Idiots guide to ETF bonds

[Oggy]

Gents

I have been reading around some more and thinking about purchase of some ETF bonds, mainly as a means of wealth preservation. VAGP or similar seems to curry some favour across these boards, so assuming that will be my choice and bearing in mind my relative (read gross!) ignorance of such investments, I'd be most grateful if folk could clarify or put me right on the below please.

I already have a SIPP account with AJ Bell. Presumably to buy VAGP, I ensure the cash is there, and simply hit deal to buy the appropriate cash equivalent number of VAGP units?

I assume the price I'd pay be the current market price?

Can I sell at any time? - i.e. I am not locked in for a minimum maturity period. Should I decide to sell, I assume the price I would receive be whatever the market price is at the time?

Is face value of any relevance here? I only ask this as my limited understanding is that with (other) bonds what you receive back - the capitol - after maturity is the face value of the bond - which may be different to the market value when you buy or even sell. Not sure this applies to ETFs

interest/coupon paid regularly

Is VAGP in £ - not sure from the documentation.....If so, is this generally seen as favourable?

I am still learning so bear with me here please!

[richfool]

Yes, you buy bond ETF's just like any other share or IT through your broker's trading account. They will show a buying and selling price, which are usually close together.

[tjh290633]

I think you are confusing two things, ETFs and bonds. Some ETFs may invest in bonds, but they are not themselves bonds. They do not have a maturity date nor a fixed coupon. They are traded on the stock exchange during the trading day, unlike OEICs which are usually priced at noon and orders received before noon are closed at that price. Orders placed after noon are closed at the next trading day's price.

TJH

[monabri]

It is not a bond...it's a fund sold by Vanguard. This fund contains over 10,000 bonds. There is no maturity date as such. The ETF does the buying of new bond issues and retirement of matured bonds ' automatically '.

VAGP is bought /sold in Sterling (£). The bonds it holds are in many currencies. It can be bought/sold anytime the UK market is open. It should be readily available to buy via AJ Bell.

The fund is not 'hedged' but as to whether this is advantageous...I don't know.

To get an idea of the price you will pay, look it up on the LSE. ( possibly you are thinking of 'index linked bonds' where a bond's price is shown on the LSE
as "x" but the actual price is higher?....." face value" question)

The distribution from the funds looks to be 4x a year. You are not receiving a coupon as such, but a fund distribution.

Note, unlike government bonds ( gilts) you might need to pay CGT if you make a profit on sale. The distribution yield is also potentially taxable.

Note... VAGP is domiciled in Ireland (IE00BG47KG48) - It is thus "foreign" as far as any distribution yield ( 1.86% -ish) is concerned. This might be a factor if held in a taxable account. It is not an issue in a SIPP.

[monabri]

Note, unlike government bonds ( gilts) you might need to pay CGT if you make a profit on sale. The distribution yield is also potentially taxable.

Addition: CGT/ Tax only applies if held in a taxable account.

[Newroad]

Hi Oggy et al.

A couple of additional points.

VAGP is the distributing version of the ETF (which I hold). There is now also an accumulating version, VAGS - which, as you're talking about wealth preservation rather than income may be more suitable.

As to whether Vanguard Bond ETF's etc are a good idea, here is one discussion posted previously: https://occaminvesting.co.uk/the-best-vanguard-bond-funds-for-uk-investors/

Also, I can't find the reference quickly, but there has been an argument made that equities should be global but bonds local - maybe someone else can provide the source. If you find this argument has merit, then VGOV or similar may be preferable to VAGP/VAGS.

Regards, Newroad

[monabri]

Short Pensioncraft "video" on Vanguard's new accumulation funds.

https://www.youtube.com/watch?v=NSj7CMSulqA


It might worth watching some of Ramin's other videos...Google " Pensioncraft Bonds ".

[mc2fool]

I have been reading around some more and thinking about purchase of some ETF bonds, mainly as a means of wealth preservation. VAGP or similar ...

http://uk.advfn.com/stock-market/london/vanglbaggetf-VAGP/share-price

[richfool]

It is not a bond...it's a fund sold by Vanguard. This fund contains over 10,000 bonds. There is no maturity date as such. The ETF does the buying of new bond issues and retirement of matured bonds ' automatically '.

VAGP is bought /sold in Sterling (£). The bonds it holds are in many currencies. It can be bought/sold anytime the UK market is open. It should be readily available to buy via AJ Bell.

The fund is not 'hedged' but as to whether this is advantageous...I don't know.

The distribution from the funds looks to be 4x a year. You are not receiving a coupon as such, but a fund distribution.

I think you will find that VAGP is hedged (as per the "H" in the title after the GBP and confirmed below).

https://www.hl.co.uk/shares/shares-sear ... -etf-h-dis

https://www.fundslibrary.co.uk/FundsLib ... PUl8CJ&r=1

[Oggy]

Gents

Very many thanks for all your replies. All very useful. I particularly value the article form Newroad. To clarify a wee bit further please......

With regard to the wealth preservation aspects only, can a bond ETF [b]fund [/b]such as VAGP or VAGS be viewed in a similar light to other bond investments? Am I in essence, investing in bonds with broadly similar levels of wealth preservation?

With reference to the price chart from mc2fool, and a recent article in the DT, it would seem bonds are a good buy at present - thoughts most welcome.

Tax implications - It will all be done within a SIPP so I assume no tax implications - until I start drawdown?

Hedging - is this done "automatically" within VAGP/VAGS?

Again, many thanks

[monabri]

I think you will find that VAGP is hedged (as per the "H" in the title after the GBP and confirmed below).

https://www.hl.co.uk/shares/shares-sear ... -etf-h-dis

Interesting, the blurb in the HL site says " currency hedging = No".

[mc2fool]

With regard to the wealth preservation aspects only, can a bond ETF [b]fund [/b]such as VAGP or VAGS be viewed in a similar light to other bond investments? Am I in essence, investing in bonds with broadly similar levels of wealth preservation?

With reference to the price chart from mc2fool, and a recent article in the DT, it would seem bonds are a good buy at present - thoughts most welcome.

Well that's crystal ball gazing. Not necessarily wrong but you won't know until after the fact. And did they say bonds are a good buy at present or bond funds/ETFs?

The price chart was to show that if wealth preservation is your goal it might not work out that way; it hasn't for anyone who bought VAGP prior to 2022, so far at least.

There's a lot of difference between buying bonds and buying a bond fund. With the former, defaults aside, you know from the outset exactly what the cash flows (coupons) will be and when, and, if you hold to maturity, exactly how much capital you'll get returned at the end. With bond funds/ETFs you have no such certainties. The value of that, or not, is up to you but it's important to know the difference.

[richfool]

I think you will find that VAGP is hedged (as per the "H" in the title after the GBP and confirmed below).

https://www.hl.co.uk/shares/shares-sear ... -etf-h-dis

Interesting, the blurb in the HL site says " currency hedging = No".

This bit, the Vanguard Key Investor Information" is the confirmation:

Key Investor Information
This document provides you with key investor information about this fund. It is not marketing material. The information is required by law to help you
understand the nature and the risks of investing in this fund. You are advised to read it so you can make an informed decision about whether to invest.
Vanguard Global Aggregate Bond UCITS ETF
(the "Fund")
A sub-fund of Vanguard Funds PLC
GBP Hedged Distributing
ISIN: IE00BG47KG48
Manager: Vanguard Group (Ireland) Limited (“VGIL”)

https://www.fundslibrary.co.uk/FundsLib ... fkdLOC&r=1

[mc2fool]

It's pretty clear here: https://www.vanguardinvestor.co.uk/inve ... g/overview

[Newroad]

Hi Oggy.

I think the answer to your question is more complex. You could do worse than look here for inspiration

https://monevator.com/lars-kroijer-onhedge-fund-mimicking-etfs-checking-your-portfolio-and-minimal-risk-assets/

though I'm not sure this is the original reference to the local government bonds I was thinking of.

For very low risk, you may want to build a "bond ladder" of UK Gilts. Do a search for "bond ladder" on this site and elsewhere and you'll get a sense of what one of those is. I have contemplated one from time to time, but on balance, I have decided that what I perceive to be the slightly higher risk of VAGP is more convenient for me.

Regards, Newroad

[Oggy]

Well that's crystal ball gazing. Not necessarily wrong but you won't know until after the fact. And did they say bonds are a good buy at present or bond funds/ETFs?

The price chart was to show that if wealth preservation is your goal it might not work out that way; it hasn't for anyone who bought VAGP prior to 2022, so far at least.

There's a lot of difference between buying bonds and buying a bond fund. With the former, defaults aside, you know from the outset exactly what the cash flows (coupons) will be and when, and, if you hold to maturity, exactly how much capital you'll get returned at the end. With bond funds/ETFs you have no such certainties. The value of that, or not, is up to you but it's important to know the difference

The latter paragraph is instructive so thanks for that. I am indeed after wealth preservation, so I'd be keen to understand how to purchase bonds rather than bond funds/ETFs - either from HL or AJ Bell if possible, and what folk would recommend - UK gilts seems to have some favour? The DT article entitled "Prepare for the year of the bond" incidentally concerns bonds - gilts - but does go on to mention ETFs - Ishares CoreUKGilts ETF.

[Oggy]

Hi Oggy.

I think the answer to your question is more complex. You could do worse than look here for inspiration

https://monevator.com/lars-kroijer-onhedge-fund-mimicking-etfs-checking-your-portfolio-and-minimal-risk-assets/

though I'm not sure this is the original reference to the local government bonds I was thinking of.

For very low risk, you may want to build a "bond ladder" of UK Gilts. Do a search for "bond ladder" on this site and elsewhere and you'll get a sense of what one of those is. I have contemplated one from time to time, but on balance, I have decided that what I perceive to be the slightly higher risk of VAGP is more convenient for me.

Regards, Newroad

Thanks again. I am torn between the ease and convenience of VAGP/VAGS and the like, and the slightly higher risk that entails. Mc2fool appears to corroborate the higher risk view. Quantifying that higher risk is difficult I am sure, and yet I am conscious of my lack of knowledge in this area were I to buy bonds. The ease and simplicity of bond funds does appeal for that reason. I can only state that what I would like is some sort of steady investment that would remain reasonably intact were there an equity crash.

[Newroad]

Hi Oggy.

Here's my "advice" in the context of not actually giving advice, but rather a line of thought.

Firstly, determine a nominal and simple starting point for consideration. For example, on the basis of the rule of thumb of 100-age in equities and the earlier thoughts about global equities, local bonds, you might start out if you were, say, 55 years old, with

45% VWRL
55% VGOV

Secondly, decide whose investment ideas and philosophy makes the most sense to you and ensure you understand what they are saying. For me, it's this book, but other choices are available

https://www.harriman-house.com/smart-portfolios

Having done the two things above, decide how much effort you are prepared to put in - that will determine where you end up investing on the spectrum between the simple starting point and the likely more complex full implementation of the philosophy. This will be an inherently personal choice, not right or wrong.

Regards, Newroad

[kempiejon]

The latter paragraph is instructive so thanks for that. I am indeed after wealth preservation, so I'd be keen to understand how to purchase bonds rather than bond funds/ETFs - either from HL or AJ Bell if possible, and what folk would recommend - UK gilts seems to have some favour? The DT article entitled "Prepare for the year of the bond" incidentally concerns bonds - gilts - but does go on to mention ETFs - Ishares CoreUKGilts ETF.

I have bought gilts from AJ bell and HL. You pick the one you want but unlike a regular share where you're offered a live price if you place the order, the gilts are offered at an indicative price and the order will be filled shortly at the best price but not live, for me it has been around the indicative price, I think better.
AJ bell has a page of gilts https://www.ajbell.co.uk/our-services/i ... lts/prices

[Dod101]

Hi Oggy.

I think the answer to your question is more complex. You could do worse than look here for inspiration

https://monevator.com/lars-kroijer-onhedge-fund-mimicking-etfs-checking-your-portfolio-and-minimal-risk-assets/

though I'm not sure this is the original reference to the local government bonds I was thinking of.

For very low risk, you may want to build a "bond ladder" of UK Gilts. Do a search for "bond ladder" on this site and elsewhere and you'll get a sense of what one of those is. I have contemplated one from time to time, but on balance, I have decided that what I perceive to be the slightly higher risk of VAGP is more convenient for me.

Regards, Newroad

Thanks again. I am torn between the ease and convenience of VAGP/VAGS and the like, and the slightly higher risk that entails. Mc2fool appears to corroborate the higher risk view. Quantifying that higher risk is difficult I am sure, and yet I am conscious of my lack of knowledge in this area were I to buy bonds. The ease and simplicity of bond funds does appeal for that reason. I can only state that what I would like is some sort of steady investment that would remain reasonably intact were there an equity crash.

I am not much into bonds but those that I do hold are bond funds (where as you will appreciate the manager decides on which bonds to hold) There is no maturity date because the fund will hold many different bonds with different maturity dates and coupons. I cannot be bothered/ do not feel competent enough to buy individual bonds although I used to buy short dated gilts when you could buy them below par, and hold them to maturity for a guaranteed capital gain. I do not think bonds guarantee wealth preservation any more than equities do these days. Obviously as interest rates fall over the next few years (if they fall over the next few years) the capital value of them should increase, but you may wait for some time.

If you want to educate yourself I think reading some of the threads on the bonds and gilts board would be sensible. Do not rush into anything until you understand what you are buying and why.

Dod