Posts tagged risk control

iShares ETFs – Synthetic or Direct Holdings?

6 months ago
by Craig Rowland in

Relating to this post about funds holding things they otherwise shouldn’t:

Vanguard Treasury Bond Funds Filled with Mortgage Garbage

A reader wrote to iShares to ask about their ETFs and find out which had direct holdings and which were synthetically run with derivatives. The directly held funds have less moving parts involved around counter-party risk and are theoretically safer than synthetic versions. Here was iShare’s response which I was given permission to repost (H/T to R):

Thank you for your interest in iShares.

Further to your email, we have stipulated which of the funds you are holding are physical/synthetic below:

TLT – Physical
ACWI – Physical
IWRD – Physical
EEM – Physical
IDVY – Physical
IUKD – Physical
JSC – Non iShares ETF – Statestreet -
EWJ – Physical
XMWO – Non iShares ETF – DBX Trackers – Synthetic ETF
SHY – Physical
SHV – Physical

As of 19th September 2011, iShares managed 113 ETFs domiciled in Ireland of which only two were synthetic. Please note some of the products listed above are not Irish domiciled iShares ETFs. Should you require any further assistance please do not hesitate to contact us.

Best regards,

iShares Feedback

Looking at the above, the Treasury Long Term (TLT), and Short Term Treasury Funds (SHY and SHV) are directly held by the bond funds. I still recommend you hold bonds directly if you are able. However, if you are not able, the iShares funds still appear to be one of the better choices out on the market especially compared to Vanguard’s Treasury bond funds.

 

 

 

 

 

 

 

 

 

 

 

 

Vanguard “Treasury” Bond Funds Filled with Mortgage Garbage

7 months ago
by Craig Rowland in ,

EyeDee over at the Bogleheads forum posts the following:

Those who own Vanguard Treasury funds to avoid mortgage-backed securities should probably be aware that as of 08/31/2011, Government Mortgage-Backed securities in Vanguard’s Treasury funds are up to:

17.7% in Short-Term Treasury Fund
17.4% in Intermediate-Term Treasury Fund
16.9% in Long-Term Treasury Fund

These links go over the current composition of these funds:

https://personal.vanguard.com/us/funds/snapshot?FundId=0032&FundIntExt=INT#hist=tab%3A2
 https://personal.vanguard.com/us/funds/snapshot?FundId=0035&FundIntExt=INT#hist=tab%3A2
 https://personal.vanguard.com/us/funds/snapshot?FundId=0083&FundIntExt=INT#hist=tab%3A2

I went over why I don’t like Vanguard’s Treasury Bond Funds in a previous post on holding cash. Sometimes you just can’t help but use them depending on your situation, but given the choice I recommend avoiding Vanguard’s Treasury Funds.

Now, allow me to vent for a bit.

Vanguard bond managers are adding absolutely no benefit to investors by shifting around 20% of the assets in these funds to what they think adds more value. And if you look at the Total Bond Fund fiasco in 2002, even Vanguard managers can and do make mistakes. They are chasing yield, and chasing yield can cause problems.

I had posted before that running a Treasury bond fund should be the simplest job in the world for Vanguard and they are trying to make it difficult. If I ran the fund I would require a computer and a PlayStation 3.

The computer is to balance the deposits and redemptions each morning and close of business with buys/sells of Treasury bonds.

The PS3 is for the other seven hours a day where I would have absolutely nothing to do.

I don’t understand why they feel like they need to run their Treasury funds with a speculative bent. I recommend you just buy bonds directly and sit them in your brokerage account or at Treasury Direct. This costs you nothing each year in management fees and they just sit there quietly and pay you interest twice a year.

If you can’t do the above, then use the iShares products (Tickers: TLT, SHY, SHV) that are essentially 100% Treasuries and have a prospectus that limits better what they can do behind the scenes.

Vanguard putting mortgage bonds in a Treasury bond fund is completely inappropriate. Mortgages behave much differently than nominal bonds in changing interest rate environments. Why? Well, people refinance mortgages when interest rates are falling for instance but tend to hold onto low interest loans when rates rise. So it’s heads they win tails you lose. Mortgages have no business being in a Treasury bond fund and I recommend avoiding Vanguard Treasury Bond funds if you are able.

Article: Lessons for investors from Japan’s lost decades

7 months ago
by Craig Rowland in

Hat Tip to Odysseusa for this article from Globe and Mail:

Lessons for investors from Japan’s lost decades

The lesson? Broad diversification works.

A Japanese investor who held government bonds, foreign stocks, precious metals and cash, in addition to domestic shares, would have blunted the Nikkei’s fall and even earned a profit. That may not be the most exciting take-away from Japan’s experience, but it’s one time-tested result that investors should keep in mind as they seek a refuge from today’s market weakness.
 

(emphasis added)

Couldn’t agree more. Portfolios should hold stocks, bonds, cash and gold at all times no matter what we may think will happen in the markets.

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