Will McClatchy at ETFzone.com

Response to Roger Nusbaum on Bond ETFs

Agreed. The yield bounces around with GKD, but at least the interest rate risk profile remains the same. It remains a long bond and does not morph into a shorter term bond. Unfortunately for some of your clients, when the long bond expires, they will have to reinvest and then they could be in trouble unless they plan on living only so many years.

Response to Roger Nusbaum on Bond ETFs

If a bond fund owns 10-year bonds, you will certainly "get back par" in an economic sense even if the fund sells the bond before maturity. That is because the person who buys the bond buys to the right to "get back par". There is no economic penalty to a bond for selling, all else being equal.

Response to Roger Nusbaum on Bond ETFs

What's with the variable rate/variable price stuff? Funds which own Treasuries act like Treasuries. Treasuries are fixed rate instruments. Their price fluctuates with interest rates, inversely.

Response to Roger Nusbaum on Bond ETFs

Ssorry about the mispelling, Roger.

I am happy to be in the minority. ETFzone considers its main mission to dispelling myths regarding ETFs. Let's follow your example in your blog:

"If the yield on the ten year was 6% and you thought that was pretty good, you risk getting a lower rate with GKD if the yield in the marketplace goes down. That which might yield 6% today could yield 4% next year. If you buy an individual treasury, your yield will be whatever it was when you bought it -- which makes managing this portion of your portfolio much easier."

After one year GKD, which maintains a constant 10-year average maturity, still has a 10-year maturity. But the individual Treasury is now equivalent to a 9-Year maturity because it has 9 years left. If as you say the marketplace yield (essentially interest rate) for a 10-year bond goes from 6% to 4%, then the value of both holdings will rise, because both entitle the holder to many more years of 2% higher-than-market interest. The longer maturity GKD will get a bit more of a boost from its extra year. So actually, in your example GKD is the winner at that moment in time. Each month at Treasury auction as GKD turns over its holdings for new 10 year Treasuries, GKD takes its winnings (or losses) and plows them into the next batch.

I have no idea what you mean by "variable rate aspect to the treasury portion of a fixed income portfolio". GKD is not a variable rate product. It contains only fixed rate 10-year Treasuries. It does turn over its portfolio to maintain that 10-year duration, but that is not a variable rate as most people understand it.

My main point is that investors need to be clear whether they are maintaining a portfolio with set asset allocation targets, or if they are saving for a balloon payment or steady income over a known period. Most pension funds asset allocate with set targets, as do most investors saving for retirement. Clearly if one is saving for balloon payments such as college education or if one has set income requirements over a known period and no longer, then an individual bond is perfect. But when you essentially say that "average" investors should not asset allocate with bonds, I worry about how that advice will be taken.