Bond ETFs for income

[Muffhands]

Thank you guys for helping. Can you lose your entire principle in a bond ETF like shyg or AGG? Or is the risk just in the etf price being lower than when you initially purchased it. It’s seems highly unlikely that it would go to zero as it is highly diversified. I appreciate the help without the criticism.

 

[Sig]

Tell your friend to look into fixed annuities, it sounds like they want no/minimal risk and steady income, that's called a fixed annuity.

That's kind of a funny statement given the context of the conversation. Let's say company X offers you a fixed annuity in exchange for your $1M. They go bankrupt. At that point you become essentially an unsecured creditor (somewhat oversimplified). As opposed to buying a senior bond from the same company, where you would be a secured creditor in the event of a default, and probably get a better interest rate to boot. So if you want no risk an annuity isn't it, it's actually riskier than bonds in the annuity company would be.

 

[Sig]

Diversify them to fix deposits around the world. Third world countries or developing countries. You could get about 5-10% easily. Buy their government bonds for higher yields.

Risk adjusted returns are the same no matter where you buy the bond. Developing country bonds have a higher yield to reflect both the higher risk, and if they're not denominated in USD to reflect the interest rate differential. There is no free lunch there.

 

[sss12]

That's kind of a funny statement given the context of the conversation. Let's say company X offers you a fixed annuity in exchange for your $1M. They go bankrupt. At that point you become essentially an unsecured creditor (somewhat oversimplified). As opposed to buying a senior bond from the same company, where you would be a secured creditor in the event of a default, and probably get a better interest rate to boot. So if you want no risk an annuity isn't it, it's actually riskier than bonds in the annuity company would be.

In addition, even if they did not go belly up, you have the honor of paying very high fees on what is essentially a short fixed income port.

 

[sss12]

Thank you guys for helping. Can you lose your entire principle in a bond ETF like shyg or AGG? Or is the risk just in the etf price being lower than when you initially purchased it. It’s seems highly unlikely that it would go to zero as it is highly diversified. I appreciate the help without the criticism.

And my two cents to the question the OP asked. Obviously this is very generic....Ladder a portfolio of corp and muni (depending on domicile of state) individual bonds, keep the credit rating relatively high with the bulk of the fixed income portfolio. You define "bulk "based on investors risk profile and income needs.

Then use the EFT and CEF universe to get exposure to the more exotic/aggressive sectors. HY, MLP, REIT and foreign and world dollar funds.

 

[kj5159]

That's kind of a funny statement given the context of the conversation. Let's say company X offers you a fixed annuity in exchange for your $1M. They go bankrupt. At that point you become essentially an unsecured creditor (somewhat oversimplified). As opposed to buying a senior bond from the same company, where you would be a secured creditor in the event of a default, and probably get a better interest rate to boot. So if you want no risk an annuity isn't it, it's actually riskier than bonds in the annuity company would be.

Insurance companies and the policies they write are insured by the state government where the insurance company is incorporated. That's why they are legally allowed to say "guaranteed income", if the insurer goes bankrupt the policy holder is protected. This is the whole reason insurance companies have capital requirements and leverage limits and credit ratings etc. is to make sure the state they are headquartered in is protected and able to pay if/when the insurer goes under.

The only potential risk there is opportunity cost if you're waiting for this claim to be paid in the event of the insurer's bankruptcy.

Could also buy CD's or treasuries.

 

[sss12]

Insurance companies and the policies they write are insured by the state government where the insurance company is incorporated. That's why they are legally allowed to say "guaranteed income", if the insurer goes bankrupt the policy holder is protected. This is the whole reason insurance companies have capital requirements and leverage limits and credit ratings etc. is to make sure the state they are headquartered in is protected and able to pay if/when the insurer goes under.

The only potential risk there is opportunity cost if you're waiting for this claim to be paid in the event of the insurer's bankruptcy.

Could also buy CD's or treasuries.

Yeah, this is what I want when I create a FI portfolio. To be "waiting for a claim to be paid on MY ENTIRE PORTFOLIO in the event of ...bankruptcy".

ALSO....At these i rates I consider CD/treasuries as a cash substitute, not a investment portfolio. But that is only my view.

 

[kj5159]

Yeah, this is what I want when I create a FI portfolio. To be "waiting for a claim to be paid on MY ENTIRE PORTFOLIO in the event of ...bankruptcy".

ALSO....At these i rates I consider CD/treasuries as a cash substitute, not a investment portfolio. But that is only my view.

I don't disagree with you. Just wanted to point a guy in a good direction rather than a never maturing bond fund.

Meh, I'm not getting paid a commission either way

 

[sss12]

I don't disagree with you. Just wanted to point a guy in a good direction rather than a never maturing bond fund.

Meh, I'm not getting paid a commission either way

I get where you are coming from. But to digress a little....weren't policy holders of AIG contracts getting a little nervous in 08/09 before Hank helped them out ?

 

[Sig]

Insurance companies and the policies they write are insured by the state government where the insurance company is incorporated. That's why they are legally allowed to say "guaranteed income", if the insurer goes bankrupt the policy holder is protected. This is the whole reason insurance companies have capital requirements and leverage limits and credit ratings etc. is to make sure the state they are headquartered in is protected and able to pay if/when the insurer goes under.

The only potential risk there is opportunity cost if you're waiting for this claim to be paid in the event of the insurer's bankruptcy.

Could also buy CD's or treasuries.

They actually aren't all insured or insured all the way. It's more like a levy goes out to the remaining insurance companies when one goes under (obviously a bit oversimplified), which seems like contagion waiting to happen. Especially if the state is somewhere like Nebraska where they can't even a fund a 5 day school week.