par value;
“n. Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments.Nov 28, 2017″ –Google search
Buying
bonds by the bag nay be simple, quick, or frustrating. Comprehending the consequences may require a touch of learning–or three straight days of continuous drill-down. Bonds can be some of the most secure investments on the rack. However bond funds add ongoing layers of fees that seriously compound over time. Additionally, you face complexity–to an already confusing vehicle. We have the basics, in ultra-fast simple terms–and a Pair to Compare. We also provide safe and stable stock alternatives that pay more.
Look inside first. A blind bond bag can prove as much fun as gastrointestinal surgery. Who knows what bond ETF mangers have tossed in while you were supposedly sleep-buying? And the expense ratio and yield and share price fluctuation? All count. Gas us if you want, but we’re still awake. Adding up too.
Why worry? “Bombs–oops, bonds, are the safest.” Does that include Italian junk? Advisers will tell you that holding bonds is “wise,” a “must.” It’s called diversification. The older you get the more you need. Well yeah, if your nest egg’s the size of an airport. Ours isn’t. When bond buying go with the local. You wanna be awake for this one.
We
know we know. That lead image is shameless pandering. But we don’t mind–not anymore. Nor would those flogging funds. Just because we’re jazzed by reading and researching any aspect of investing, doesn’t mean others are. But then, the above image could have read “In love with her long term? Own bonds. Own a hellacious mob of bonds.” Maybe.
Bonds are born at “bond auctions,” or “offerings.” Ever after they trade in the “secondary market,” at either a “premium” or a “discount,” to par. The law of supply and demand rules there. Volatile or declining equity markets control demand. All that is tracked by one number–the “yield.”
The smaller your nest egg the less time you have. Bonds take time. Bond funds pay by the penny and charge by the day. That’s when they’re “working.” Bond funds trade by the share. That makes them stock market instruments, not bonds. They just own bonds underneath.
If you’re in the stock market make it pay. Otherwise don’t take on market risk. Dodge fees and simply buy bonds directly. “Diversification” you’re asking? If you bonds are that unsafe, what are you really gaining by owning them? You certainly aren’t being paid much. Excessive conservatism is also a risk, and a cost–opportunity cost. How much time do you have laying around? Life won’t wait forever.
Bonds will love you for a long time–the right ones anyway. Same same for the right bond ETF. A low expense ratio and a working understanding of bonds are key.
Are bond ETF’s a good investment? Will bond ETFs work in 2019? Well, yes–bond ETFs too. But bonds in action are similar to the Rubik’s cube. When Erno Rubiks was inventing his cube he was thinking “bonds.” Cubes are brilliantly clean and straightforward, until in the hands of financial “innovators.” Those are the people who also invented the “collateralized debt obligation,’ or “CDO.”
ETFs kill when they become overly complex, costly, or create overlap in your portfolio. Every overlap layers cost, which itself compounds over time.
The ETF, or exchange traded fund was designed for speed, ease, and efficiency. Built-in diversification is great. Vanguard invented the vehicle to provide busy people simple exposure to a complex market. ETFs ETFs also offer all-day trading, unlike their forerunner the mutual fund. Prior to that, the once-loved mutual fund was the only way to “buy the market” in one vehicle. Mutual funds suffer from three–oops–six major problems.
STOCKjAW covers the many troubles of the dated mutual fund in “The McMutual Fund. Fries And A Funky 5.75% McLoad.”
https://stockjaw.com/2017/11/25/the-mcmutual-fund-fries-and-a-funky-5-75-mcload/
-A Pair to Compare-
The SPDR GOVT U.S. Treasury
GOVT; iShares U.S. Treasury Bond ETF
Net assets 6.9B, Inception 2-14-2012. Total holdings 117. All AAA rated.
Net expense ratio 0.15%. Excellent.
FUND RETURN
Figures do not include net expenses.
(ALL DATA IN %.)
1Y 3Y
Price movement alone.
$SPX -6.19 29.5
GOVT -0.64 – 2.6
(ex. distributions, loads, redemption fees, or tax implications.)
Returns including all reinvested distributions.
GOVT 0.26 1.09 5 year 1.77%
Since inception 2-14-12, 1.23%
( share price fluctuations, plus total reinvested distributions;as of 12-31-18; excluding loads, redemption fees, or tax implications on distributions. 5 year, and since inception data as of end date 12-31-18; annualized.)
The “yield” figures above are dependent upon fluctuating share price. Current share price is the base used to determine yield. Yet these yields do not include appreciation or depreciation of share price. Rather, yields directly result from “distributions.” For the GOVT distributions include only “dividend income.”
Over the past year the GOVT has fluctuated between $24.05-$25.00. 3-year chart.
Bonds involve four main elements: face value, coupon rate, fluctuating secondary market price, and in turn fluctuating yield. Add in a bond fund’s costs and expenses, and share price fluctuation, and the picture becomes more complex.
The iShares JNK High Yield.
JNK; SPDR Bloomberg Barclays High Yield Bond ETF
Net assets 6.8B, Inception 11-28-2007. Total holdings 870.
Net expense ratio 0.40%.
All data as of 1-16-19.
FUND RETURNS
Figures do not include fees and expenses.
(ALL DATA IN %, and annualized.)
1Y 3Y
Price movement alone.
$SPX -6.19 29.5
JNK -5.33 6.46
(ex. distributions, loads, redemption fees, or tax implications.)
Returns including reinvested distributions.
JNK – 3.27 5.63 5 Year = 2.06
Since inception 11/2007 = 4.72
(Includes share price fluctuations, plus total reinvested distributions; as of 12-31-18; excluding loads, redemption fees, or tax implications on distributions. 5 year, and since inception data as of end date 12-31-18; annualized.)
Fund Strategy
“The investment seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays High Yield Very Liquid Index.”
This description continues by explaining that the “adviser” has discretion to invest in other securities that have ” economic characteristics that are substantially identical” to the securities in the index. In aggregate, the JNK holds at least 80% of it’s assets in securities that are in the index, and at maximum 20% something else.
HOLDINGS
The JNK portfolio holds a bit of everything, including stocks, derivatives, cash & equivalents, corporate, government, municipal, secularized.
In addition the fund covers a minimum of ten countries including the U.S., Canada, most of western Europe, Australia, and Hong Kong. Although the fund can include securities of any maturity, it’s focus lies mainly between three and ten years.
Tracking bonds and bond funds means tracking yield. Yields actually fall when demand spikes. Although the “rate” or “coupon” remains fixed, the yield is calculated on the market price of the underlying instrument.
Our economy and markets are like some Rube Goldberg contraption. Every time the fed plays with “rates,” like now, all asset values are effected. Explaining that is like explaining a watch. Even economists fail at that, as a rule. Explain that.
GOVT SUMMARY
It’s difficult to look at these numbers and call it either protective, or on any level profitable. Fixed income of every form has paid rock-bottom rates ever since the ’09 financial crisis.
Life is far too short to accept returns that lag even what many CDs have paid since ’09. If you’re investing your money and time, you deserve, and can safely gather, much more than 1.23%. Nearly any quality dividend paying stock did infinitely better over any time frame of this fund. Think reliable Verizon, currently paying a 4.15% dividend. Total return, share price appreciation plus reinvested dividends; 1 year,14.9%, 3 year 46.3%.
JNK SUMMARY
The annualized 4.72% yield provided by the SPDR JNK(short for junk) feels somewhat satisfying, when viewed as a bond. However, the term “junk bond” was directly derived from the much lover safety level of the underlying “securities” on which such “high yield” funds are built. Think Italian debt.
The attractive feature of bond investing is safety, or lowered risk when talking high yield. By their very nature junk bonds offer less protection, and no real share price appreciation. In the end, the JNK offers a complex vehicle, layered compounding fees, no real added safety when compared to utility or telecom stocks, and no potential for meaningful share price appreciation. Again, buy a solid dividend paying stock. Think utilities, such as Dominion Energy(D) is currently paying a 4.85% yield. Or consider Southern Company(SO), currently paying 5.13%, 10.5% including share price appreciation. You can sleep on those, and be paid while doing so.
If bonds
are your bag, buy individual issues laddered by maturity. Avoid the added complexity and layered fees altogether. Rising rates should help, until they come down again. Smart people will tell you that diversification is just as important within bond holdings as it is equities. Tax-free municipal bonds might interest. But then, tax free on what level? In addition, quality matters. Bonds, like warranties are only as good as the issuer.
Everyone loves a stand up fight. Savor our income payer square-up: Bond funds vs. dividend stock shootout. Five bond funds over three time periods, verses four stock dividend faves;
The Better Than Bond.
Payment In Dollars Not Pennies.
https://stockjaw.com/2019/01/21/the-better-than-bond-payment-in-dollars-not-pennies/
Thanks for Reading.
