best medium term bond etf for growth

[forgotusername]

I have my equity etf covered but am looking to put some money into a bond etf for a few years in the hope that as things begin to normalise the vale of the underlying bonds will increase. I'm flexible about the timeframe and happy to wait a bit longer if I have to

[GeoffF100]

It depends on what you want. You could look at VAGP and VGOV.

[dealtn]

I have my equity etf covered but am looking to put some money into a bond etf for a few years in the hope that as things begin to normalise the vale of the underlying bonds will increase. I'm flexible about the timeframe and happy to wait a bit longer if I have to

What makes you think the current implied forward rate embedded into the price of the bonds doesn't already reflect that predicted improvement or prices "normalising"?

[GeoffF100]

I have my equity etf covered but am looking to put some money into a bond etf for a few years in the hope that as things begin to normalise the vale of the underlying bonds will increase. I'm flexible about the timeframe and happy to wait a bit longer if I have to

What makes you think the current implied forward rate embedded into the price of the bonds doesn't already reflect that predicted improvement or prices "normalising"?

I do not expect he has a clue. I know I don't. He seems to think he knows what is normal. That's one up on me.

Vanguard seems to believe that global bonds hedged into the local currency are the best diversifier for global equities. That would suggest VAGP, if that makes sense for the OP's circumstances. The hedging costs are significant though, and show up in the transaction costs, not the OCF. VGOV does not incur those costs, but is more sensitive to interest rate changes.

The OP seems to be willing to wait several decades for his investment to come good. It is anyone's guess what will happen over that time frame.

[Hariseldon58]

One could mix IGLS ( shorter duration Gilts) with VGOV to achieve a duration that suits one’s needs.

My preference is for unhedged bonds , both sterling and US $

[dealtn]

What makes you think the current implied forward rate embedded into the price of the bonds doesn't already reflect that predicted improvement or prices "normalising"?

I do not expect he has a clue. I know I don't. He seems to think he knows what is normal.

...

The OP seems to be willing to wait several decades for his investment to come good. It is anyone's guess what will happen over that time frame.

But that's an issue. To make money out of bonds you need to understand their pricing. Many people work on an overly simplistic understanding of interest rates fall, bond prices rise, so if the yield falls you will make money. But the yield change that matters is the expected already priced forward yield.

So in simple terms you might have a 10 year bond yielding 6%. You think "normal" is 5%. You buy it and in 4 years time it yields 5% (or even better 4.5%) but you are down on your investment not up. Interest rates have fallen but the price has also fallen. Why? Because the now interest rate is higher than the priced and predicted interest rate for that 6 year period remaining in the price 4 years ago.

Mathematically that original 10 year yield of 6% might have been made up of successive 1 year forward yield periods of 12%, 10%, 8%, 6% and then 6 years at 4% (an average of 6%). With 4 years passed and 6 remaining at 5% (or 4.5%) yield for each of the remaining years, the price (and bond yield) has moved. Yields have risen from 4%, not fallen from 6%.

So when investing based on "normalisation" expecting to profit from it, importantly you need to know what is already priced in that forward space, and not the current "spot" space.

[GeoffF100]

I do not expect he has a clue. I know I don't. He seems to think he knows what is normal.

...

The OP seems to be willing to wait several decades for his investment to come good. It is anyone's guess what will happen over that time frame.

But that's an issue. To make money out of bonds you need to understand their pricing. Many people work on an overly simplistic understanding of interest rates fall, bond prices rise, so if the yield falls you will make money. But the yield change that matters is the expected already priced forward yield.

So in simple terms you might have a 10 year bond yielding 6%. You think "normal" is 5%. You buy it and in 4 years time it yields 5% (or even better 4.5%) but you are down on your investment not up. Interest rates have fallen but the price has also fallen. Why? Because the now interest rate is higher than the priced and predicted interest rate for that 6 year period remaining in the price 4 years ago.

Mathematically that original 10 year yield of 6% might have been made up of successive 1 year forward yield periods of 12%, 10%, 8%, 6% and then 6 years at 4% (an average of 6%). With 4 years passed and 6 remaining at 5% (or 4.5%) yield for each of the remaining years, the price (and bond yield) has moved. Yields have risen from 4%, not fallen from 6%.

So when investing based on "normalisation" expecting to profit from it, importantly you need to know what is already priced in that forward space, and not the current "spot" space.

My point here is that the OP cannot invest based on normalisation, and neither can anyone else, unless they have a time machine. The approach that Vanguard (and the FCA for that matter) advocates is to allocate x% to equities and (100% - x%) to bonds, with x depending on risk tolerance. Having done that, cross fingers, rebalance and hope. They do not believe that x should depend on the interest rates or anyone's expectation of future interest rates.

[dealtn]

My point here is that the OP cannot invest based on normalisation, and neither can anyone else, unless they have a time machine. The approach that Vanguard (and the FCA for that matter) advocates is to allocate x% to equities and (100% - x%) to bonds, with x depending on risk tolerance. Having done that, cross fingers, rebalance and hope. They do not believe that x should depend on the interest rates or anyone's expectation of future interest rates.

I disagree. You can invest based on a view on what the future is expected to bring, or on a reversion to "normal". You can't guarantee it though, of course, but it's perfectly reasonable and rational to invest on a view of what might be expected to happen, but a crucial element of such a strategy, and particularly in the bond space, is to understand what is already priced by the market.

[GeoffF100]

My point here is that the OP cannot invest based on normalisation, and neither can anyone else, unless they have a time machine. The approach that Vanguard (and the FCA for that matter) advocates is to allocate x% to equities and (100% - x%) to bonds, with x depending on risk tolerance. Having done that, cross fingers, rebalance and hope. They do not believe that x should depend on the interest rates or anyone's expectation of future interest rates.

I disagree. You can invest based on a view on what the future is expected to bring, or on a reversion to "normal". You can't guarantee it though, of course, but it's perfectly reasonable and rational to invest on a view of what might be expected to happen, but a crucial element of such a strategy, and particularly in the bond space, is to understand what is already priced by the market.

That is active investment. This is the passive investment board. Of course there are people who believe that they can beat just buying everything and sitting on it. Their record is not good after costs, but that does not deter them. Look at the predictions of future interest rates that were made by the central banks and the markets and compare them with what actually happened. I am not saying that I never make active decisions, but that is another matter.

[dealtn]

I disagree. You can invest based on a view on what the future is expected to bring, or on a reversion to "normal". You can't guarantee it though, of course, but it's perfectly reasonable and rational to invest on a view of what might be expected to happen, but a crucial element of such a strategy, and particularly in the bond space, is to understand what is already priced by the market.

That is active investment. This is the passive investment board. Of course there are people who believe that they can beat just buying everything and sitting on it. Their record is not good after costs, but that does not deter them. Look at the predictions of future interest rates that were made by the central banks and the markets and compare them with what actually happened. I am not saying that I never make active decisions, but that is another matter.

You can be passive in waiting for that value to out, which appears to be what the OP is suggesting through his normalisation which is what I am addressing. If you think his post is on the wrong board feel free to report it to the board's moderator.

[GeoffF100]

That is active investment. This is the passive investment board. Of course there are people who believe that they can beat just buying everything and sitting on it. Their record is not good after costs, but that does not deter them. Look at the predictions of future interest rates that were made by the central banks and the markets and compare them with what actually happened. I am not saying that I never make active decisions, but that is another matter.

You can be passive in waiting for that value to out, which appears to be what the OP is suggesting through his normalisation which is what I am addressing. If you think his post is on the wrong board feel free to report it to the board's moderator.

I am not a zealot who does not want heresies mentioned here. Nonetheless, it is fair to point out that nobody knows where interest rates will go over the next ten years.

[Dicky99]

What makes you think the current implied forward rate embedded into the price of the bonds doesn't already reflect that predicted improvement or prices "normalising"?

I do not expect he has a clue. I know I don't. He seems to think he knows what is normal. That's one up on me.
.

It's a bit of a heavy handed response to the OP's quite reasonable question. Lots of people counter balance their equity investments with a bond ETF without feeling the need to have an exceptional understanding of individual bond pricing just as people invest very profitably in equity ETFs without needing to have an exceptional understanding of fundamental analysis of individual stocks.

[GeoffF100]

I do not expect he has a clue. I know I don't. He seems to think he knows what is normal. That's one up on me.
.

It's a bit of a heavy handed response to the OP's quite reasonable question. Lots of people counter balance their equity investments with a bond ETF without feeling the need to have an exceptional understanding of individual bond pricing just as people invest very profitably in equity ETFs without needing to have an exceptional understanding of fundamental analysis of individual stocks.

Proposing to buy a bond ETF because you believe that future interest rates will be lower than the market expects is different to counterbalancing your equity investments with a bond ETF, without any belief about what future interest rates will be. Do you believe that it is possible to predict future interest rates?

[Dicky99]

It's a bit of a heavy handed response to the OP's quite reasonable question. Lots of people counter balance their equity investments with a bond ETF without feeling the need to have an exceptional understanding of individual bond pricing just as people invest very profitably in equity ETFs without needing to have an exceptional understanding of fundamental analysis of individual stocks.

Proposing to buy a bond ETF because you believe that future interest rates will be lower than the market expects is different to counterbalancing your equity investments with a bond ETF, without any belief about what future interest rates will be. Do you believe that it is possible to predict future interest rates?

The OP is seeking advice about bond ETFs "in the hope that as things begin to normalise the value of the underlying bonds will increase". Where's the prediction in that?

[GeoffF100]

Proposing to buy a bond ETF because you believe that future interest rates will be lower than the market expects is different to counterbalancing your equity investments with a bond ETF, without any belief about what future interest rates will be. Do you believe that it is possible to predict future interest rates?

The OP is seeking advice about bond ETFs "in the hope that as things begin to normalise the value of the underlying bonds will increase". Where's the prediction in that?

I did not mention the OP in that post. dealtn was certainly writing about that. The OP seemed to be implying that he knew what is normal, but perhaps I was right and he knew no more than I do.

[JohnW]

bond etf for a few years in the hope that as things begin to normalise the vale of the underlying bonds will increase’

You can hope for what you want but markets will ignore your wishes, so choose according to some well founded ideas.
Do you want the risk of corporate bonds or the safety of government bonds? Do you care about the volatility of currency movements? If so hedge any foreign bonds. ‘..a few years…’ means you don’t want a long duration fund if you care about price volatility; read up on bond duration if it’s new to you as it’s crucial with bonds. Fund fees are perhaps even more important with bonds since their returns are usually lower than stocks’; choose a low cost fund.
https://www.evidenceinvestor.com/bond-f ... rningstar/

[tjh290633]

I disagree. You can invest based on a view on what the future is expected to bring, or on a reversion to "normal". You can't guarantee it though, of course, but it's perfectly reasonable and rational to invest on a view of what might be expected to happen, but a crucial element of such a strategy, and particularly in the bond space, is to understand what is already priced by the market.

That is active investment. This is the passive investment board. Of course there are people who believe that they can beat just buying everything and sitting on it. Their record is not good after costs, but that does not deter them.

Surely if someone buys a portfolio and then sits on it, he is not incurring any costs. Possibly a minimal platform fee, £40/year perhaps, and I suppose if he goes for a fund, he then has management fees, but why go for a fund?

TJH

[AWOL]

I disagree. You can invest based on a view on what the future is expected to bring, or on a reversion to "normal". You can't guarantee it though, of course, but it's perfectly reasonable and rational to invest on a view of what might be expected to happen, but a crucial element of such a strategy, and particularly in the bond space, is to understand what is already priced by the market.

That is active investment. This is the passive investment board. Of course there are people who believe that they can beat just buying everything and sitting on it. Their record is not good after costs, but that does not deter them. Look at the predictions of future interest rates that were made by the central banks and the markets and compare them with what actually happened. I am not saying that I never make active decisions, but that is another matter.

Surely people can discuss passive funds in the passive investing board, even if they employ a degree of tactics to their choices. Many "passive" investors switched to shorter dated funds when yields got very low and some switched once rates started increasing. They may still have a broadly static allocation (or not) to equity:bonds or still use passive funds.

All passive investors make active choices such as global or not, which global index, small caps or not, what asset allocation, global or local bonds, government or aggregate or corporate bonds, MBS, commodities, property, does the index filter companies in a way I approve of, etc. Surely they can still ask questions about passive funds here?

[GeoffF100]

That is active investment. This is the passive investment board. Of course there are people who believe that they can beat just buying everything and sitting on it. Their record is not good after costs, but that does not deter them. Look at the predictions of future interest rates that were made by the central banks and the markets and compare them with what actually happened. I am not saying that I never make active decisions, but that is another matter.

Surely people can discuss passive funds in the passive investing board, even if they employ a degree of tactics to their choices. Many "passive" investors switched to shorter dated funds when yields got very low and some switched once rates started increasing. They may still have a broadly static allocation (or not) to equity:bonds or still use passive funds.

All passive investors make active choices such as global or not, which global index, small caps or not, what asset allocation, global or local bonds, government or aggregate or corporate bonds, MBS, commodities, property, does the index filter companies in a way I approve of, etc. Surely they can still ask questions about passive funds here?

Of course they can. The context of my comment has been lost here. Long discussions about whether interest rates are going to rise or fall and over what time period, what the market has priced in, and how best to exploit that are better conducted elsewhere.

[AWOL]

Fair enough. I reckon they will rise then fall but maybe not so I just hold a gilts ETF as ballast. Perhaps a gilt ladder would work better for those who are nervous about capital values.