Response to Roger Nusbaum on Bond ETFs

by: Will McClatchy

Roger Nusbaum wrote on July 6 that most investors should buy individual Treasuries, not an ETF that maintains a constant maturity (see "Five New Bond ETFs, and Why They May Not Be for You").

I expected someone to take him to task, but I guess I will have to. According to Roger:

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.

Yes, easy enough but completely contrary to basic rules of asset allocation. The average investor should allocate assets relatively passively at modest or low cost between equities, fixed income and other asset classes in a well thought out asset allocation to keep risk and reward in acceptable balance.

Treasuries are an obvious choice to dampen risk. They can only do so in a consistent way if the interest rate risk remains constant. Which is what excellent new Ameristock ETFs do at the phenomenally low cost of .15% annual fee. It's just like rebalancing equities and bonds. If you let equities grow without selling some off and buying some bonds to get back to the strategic asset allocation split then you are not asset allocating. That's fine if you know what you are doing, but clearly this is not for the average investor.

Roger Nusbaum advocates that investors buy a very long bond and hold it for term. During its evolution its interest rate risk changes radically (from risky/yieldy to low risk/low yield). Not exactly for the average investor.

We are talking about basics here.

Disclosure: none

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