Gary, re: NLY,
Are you saying that you do not see a significant risk to your principal if interest rates start to rise
i think NLY mgmt would probably do better in a somewhat higher rate environment, BWDIK. keep in mind that what they invest in is mortgages, and in America, mortgages come with a free call option. this means when rates fall, as they have over the past few months, lots of people refinance (the mortgage refi index hit an all-time high last week). this is a big headache for the mortgagees, who end up having high-yielding investments called, even as their own liabilities are not taken in so quickly. all the recent hubub about FNM's "duration gap" was due to their high-yielding assets getting called.
so while "there are no assurances" that they will always zig when they should zig and zag when they should zag, i believe NLY's approach takes a possible rise in rates into consideration. they employ what they call a "barbell" approach, which i gather means matching different maturities, etc. with a combination of floating, fixed, and hybrid paper. i also gather they are NOT big into derivatives, as some other mortgage REITs may be.
in any case, i consider NLY a fairly "risky" play for me personally, but within that context i don't mind having a small investment in it.
I would guess that you hold this for taxable income rather than sheltered so that you could write-off any loss in the event fundamentals changed and you decided to exit?
actually, i have this in an IRA. think of it this way: by holding it in an IRA, if it turns out to be a good investment, i will collect the dividends tax-free and not have a capital loss. if it turns out to be a bad investment, i will still collect dividends tax-free, but not have a declarable capital loss.
in contrast, if i held it in a taxable acct, i would be taxed on the dividends at my marginal rate, regardless of whether there is an eventual capital loss to declare. and besides, i'm not going into this with the anticipation of a capital loss (though i admit it is a possibility). but i am definitely anticipating at least some dividends.
i generally have flexibility to hold things either in tax-sheltered or taxable accts, so i try to keep the income stuff in the tax-sheltered accts. however, this is not a hard-and-fast rule. e.g., when i purchase foreign dividend-paying stocks, i basically always buy them in a taxable acct. why? because the foreign governments tax the dividends regardless of whether i hold the securities in a tax-sheltered account. by holding them in a taxable acct, however, i can use the foreign tax paid as a tax credit on my US tax return.
Any thoughts which might be safer....NLY or ACG?
i don't know anything about ACG. looking at their Yahoo description, i guess it's a closed-end bond fund that uses leverage. that's a different animal entirely (compared to NLY, which is a mortgage REIT). i have no idea whether it's a good investment or not. i don't know much about closed-end funds. looking at Morningstar, it appears that ACG has an expense ratio of 1.19%. that seems rather high to me for a bond fund.
quicktake.morningstar.com
Would you ever hold a bond fund as a small component for diversity in a taxable or non-taxable account during an inflationary environment
the short answer is YES. however, in an inflationary environment i would not hold a fund with a long duration (and ACG seems to have what i would call a long duration).
my general feeling about bond funds is, i want broad diversification with low expenses. i do not want to pay extra for "active" management. with stocks, at least active mgmt can potentially add an infinite amount of value (alpha)--although they hardly ever do on a consistent basis. but when it comes to investment grade bonds, usually the best that can happen is the bonds pay off at par and the fund collects their yield. where is the home run in that? i think with investment grade bonds, not striking out is much more important than swinging for the fences. this means broad diversification, within the targeted bond class, is very important to me. and i want to achieve that diversification without paying an arm and a leg.
right now, the only bond fund i own is Vanguard Short Term Corporate. the Admiral Class shares (VFSUX) have an expense ratio of just 18 basis points (0.18%).
with bond yields so low right now, i think attention to expenses is very important. many bond funds charge around 1% expense ratio. over a long period of time, that 1% adds up. say over 20 years, that is 20% of principal, whereas for VFSUX it is just 3.6% of principal. i have a hard time believing many active corporate bond funds are going to add more than 17% of principal over the next two decades, while maintaining the level of diversification that VFSUX has.
the only other bonds i have owned recently are TIPS. these i just buy directly (not through a fund), since i don't see what value-added a fund manager could add to these. however, i sold my TIPS not long ago because i felt the meltup in Treasurys was getting ridiculous. so i am now sitting on more cash than i would like to and am considering my options.
with corporates, there is no way that i could get the level of diversification i have in VFSUX at their low costs by buying bonds directly. i have talked to brokers who try to get me to buy directly, and their idea of diversification is to buy, say 10 different bonds for a million-dollar bond portfolio. i say that ain't diversification! what if you bought WCOM bonds? tankola. the expenses in corporate purchases [i have read estimates of 3-4% average spreads] are just way too high for my taste. |
