Bond ETFs for income

[ET180]

Not all investments can go to zero... can an investment in an snp500 index fund go to zero? Im not asking if something is theoretically possible but probable I’m asking for personal experience with bond etf investing, which it is apparent you have none. Run along.

As if capital preservation doesn't matter to older wealthy bond investors...sure, just tell your friend that you've asked some basic questions on an internet forum (some of which could have been answered by common sense) and his multi-million dollar investment in high yield junk bonds probably won't go to zero so he has almost nothing to worry about. Btw, even if you did not read the prospectus, why not pull up a chart and look at what happened to some of these bond ETFs back in 2008 / 2009. Along with the yield, that will give you some idea of the level of risk involved.

 

[stockmarketbeginner]

I have a wealthy family member that is trying to obtain a steady stream of income using the money that have built up in the stock market over the past 10 years. We were looking at a bond ETF like VCSH or AGG. Also I found some junk bond ETFs that pay a higher yield. My question is

Since the bond etf does not mature, you have a risk of not being repaid the total amount of capital. The amount you get “repaid” just depends on the price of the bond etf when you sell it? Is that accurate. Can these bond ETFs go to zero?

Also, if a company defaults on the bond, how much of an affect will that have in the etf or yield, considering some of these ETFs hold thousands of corporate bonds.

What other risks are we looking at by using these instruments? Are they considered generally safe for preserving capital and creating income streams? Thanks.

When interest rates rise, existing bond values fall. Some of the experts around here can provide some details. But in a rising interest rate environment, I'm not sure if a bond fund is going to be so great.

 

[Muffhands]

When interest rates rise, existing bond values fall. Some of the experts around here can provide some details. But in a rising interest rate environment, I'm not sure if a bond fund is going to be so great.

Yeah but to me that just seems like timing the market. Isn’t that like saying certain times are bad for being in equities. I think if I’m looking for the long term (5-10 years) it doesn’t really matter what rates are doing right?

 

[kj5159]

If you buy a bond and hold it to maturity, assuming the issuer doesn't default, then rising rates won't matter to you. The bond will lose value when it is marked to market but if you're just going to hold it to maturity regardless you get repaid face value.

 

[Sig]

If you buy a bond and hold it to maturity, assuming the issuer doesn't default, then rising rates won't matter to you. The bond will lose value when it is marked to market but if you're just going to hold it to maturity regardless you get repaid face value.

True. But keep in mind that if you buy a 10 year bond at 2% and interest rates go to 10% in year 2, you lose out on 800 basis points worth of interest for 8 years. That's exactly reflected in the amount the bond decreases in value in year 2. So the fact that you get repaid face value at the end of 10 years is somewhat of a red herring and rising interest rates do matter.

 

[kj5159]

True. But keep in mind that if you buy a 10 year bond at 2% and interest rates go to 10% in year 2, you lose out on 800 basis points worth of interest for 8 years. That's exactly reflected in the amount the bond decreases in value in year 2. So the fact that you get repaid face value at the end of 10 years is somewhat of a red herring and rising interest rates do matter.

Yeah well there's that. LOL.

 

[srinir]

True. But keep in mind that if you buy a 10 year bond at 2% and interest rates go to 10% in year 2, you lose out on 800 basis points worth of interest for 8 years. That's exactly reflected in the amount the bond decreases in value in year 2. So the fact that you get repaid face value at the end of 10 years is somewhat of a red herring and rising interest rates do matter.

While it is true, coupon is reinvested at higher interest rates. So total return over that 10 year is higher. Duration of the bond is the breakeven period, provided coupon is reinvested.

I picked random article from internet, but one can workout the details
https://www.schwab.com/resource-cen...-bonds-or-bond-funds-when-interest-rates-rise

Inflation is higher threat for the bonds than the rising rates.

 

[Sig]

While it is true, coupon is reinvested at higher interest rates. So total return over that 10 year is higher. Duration of the bond is the breakeven period, provided coupon is reinvested.

View attachment 184866

I picked random article from internet, but one can workout the details
https://www.schwab.com/resource-cen...-bonds-or-bond-funds-when-interest-rates-rise

Inflation is higher threat for the bonds than the rising rates.

A good point. Alternately when your current 10 year treasury rate is 2.8%, not a whole lotta coupon to invest.

 

[Muffhands]

If you buy a bond and hold it to maturity, assuming the issuer doesn't default, then rising rates won't matter to you. The bond will lose value when it is marked to market but if you're just going to hold it to maturity regardless you get repaid face value.

Yes but a bond etf does not mature. I’m asking specifically about bond ETFs

 

[sss12]

Yes but a bond etf does not mature. I’m asking specifically about bond ETFs

see my post #15