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One attraction of individual bonds is that you can plan on the value
at maturity. Bond mutual funds do not mature. I would like to know
how a Bond ETF works at maturity,
For example the iShares Lehman MBS Bond Fund (http://us.ishares.com/
product_info/fund/holdings/MBB.htm) is all high quality corporate
bonds. Apparently 99% of the bonds in this ETF mature in Nov 2008.
What happens then? Does the holder receive the face value at
maturity? Does the manager reinvest the money in a new portfolio?
Thanks
Frank
On Oct 30, 5:30 am, FranksPlace2 <F...@g...com> wrote:
> maturity? Does the manager reinvest the money in a new portfolio?
Your MBB example appears to keep rolling over to another uniform bunch
of bonds due a few months out; not sure how. But there is an etf PLW
that replicates a tbill ladder, although thru an index. I always
thought laddering was a ridiculous amount of upkeep for individuals
and why not let a managed product do it, but maybe it can't work with
something you can sell at any time.
I hear a lot of etfs are struggling and subject to being shut down due
to not covering their expenses. I would guess some of these are bond
etfs, because their trading seems so darn light - you may be lucky to
see a price-setting trade on any given day. For these I am told you
will see a surprise return of your money with no brokerage fee.
dumbstruck wrote:
> I always
> thought laddering was a ridiculous amount of upkeep for individuals
> and why not let a managed product do it, but maybe it can't work with
> something you can sell at any time.
It's not so much the effort but individual commissions that can add up
to more than the expenses of an ETF.
Starting the ladder takes a number of bonds, but keeping it up is
trivial, what upkeep?
Joe
"FranksPlace2" <F...@g...com> wrote in message
news:a1779c62-a9af-47f6-a898-cc4128d343ac@b1g2000hsg
.googlegroups.com...
>
> For example the iShares Lehman MBS Bond Fund (http://us.ishares.com/
> product_info/fund/holdings/MBB.htm) is all high quality corporate
> bonds.
>
No it is not. The fund does not hold any corporate bonds, it holds MBS
securities. With the exception of a short term holding, all the holdings are
agency MBS.
"The iShares Lehman MBS Bond Fund seeks investment results that correspond
generally to the price and yield performance, before fees and expenses, of
the investment grade agency mortgage-backed securities sector of the United
States as defined by the Lehman Brothers U.S. MBS Index."
FranksPlace2 <F...@g...com> writes:
> One attraction of individual bonds is that you can plan on the value
> at maturity. Bond mutual funds do not mature. I would like to know
> how a Bond ETF works at maturity,
When a bond matures, the principal may be reinvested by the
manager. Interest received must be distributed to shareholders,
as well as any net capital gains due to transactions.
> For example the iShares Lehman MBS Bond Fund (http://us.ishares.com/
> product_info/fund/holdings/MBB.htm) is all high quality corporate
> bonds. Apparently 99% of the bonds in this ETF mature in Nov 2008.
You're somewhat mistaken. The average duration of
that fund is 4+ years. The effective maturity of the
bonds in the fund is probably more than twice as long as that.
However:
What the fund holds are not the actual mortgage backed
securities. See where it says "TBA" next to the names
of all those securities? Those are standardized forward
contracts for future delivery of mortgage-backed securities.
These TBA contracts ("To Be Announced"). This isn't a bad
explanation of them: <http://www.investopedia.com/terms/t/tba.asp>
The ETF in question holds a huge exposure to both 30yr
and 15yr fixed rate mortgages via these TBAs. They very
likely won't actually take delivery of those mortgages
(ie. they won't hold those forward contracts to their
maturity) but rather will "roll" them forward - as
we get closer to the November maturity you saw there,
they'll sell November TBAs and buy December ones. This
way they maintain relatively constant exposure to the
value of the mortgages, but don't have to take delivery
of all these individual securities.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
FranksPlace2 wrote:
> One attraction of individual bonds is that you can plan on the value
> at maturity. Bond mutual funds do not mature. I would like to know
> how a Bond ETF works at maturity,
>
> For example the iShares Lehman MBS Bond Fund (http://us.ishares.com/
> product_info/fund/holdings/MBB.htm) is all high quality corporate
> bonds. Apparently 99% of the bonds in this ETF mature in Nov 2008.
Frank, bond ETFs and mutual funds will have bonds maturing frequently,
and in both the manager just reinvests the proceeds (assuming the cash
isn't needed for redemptions or distributions). ETFs and mutual funds
that track bond indices try to match the composition and performance of
the index as closely as possible, and that goal will drive decisions
about what bonds are bought and sold.
Bonds aren't necessarily held till maturity though, and there's often
quite a bit of turnover because the main goal is to match the index with
respect to duration (average term of the bonds) and credit quality.
The specific ETF you mentioned is unusual in that it holds what are
called "TBA bonds," which are a way of trading mortgages that haven't
been packaged into bonds yet. The bonds don't really mature in Nov 2008,
that date has to do with the naming convention for TBA bonds. You might
want to read up on the mortgage-bond market a bit if you're looking at
that ETF; it isn't as straightforward as say a treasury bond index fund.
-Tad
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