Bond ETFs for income

Discussion in 'ETFs' started by Muffhands, Apr 16, 2018.

  1. 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.
  2. You seem to focus on ETFs which invest in corporate bonds. There are also several ETFs available which invest in Government bonds.
    I think that your questions can be answered by reading the documentation of the ETFs that you are interested in.
  3. Most of the documentation explains the specifics of the etf such as holdings, expense ratio, performance etc... I’m looking more for information regarding bond ETFs in general.

    AGG is a total bond market etf which includes both government and corporate bonds. I’ve read most of the information and just had those 2 questions regarding bond ETFs in general. I was also curious if there are any risks to them that are not easily foreseeable at face value. I am very familiar with stocks and options and I know
    there are uncommon but real scenarios that can be catastrophic and was curious to hear other people’s experience.

    I should’ve expected someone on ET to give an answer like “ read the documentation”... anybody else with some knowledge of the subject willing to help?
  4. ET180


    Hobby is right. Stop being lazy and read the f***ing documentation. If your wealthy friend is too lazy to do due diligence and understand how a potential investment works, consider investing in a bond fund such as Doubleline or whatever fund Bill Gross now manages. To answer your question, yes, of course any investment can go to zero. Bond ETFs continuously invest in government or corporate bonds so they own bonds of varying maturities, but usually target specific dates of maturities. For example, TLT targets 20 year treasuries and SHY targets 1 to 3 year. Consequently, SHY offers a much lower yield than TLT. If the bonds that they invest in default, that won't be good for the value of the ETF. The money you make on a bond ETF will be just like any other stock or ETF. It will depend on price sold - price bought + any dividends received. Dividends paid will be a function of maturity and credit rating -- factors of risk.
    HobbyTrading likes this.
  5. Who said we did not read the documentation. I’m asking for personal opinions. Is this what you tell everybody who asks a question about anything? To go read documentation? What is the point of this forum? This thread is asking for personal experience. I am well aware of documentation attached to the ETFs in question. Can you read the documentation about futures and learn everything you need to learn about trading futures? It’s about personal experience.

    Of course there are other ways to obtain the information. I figured asking a bunch of “experienced traders” their experiences would be beneficial. Guess we are lacking in that aspect. We are wealthy due to patience and diligence. I have managed the equities account to build it up to a multi million dollar portfolio. I asked a lot of questions to other people to do so. If you can’t help move along.
    Last edited: Apr 16, 2018
  6. 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.
  7. truetype


    I have plenty of experience trading bond ETFs but I don't know which way interest rates and credit spread will go in the next X years, any more than you and your wealthy family do. You pay your money and you take your chances. Find products from reputable sponsors with low annual fees. Or if you're a tinfoiler who believes ETFs are a fraud or scam, then buy bonds directly. Your wealthy family presumably has enough money to buy a diversified portfolio of direct issues.
    ET180 and Muffhands like this.
  8. That is correct. However, you also run that risk buying the underlying bonds due to the risk of default.
    Muffhands likes this.
  9. kj5159


    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.
    Muffhands likes this.
  10. carrer


    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.
    #10     Apr 16, 2018
    Muffhands likes this.