Big Problem with Bond ETFs!!! DO NOT Buy TIPS ETFs? 

You pointed out the problem with investing in bonds in a rising interest rate environment. You are right that holding a bond directly from IPO to maturity is better vs holding the bond ETF in a rising interest rate environment, but if the opposite is true, a decreasing interest environment, then you would be better off investing in the bond ETF. The reason the bond ETF would be best in a decreasing interest environment is because the ETF bonds are appreciating in value and the bond owned directly will mature at it's face value (no appreciation). All in all, if you invest long-term into a diversified mix of bonds directly, then the return performance should not be much different than investing in an index that is similar to those bonds. So, if you believe interest rates are peaking, then long-term bond ETFs will perform better than their recent history. Also, if you think inflation is peaking, then any investment in TIPS will perform poorly in the near term. Not sure you touched on it (I didn't hear it mentioned, possibly I was distracted), but TIPS behave differently than normal treasury bonds. TIPS value increases as inflation increases, which means TIPS interest rates also increase with inflation. However, the market prices in what is expected to happen and not what is currently happening or what happened in the past. So, if TIPS are down, it means the market is expecting in the future either that inflation will decrease and thus TIPS will earn less in interest or that the economy is improving and thus investors are selling TIPS to invest more in riskier assets.

I'm planning to switch to bonds. I have only been doing ¢rypto but I believe bonds have way less volatility. I don't get so much from the videos online🤦‍♀🤦‍♀. I'll need some guidance

Insightful video as always but can you also discuss about portfolio management companies? This is a recognized phenomena and there are companies/individuals that help invest and manage generational wealth. Some also organize get togethers, and social events for the family. These types of trusts and corps for the super wealthy would make an interesting video.

Thank you for this video I was asking myself the exact same question recently so your video was well timed.

You're right, but what about short term Tips etfs? Since it is short term, the underlying assets mature faster than 5-7 year etfs, thus new bonds with new interest rates are purchase more often.

So far in the past few months I’ve slowed down buying to only maybe an IPO or something I already own that has been overly beaten down. Only money I’m consistently putting into the market are through my financial advisor.

I believe you would be buying these bond ETFs for the next QE cycle, while we are in a QT cycle. Once the FED goes neutral, I believe these bond ETFs will balance out and start expanding when the FED starts buying again. The only reason why you would be buying these ETFs are for their dividends and not what the underlying base prices are. Kind of like a hold and dividend forever strategy.

the first minute was duplicated

Since Blackrock had launched their iBond-ETFs last year, maybe an update to the topic is needed? To my mind, it seems as though these ETFs are a valid solution to the problem of uncertainty regarding the general interest rate environment since they do mature like a singular bond does.

Excellent description of the problem. The ETF/Fund set up is one where there is constant purchases and liquidations. Thus, in the bond fund scenario, you are guaranteed to sustain a capital loss due to the turnover within the fund. It is counterproductive to the "safety" aspect of a bond fund. It seems that risk is a relative term.

I never understood why people claimed that Bond ETFs are "safe". The idea that I could lose money if interest rates rise was always a no go for me. Shame that it isn't easy to buy individual bonds in Germany

I wish I knew this a year ago. I bought SCHP, another TIPS ETF, near the peak thinking it would be a "safe" way to counter inflation. Now it's down 20%. The question now is, hold or sell and reinvest elsewhere?

TIPS.. yes but with interest rates at a somewhat high level and the unit price now somewhat depressed and paying 6% yield, perhaps tips is a good bet at the moment?

I always have a hard time when someone picks a specific period of time to show me how horribly something has performed

The problem is most people consider CPI as a real indication for inflation ! Inflation by definition is the expansion of money supply ( or how much currency is debased) and it is much higher than CPI ! Easily 15-20%

Thanks Jimmy! There has been a collective amnesia in the financial services industry on the purpose of bonds in a portfolio. Until about 2000 they were sold / marketed as a means of capital preservation. That’s only true if they are held to maturity. Bond ETFs strip that important feature out and they are simply another “total return” asset. This year has shown that the Emperor has no clothes.

Dude.... Are you serious with this? Of the 5 year vs 3-7 year tracks early on in its life because its basically the same asset. As time goes on it simply is not the same product.

I’ve been invested in VTIP which is a short duration bond ETF and it is only down 3% in 2022 and that’s just on price action. In the meantime I’ve collected some nice payouts that I have been using to buy undervalued stocks.

2nd 🥈 !! Love the informative videos! Would you be able to do a follow-up series where you revalue stocks on previous videos?

There are two thing wrong with this - first one should have bought short time bond not intermediate or long term when fed was increasing rates or move to cash now when they are almost done buy anyone short ,intermediate or long term it’s perfect timing for making profit as it moves from max out red to green.

Glad my comment on the previous video motivated this one. I have reached the same conclusion... the hard way. Great video as always.

Would be awesome if you do a reanalyse of BABA, since you have a position on it, talking about whether it’s a buy or not at these levels, thanks Jimmy!

I guess it is important to think about Bond ETFs as a pure capital preservation / income stream? Not as an actual bond. The price return is down but in return, I should be getting higher coupon payments from it which is nice. It wouldn't make sense to sell it now right?

Really good summary, Jimmy. Bond ETFs are for traders. Individual bonds are for investors.

NOW is the time to load up on bond etfs, fact of the matter is timing, you don't buy bonds when rates are increasing, you buy when the feds pause then pivot. An etf will out perform a bill. pull up the charts on them between 2016-2018

Hello I recently found your channel. Truly amazing. Can you please do a similar video on bond mutual fund using vanguard bond fund as an example? Thanks

What about BND ?

Holding a single bond or an ETF is the same thing. The ETF is priced daily, so has to show the decreased face value on the open market if rates rise. Holding a single bond is the same, the face value drops in an increasing rate environment, and vice versa. Same with CDs (you just don't see it b/c the face value looks identical) but if that was priced on the open market, it would have a discounted face value. When a bond matures in the ETF, it's rolled into a new bond at the higher rate.

Hey Jimmy, you once did a video about the dogs of the dow, I think you should review that strategy again, there might be a lot of value for your fan base.

BTI is my favorite bond right now. Nothing like some cigs and divs.

What a superb videos. It has explained what I was thinking about ETF bonds and cleared me I was right and my mathematics assumptions were what you have shown. Thanks & subscribed

Thank you for pointing this out!

Could you analyze BK, Bank of New York Mellon? Thank you for your work.

I’d say almost everyone would be better off directly buying bonds at your broker or from treasury direct. It’s super easy to do and you guarantee your returns. “On paper” my bond might go down if I wanted to trade it. But when I hold it I know exactly what I’m getting.

Well. If you hold the indvidual bond, with each year you hold it the duration comes down. Of course when in the last year of holding the bond there is a sharp rise in interest rates, the individual bond that has only a duration of 1 left will not fall as much as the bond fund that keeps it's duration at a stable level by constantly trading the bonds it holds to match a certain duration profile.

Thanks Jimmy really great video.

Found this out the hard way. Put 20k into bond funds summer 2021 and currently down 5500k. Trying to figure out if I should keep them or take the loss and buy cheap stocks. Good video.

i think that is the game... people want to buy etf bonds because it is cheap now, if interest rates start to go down the etf will go up. The bonds will stay with much more less volatility

Thank you. I was wanting to buy SCHP. I won't now since you explained to me what I'd be getting into.

Hi, what about IB01?

It's not a problem...it's simply an opportunity. You're only highlighting one side of the yield moves.

When u say total return in the early part of the video does that include the dividends?

Never invest in bonds with a longer maturity than you are willing to wait it out!

Bravo , finally someone demistifying the myth of ETFs showing their big pitfalls

Wouldn't that chart say TIPS is a better buy now vs the treasury itself? The chart follows pretty closely until that massive drop...Seems the discount would be much better buying TIPS here vs the treasury even though it was reversely true prior to that?

I still don't get if this under performance of ETF vs individual bond is due to the interest rates rising sharply, or would it also happen if rates rise slowly? Also, if the interest rates fall sharply, would an ETF outperform an individual bond?

Great video, had been looking at bond ETFs recently but didn't understand them enough to go through with buying, now I think it makes sense! Looks like we could be approaching a good buying opportunity for bond ETFs, depending on how much further interest rates are expected to rise?

What books do you recommend to start trading?

You’re the man, Jimmy.

god damn i bought TLT etf

Good to know.

Just buy 3 month and 6 month treasuries. They’re yielding 3-4%.

Bond ETFs are for speculators, not for investors. I was sitting on TBT this year, it was a great ride.

Good luck I don’t own bond etf.

Do these problems also hold true for Bond Mutual Funds? I assume yes.

This is why I own both BOND etfs and actual bonds - at least those I can actually buy, and in my region its mostly corporate ones that are easy to buy :( You Americans are so lucky, Europeans sad🤣