1. Claymore Introduces Term Corporate Bond ETFs: The most important risk of an investment grade bond fund is interest rate risk. Credit risk exists, but is muted by the quality of the bonds and the diversity of holdings. Since the typical bond fund has no maturity, the investor is subject to a loss in value during periods of rising interest rates that can become acute when that rise occurs rapidly and/or over a long period of time measured in years. The owner of the individual bond always has the option of holding it to maturity and will be paid the bond's par value assuming the issuer is not bankrupt. That option mitigates interest rate risk. It does not eliminate it, particularly for long dated paper, since the investor is still subject to lost opportunity risk. If you buy a 10 year bond with a five per cent coupon and rates go to 10% for that issuer, the five percent coupon will lose a lot of its value, which could be recouped at maturity, but the investor loses the opportunity of investing those funds at a higher rate for those funds tied up in the 5 year bond. So, there is a trade off. To reduce interest rate risk, I can invest in a variety of individual bonds, but that may end up enhancing my credit risk compared to a more broadly diversified bond fund. I do not buy the argument about the expertise of bond fund managers except for individuals who do not have the time or the background to make their own selections. To prove that point, I think that the investor needs to compare the performance of their bond fund manager with a comparable bond index fund.
In earlier posts, I mentioned that Western Asset had introduced two term closed end bond funds, IGI and GDO, and I bought shares in both of them. Those two funds liquidate in 2024. The liquidation term date reduces interest rate risk inherent in bond funds. (see discussion: ITEM # 3 Bought 100 CEF IGI at $19.89; Item # 1 Bought 100 of the CEF GDO at 18.6; Item # 2 Interest Rate Risks- Bonds; Bond and Bond Funds).
Claymore has just introduced several low cost ETFs that invest in corporate bonds. These funds have term dates. Exchange-Traded Funds - ETFs - Claymore Securities, Inc. (scroll down to heading "fixed income"). There are seven such ETFs, with the first term date in 2011 and then one for each subsequent year, ending with 2017. Each of the funds will terminate on or about December 31. Distributions are paid monthly. The expense ratio is listed at .24%.
One problem that I have noted about these ETFs to date is their lack of volume. The bid/ask spread generally ranges in the five to ten cent range. The bid may be a few cents above the last posted net asset value. I decided to go ahead and buy one yesterday in my regular IRA, but I first had to sell IGI to do it. (See Below)
I mentioned in a prior post that Ishares has a similar product for municipal bonds. See Item # 10 /Target Date Muni ETFs
2. Added 30 shares to GE position at $15.64 (see Disclaimer): Over the past couple of years, I have been buying a small number of GE shares in the $10 to $16 range, whenever the spirit moves me, and I have been reinvesting the dividends. I view the dividend cut during the Near Depression period in an extremely negative manner. More competently run industrial companies such as Emerson Electric maintained and increased their dividends. The managers at GE Capital apparently had the peddle to the meddle going into the credit crisis and there is nothing positive that can be said about their judgment. Still, GE has the potential to rise from its numerous self-inflicted wounds, provided a worldwide recovery continues. The current managers need a good wind at their backs to move forward. Given the lackluster performance, this kind of buy will by necessity have to be long term, and any improvement in the share price will at best be slow.
Some of the GE units do appear to be competently managed, including the ones that manufacture wind turbines and locomotives.
My last add was at 15.48 last December. In addition to those shares I added the following in 2009: 50 shares at $12.54 on 1/23; 30 shares at $11.16 on 2/18; and 30 shares at $12.02 on 6/24.
3. Moody's Downgrade of Greek Debt: The market lost some of its upward momentum yesterday after Moody's downgraded Greek government debt to junk. CNBC Did anyone really believe that it was investment grade? I do not currently own any Ford Motor Credit debt. But I asked myself yesterday, if I had to choose between buying Greek government debt now one notch into junk at Moody's (Ba1) or Ford Motor Credit debt rated Caa1 by Moody's, which would I view as less risky, recognizing that both are very risky? Even after the downgrade, Moody's views Greece as a better credit risk than Ford Motor Credit. I would characterize the Ford Motor Credit debt as less risky than Greek government debt, notwithstanding Moody's lower rating. I do not own either.
4. Sold 100 BTZ at 11.84 (see Disclaimer): This position was in the Roth IRA and the security just went ex dividend. I decided to sell it after noticing that this CEF cut its monthly dividend by $.021 to $.079. I bought those shares last October at $11.45, so I had a negligible profit in the shares plus several monthly dividend payments. I also want to raise some funds in the retirement accounts so that I can place a bid on one of the new Claymore term corporate bond ETFs.
5. Sold 100 IGI at $21.26 (See Disclaimer): This is a term CEF that invests mostly in U.S. investment grade corporate bonds. After learning about the Claymore ETFs over the weekend, I decided to substitute one of them for IGI. The expense ratio is lower for the ETFs and I can choose a shorter term. The liquidation date for IGI is in 2024. I bought the IGI shares in a regular IRA last February at $19.89. This CEF is currently trading at a premium to its net asset value. CEFA - Closed-End Fund Association Since I am not aware of an ETF that is similar to GDO, I am inclined to keep my 545 shares in that CEF. Other reasons supporting a decision to keep GDO is its larger monthly dividend and its discount to NAV.
6. Sold 200 of the 400 ACG in the Roth (see Disclaimer): I needed to raise funds in the Roth to buy a Claymore term bond ETF. I am more comfortable with those ETFs than with a leveraged bond fund with no term date. The shares were sold at $7.98, a slight loss on the shares, but near breakeven adjusted for two monthly dividends.
7. Bought 100 BSCF at $20.18 (see Disclaimer): I accounted for all of the trading activity on this one yesterday. This is the new Claymore ETF for investment grade corporate bonds with a liquidation date in 2015. The bid/ask spread was $20.11/$20.18. At the time that I placed the order, I suspected that even the bid price was at a slight premium to this ETFs net asset value which was shown at the Claymore web site at $20.05 as of 6/11/2010: Claymore BulletShares 2015 Corporate Bond ETF - BSCF The inception date for this ETF was 6/7 so there is no dividend history yet. Dividends will be paid monthly. The expense ratio is .24%. This is a link to a list of the current holdings as of 6/11, which is of course subject to change on a daily basis : Claymore BulletShares 2015 Corporate Bond ETF - BSCF - HOLDINGS I will probably be paid less on a monthly basis than with IGI. However, I have a nine year earlier liquidation date with BSCF which cuts down on the interest rate risk and the risk of lost opportunity. I would expect interest rates to be significantly higher in five years than they are now which hopefully will give me the opportunity to buy something with more yield in December 2015 when BSCF liquidates.
The NAV for BSCF as of the close yesterday was $20.02, so for convenience I paid a $16 premium on those 100 shares. IGI closed yesterday at $21.24, a 3.86% premium to its net asset value of $20.45 (79 cents per share or a $79 premium on 100 shares)
8. Ongoing De-Risking in Retirement Accounts: I would call the moves described above in Items 4-7 as part of an ongoing process of de-risking, or more appropriately described as risk reduction, in the retirement accounts, where the focus has been almost entirely on current income generation. This has been progressing for about a year now, as all stock mutual funds have been jettisoned, and I am down to just two individual stocks, DD and NYB, both bought at prices that give me current yields in the 9% to 10% range at my purchase cost: Item # 4 Added 50 NYB at $10.57 Added 50 NYB at 10.9 Buys of IR & DD at 16.68/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology I am left now with mostly investment grade bonds bought at favorable prices, particularly during the Near Depression period (e.g. JZH, KTN); a few REIT preferred stocks bought at prices to yield 15 to 25% (e.g. SLGPRC, LXPPRD, FRPRK); a limited number of better quality junk rated bonds (e.g KRH, PKM, DHM); the Met Life floater (METPRA) purchased at an absurdly low price; small amounts in the Aegon (AEB, AEF, AEH at a ridiculous $4.63) and ING (e.g. INZ at less than $8) hybrids bought at very favorable prices during one of their meltdowns; CPI floaters such as Prudential's PFK; 10 year TIPs bought at the treasury auction; small positions in 3 stock CEFs that pay good dividends (e.g. BCF, JSN); a few recently acquired investment grade corporate bonds mostly in trust certificate form that yield over 8% at my cost (e.g. GFW, DFY, & DKK); some synthetic floaters bought at favorable prices (e.g. PYT, GYB, GYC); a few bank TPs (e.g.BACPRW); and lastly a few exchange traded principal protected notes as the primary means for achieving equity exposure.
The retirement accounts held up much better in 2008 and early 2009 than the taxable accounts due to my conservative management of them, and returned to pre-October 2007 levels far quicker. I would estimate that they are up about 25% since 10/2007 now adjusted for subsequent contributions (3 $6,000 in January 08, 09, & 10), but not returns on those contributions.
I can manage the retirement accounts this way because I do not anticipate needing them. And if I ever needed them, the money better be there and not somewhere in money heaven. Most likely, if most of my retirement needs were in the IRA accounts, I would manage them somewhat differently. But, I found that the bonds gave me a huge appreciation lift after purchasing them mostly in the October 2008 to May 2009 time period, possibly a once in a lifetime opportunity, though I expect little or no further appreciation in price from either the bonds or the bond like investments going forward. Instead, I am now just satisfied with the income being thrown off, over 10% based on my cost. I am investing that income in other income generating securities as soon as it reaches a level permitting me to do so. This compounding effect over time is a less volatile way to achieve my objective for these accounts over time.
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