portfolio held just two market days isn’t a yet serious investment campaign. But the first shot has been fired, and the enemy --which is the fear of making a mistake and suffering a loss-- is in retreat.