Bond ETF's Pricing
Posted: 21 Dec 2010 18:52
I am retired and hold over 60 % of my portfolio in bonds - all ETF's ( as an new DIY Investor - it seemed less stressful ) Hold about equal values of CLF, CBO, XCB & XSB.
Being worried about interest rates - listened to you guys and kept short-term to minimize risk. Understand that with the signs of a recovering economy - rates likely to rise and as a result the yield curve steepens to reflect this. As yield increases, bond prices fall and the NAV of the ETF is reduced and as a result the unit price erodes.
Ishares has reduced the monthly distribution - while Claymore has had held constant - can only assume Claymore is subsidizing distribution with return of capital. This would be borne out by the fact that NAV reduction over 12 months is greater with Claymore.
This is where I get confused and would appreciate any wisdom you guys might be willing to pass along. As yields increase - I would suppose the distribution would increase as well ??? As bonds are turned over, they will be replaced with bonds of even higher yields.
Is this not a situation not unlike owning individual bonds whereby if I do not need to cash the shares and spend only the distributions - the higher yields will increase unit prices back to my purchase price or in the worst case scenerio - we are looking at a yield to maturity situation where capital loss is factored into the yield equation and yet can expect net yields to increase over time.
In short, will the NAV continue to fall as rates increase or will increased yields mitigate NAV erosion and/or is this the time to liqidate and form my own ladder.
Being worried about interest rates - listened to you guys and kept short-term to minimize risk. Understand that with the signs of a recovering economy - rates likely to rise and as a result the yield curve steepens to reflect this. As yield increases, bond prices fall and the NAV of the ETF is reduced and as a result the unit price erodes.
Ishares has reduced the monthly distribution - while Claymore has had held constant - can only assume Claymore is subsidizing distribution with return of capital. This would be borne out by the fact that NAV reduction over 12 months is greater with Claymore.
This is where I get confused and would appreciate any wisdom you guys might be willing to pass along. As yields increase - I would suppose the distribution would increase as well ??? As bonds are turned over, they will be replaced with bonds of even higher yields.
Is this not a situation not unlike owning individual bonds whereby if I do not need to cash the shares and spend only the distributions - the higher yields will increase unit prices back to my purchase price or in the worst case scenerio - we are looking at a yield to maturity situation where capital loss is factored into the yield equation and yet can expect net yields to increase over time.
In short, will the NAV continue to fall as rates increase or will increased yields mitigate NAV erosion and/or is this the time to liqidate and form my own ladder.