I found the following article particularly interesting, and given "dumbstruck"'s posting this morning about market versus limit orders, it seemed related enough that others might also find it interesting. Ferri's work is always a pleasure to read.
Why We don't Buy Corporate Bond ETFs
Corporate bond ETFs don't work for our clients. Large price discounts
and premiums to net asset value (NAV) tend to occur when we are
trading. These deviations from NAV can add unnecessary trading cost to
portfolios. Accordingly, we're believers in traditional corporate bond
mutual funds that trade at NAV at the end of the day.
The size of the ETF NAV/MktPx discounts that Ferri demonstrates
were actually surprising to me. I've been generally pretty happy
with the performance of LQD (the iShares iBoxx $ Investment Grade
Corporate Bond ETF) - transparency of holdings, a good index, very
low costs, plenty of liquidity in the ETF. As liquid as the holdings
in LQD are, the discount it displayed was surprising, though not
surprisingly, a lot smaller than the corresponding spread for
the high-yield ETF, HYG.
I'd be very interested to see how Vanguard's unique ETF-as-a-share-class
affects this. Vanguard's got both open-end shares as well as ETF
shares of their Intermediate-Term Corporate Bond Index - VCIT and
the institutional share open-ended class shares VICBX (theoretically
the min. invst is $5million, but there may be ways around that).
Morningstar suggests that VCIT, LQD, CFT and CORP are all direct
competitors. LQD is by very far the largest and most liquid, at
over $16billion in assets. VCIT (and the corresponding institutional
shares all together) has about $0.9billion, CFT has about a billion
and CORP, by far the smallest of the group, is only about $75million.
Anyway, Ferri's article is well worth the read.
There may be some closed-end funds worth looking at in this area,
too, since CEFs have the advantage of not having to create or
redeem shares, they don't get hit by liquidity/trading issues
the same way open-ended or ETFs might. On the flip side, though,
CEFs often have (a) high management fees; (b) leverage; and (c)
discounts/premiums to NAV are sometimes erratic, though (c) may
also present some opportunities when discounts are wider than
usual for a given CEF. I generally stay away from CEFs due
to (a) and (b) (and general aversion to actively managed funds
in the first place).
- posted 8 years ago
-- David S. Meyers, CFP(R) http://www.MeyersMoney.com
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