Bond ETF vs Bond Future for longer term holding
$begingroup$
How would a long term investor go about evaluating the prospect of investing in a bond ETF vs a long position in a future of equal duration?
- Let’s asume this investment is in a taxable account.
- Let’s asume we are looking at a 2year duration (for simplicity)
- How can we estimate if the two options are roughly equivalent or one better than the other?
- Is this a shifting relationship?
Thanks
fixed-income interest-rates futures bond-futures
asked 2 hours ago
Camilo AvellaCamilo Avella
212
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Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
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add a comment |
$begingroup$
How would a long term investor go about evaluating the prospect of investing in a bond ETF vs a long position in a future of equal duration?
- Let’s asume this investment is in a taxable account.
- Let’s asume we are looking at a 2year duration (for simplicity)
- How can we estimate if the two options are roughly equivalent or one better than the other?
- Is this a shifting relationship?
Thanks
fixed-income interest-rates futures bond-futures
asked 2 hours ago
Camilo AvellaCamilo Avella
212
New contributor
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
How would a long term investor go about evaluating the prospect of investing in a bond ETF vs a long position in a future of equal duration?
- Let’s asume this investment is in a taxable account.
- Let’s asume we are looking at a 2year duration (for simplicity)
- How can we estimate if the two options are roughly equivalent or one better than the other?
- Is this a shifting relationship?
Thanks
fixed-income interest-rates futures bond-futures
asked 2 hours ago
Camilo AvellaCamilo Avella
212
New contributor
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
How would a long term investor go about evaluating the prospect of investing in a bond ETF vs a long position in a future of equal duration?
- Let’s asume this investment is in a taxable account.
- Let’s asume we are looking at a 2year duration (for simplicity)
- How can we estimate if the two options are roughly equivalent or one better than the other?
- Is this a shifting relationship?
Thanks
fixed-income interest-rates futures bond-futures
fixed-income interest-rates futures bond-futures
asked 2 hours ago
Camilo AvellaCamilo Avella
212
New contributor
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 2 hours ago
Camilo AvellaCamilo Avella
212
New contributor
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 2 hours ago
Camilo AvellaCamilo Avella
212
New contributor
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked 2 hours ago
Camilo AvellaCamilo Avella
212
asked 2 hours ago
Camilo AvellaCamilo Avella
212
212
New contributor
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
Camilo Avella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
add a comment |
add a comment |
2 Answers
2
active
oldest
votes
$begingroup$
The future will not maintain its duration as it approached maturity. The position will need to be rolled as it approaches maturity. The future will also be very sensitive to one or a series of deliverable bonds to settle the future at maturity. The cheapest to deliver bond will be the driver of the sensitivity to the set of deliverable bonds. As the future is a leveraged (unfunded instrument), it will be sensitive to short term rates embedded in the cost of the future (as well as the investment vehicle for the cash invested if the overall strategy will be unlevered). As a single holding that matures, the position will impose more operational demands on the investor, including maintenance of margin and the cash investment.
The ETF holds an actual portfolio of bonds and can maintain a target duration by managing the components of the portfolio. The basic ETF will be unlevered. However, this may not be as pure a play on a specific tenor or interest rates as the future in that as a portfolio, it will hold some combination of shorter and longer term bonds to meet it's duration target. As such, it will be sensitive to more the yield curve movements. Also, convexity may enter into the sensitivity depending on the bonds that are in the portfolio. As there is a manager of the portfolio, this investment should put less operational demands on the investor on a day to day basis. There will of course be a management fee in the ETF.
There is no one product that is better than the other and depends on the objectives, views, and operational capabilities of the investor.
answered 2 hours ago
AlRacoonAlRacoon
1,35828
$endgroup$
1
$begingroup$
Can you clarify your main point assuming the investor is indifferent about having to roll the futures ? Seems like if you add this assumption you don’t have any other qualification between the two options. Thanks
$endgroup$
– Camilo Avella
1 hour ago
1
$begingroup$
@CamiloAvella The future is a derivative instrument that has a fixed pool of bonds that qualify to be delivered to settle the future at maturity. Usually the cheapest bond to deliver will be how the future trades (However there is some optionality in that cheapest to deliver can change). As a single bond, the future is most sensitive to drivers of return for this bond. One of the factors is the duration will shorten as the future approaches maturity. As the futures are rolled, the bond will also change as the new future will have different deliverable bonds. The ETF is a portfolio of bonds.
$endgroup$
– AlRacoon
1 hour ago
$begingroup$
@AIRacoon Thanks. Do you have any comments on the differential rate of financing mentioned in the other answer?
$endgroup$
– Camilo Avella
54 mins ago
add a comment |
$begingroup$
I don't have a formal answer, more of a hypothesis:
If the implied repo rate for the cheapest to deliver is < than the 3 month treasury bill. You are better off with the future. Specially adding the tax burden on ordinary income from holding the Bond ETF vs the hybrid rate of futures.
Right now the 3m rate is 2.45% and the implied repo rate for the cheapest to deliver is 2.35%
answered 1 hour ago
hernanavellahernanavella
1365
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
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2 Answers
2
active
oldest
votes
2 Answers
2
active
oldest
votes
active
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active
oldest
votes
$begingroup$
The future will not maintain its duration as it approached maturity. The position will need to be rolled as it approaches maturity. The future will also be very sensitive to one or a series of deliverable bonds to settle the future at maturity. The cheapest to deliver bond will be the driver of the sensitivity to the set of deliverable bonds. As the future is a leveraged (unfunded instrument), it will be sensitive to short term rates embedded in the cost of the future (as well as the investment vehicle for the cash invested if the overall strategy will be unlevered). As a single holding that matures, the position will impose more operational demands on the investor, including maintenance of margin and the cash investment.
The ETF holds an actual portfolio of bonds and can maintain a target duration by managing the components of the portfolio. The basic ETF will be unlevered. However, this may not be as pure a play on a specific tenor or interest rates as the future in that as a portfolio, it will hold some combination of shorter and longer term bonds to meet it's duration target. As such, it will be sensitive to more the yield curve movements. Also, convexity may enter into the sensitivity depending on the bonds that are in the portfolio. As there is a manager of the portfolio, this investment should put less operational demands on the investor on a day to day basis. There will of course be a management fee in the ETF.
There is no one product that is better than the other and depends on the objectives, views, and operational capabilities of the investor.
answered 2 hours ago
AlRacoonAlRacoon
1,35828
$endgroup$
1
$begingroup$
Can you clarify your main point assuming the investor is indifferent about having to roll the futures ? Seems like if you add this assumption you don’t have any other qualification between the two options. Thanks
$endgroup$
– Camilo Avella
1 hour ago
1
$begingroup$
@CamiloAvella The future is a derivative instrument that has a fixed pool of bonds that qualify to be delivered to settle the future at maturity. Usually the cheapest bond to deliver will be how the future trades (However there is some optionality in that cheapest to deliver can change). As a single bond, the future is most sensitive to drivers of return for this bond. One of the factors is the duration will shorten as the future approaches maturity. As the futures are rolled, the bond will also change as the new future will have different deliverable bonds. The ETF is a portfolio of bonds.
$endgroup$
– AlRacoon
1 hour ago
$begingroup$
@AIRacoon Thanks. Do you have any comments on the differential rate of financing mentioned in the other answer?
$endgroup$
– Camilo Avella
54 mins ago
add a comment |
$begingroup$
The future will not maintain its duration as it approached maturity. The position will need to be rolled as it approaches maturity. The future will also be very sensitive to one or a series of deliverable bonds to settle the future at maturity. The cheapest to deliver bond will be the driver of the sensitivity to the set of deliverable bonds. As the future is a leveraged (unfunded instrument), it will be sensitive to short term rates embedded in the cost of the future (as well as the investment vehicle for the cash invested if the overall strategy will be unlevered). As a single holding that matures, the position will impose more operational demands on the investor, including maintenance of margin and the cash investment.
The ETF holds an actual portfolio of bonds and can maintain a target duration by managing the components of the portfolio. The basic ETF will be unlevered. However, this may not be as pure a play on a specific tenor or interest rates as the future in that as a portfolio, it will hold some combination of shorter and longer term bonds to meet it's duration target. As such, it will be sensitive to more the yield curve movements. Also, convexity may enter into the sensitivity depending on the bonds that are in the portfolio. As there is a manager of the portfolio, this investment should put less operational demands on the investor on a day to day basis. There will of course be a management fee in the ETF.
There is no one product that is better than the other and depends on the objectives, views, and operational capabilities of the investor.
answered 2 hours ago
AlRacoonAlRacoon
1,35828
$endgroup$
1
$begingroup$
Can you clarify your main point assuming the investor is indifferent about having to roll the futures ? Seems like if you add this assumption you don’t have any other qualification between the two options. Thanks
$endgroup$
– Camilo Avella
1 hour ago
1
$begingroup$
@CamiloAvella The future is a derivative instrument that has a fixed pool of bonds that qualify to be delivered to settle the future at maturity. Usually the cheapest bond to deliver will be how the future trades (However there is some optionality in that cheapest to deliver can change). As a single bond, the future is most sensitive to drivers of return for this bond. One of the factors is the duration will shorten as the future approaches maturity. As the futures are rolled, the bond will also change as the new future will have different deliverable bonds. The ETF is a portfolio of bonds.
$endgroup$
– AlRacoon
1 hour ago
$begingroup$
@AIRacoon Thanks. Do you have any comments on the differential rate of financing mentioned in the other answer?
$endgroup$
– Camilo Avella
54 mins ago
add a comment |
$begingroup$
The future will not maintain its duration as it approached maturity. The position will need to be rolled as it approaches maturity. The future will also be very sensitive to one or a series of deliverable bonds to settle the future at maturity. The cheapest to deliver bond will be the driver of the sensitivity to the set of deliverable bonds. As the future is a leveraged (unfunded instrument), it will be sensitive to short term rates embedded in the cost of the future (as well as the investment vehicle for the cash invested if the overall strategy will be unlevered). As a single holding that matures, the position will impose more operational demands on the investor, including maintenance of margin and the cash investment.
The ETF holds an actual portfolio of bonds and can maintain a target duration by managing the components of the portfolio. The basic ETF will be unlevered. However, this may not be as pure a play on a specific tenor or interest rates as the future in that as a portfolio, it will hold some combination of shorter and longer term bonds to meet it's duration target. As such, it will be sensitive to more the yield curve movements. Also, convexity may enter into the sensitivity depending on the bonds that are in the portfolio. As there is a manager of the portfolio, this investment should put less operational demands on the investor on a day to day basis. There will of course be a management fee in the ETF.
There is no one product that is better than the other and depends on the objectives, views, and operational capabilities of the investor.
answered 2 hours ago
AlRacoonAlRacoon
1,35828
$endgroup$
The future will not maintain its duration as it approached maturity. The position will need to be rolled as it approaches maturity. The future will also be very sensitive to one or a series of deliverable bonds to settle the future at maturity. The cheapest to deliver bond will be the driver of the sensitivity to the set of deliverable bonds. As the future is a leveraged (unfunded instrument), it will be sensitive to short term rates embedded in the cost of the future (as well as the investment vehicle for the cash invested if the overall strategy will be unlevered). As a single holding that matures, the position will impose more operational demands on the investor, including maintenance of margin and the cash investment.
The ETF holds an actual portfolio of bonds and can maintain a target duration by managing the components of the portfolio. The basic ETF will be unlevered. However, this may not be as pure a play on a specific tenor or interest rates as the future in that as a portfolio, it will hold some combination of shorter and longer term bonds to meet it's duration target. As such, it will be sensitive to more the yield curve movements. Also, convexity may enter into the sensitivity depending on the bonds that are in the portfolio. As there is a manager of the portfolio, this investment should put less operational demands on the investor on a day to day basis. There will of course be a management fee in the ETF.
There is no one product that is better than the other and depends on the objectives, views, and operational capabilities of the investor.
answered 2 hours ago
AlRacoonAlRacoon
1,35828
answered 2 hours ago
AlRacoonAlRacoon
1,35828
answered 2 hours ago
AlRacoonAlRacoon
1,35828
answered 2 hours ago
AlRacoonAlRacoon
1,35828
1,35828
1
$begingroup$
Can you clarify your main point assuming the investor is indifferent about having to roll the futures ? Seems like if you add this assumption you don’t have any other qualification between the two options. Thanks
$endgroup$
– Camilo Avella
1 hour ago
1
$begingroup$
@CamiloAvella The future is a derivative instrument that has a fixed pool of bonds that qualify to be delivered to settle the future at maturity. Usually the cheapest bond to deliver will be how the future trades (However there is some optionality in that cheapest to deliver can change). As a single bond, the future is most sensitive to drivers of return for this bond. One of the factors is the duration will shorten as the future approaches maturity. As the futures are rolled, the bond will also change as the new future will have different deliverable bonds. The ETF is a portfolio of bonds.
$endgroup$
– AlRacoon
1 hour ago
$begingroup$
@AIRacoon Thanks. Do you have any comments on the differential rate of financing mentioned in the other answer?
$endgroup$
– Camilo Avella
54 mins ago
add a comment |
1
$begingroup$
Can you clarify your main point assuming the investor is indifferent about having to roll the futures ? Seems like if you add this assumption you don’t have any other qualification between the two options. Thanks
$endgroup$
– Camilo Avella
1 hour ago
1
$begingroup$
@CamiloAvella The future is a derivative instrument that has a fixed pool of bonds that qualify to be delivered to settle the future at maturity. Usually the cheapest bond to deliver will be how the future trades (However there is some optionality in that cheapest to deliver can change). As a single bond, the future is most sensitive to drivers of return for this bond. One of the factors is the duration will shorten as the future approaches maturity. As the futures are rolled, the bond will also change as the new future will have different deliverable bonds. The ETF is a portfolio of bonds.
$endgroup$
– AlRacoon
1 hour ago
$begingroup$
@AIRacoon Thanks. Do you have any comments on the differential rate of financing mentioned in the other answer?
$endgroup$
– Camilo Avella
54 mins ago
1
1
$begingroup$
Can you clarify your main point assuming the investor is indifferent about having to roll the futures ? Seems like if you add this assumption you don’t have any other qualification between the two options. Thanks
$endgroup$
– Camilo Avella
1 hour ago
$begingroup$
Can you clarify your main point assuming the investor is indifferent about having to roll the futures ? Seems like if you add this assumption you don’t have any other qualification between the two options. Thanks
$endgroup$
– Camilo Avella
1 hour ago
1
1
$begingroup$
@CamiloAvella The future is a derivative instrument that has a fixed pool of bonds that qualify to be delivered to settle the future at maturity. Usually the cheapest bond to deliver will be how the future trades (However there is some optionality in that cheapest to deliver can change). As a single bond, the future is most sensitive to drivers of return for this bond. One of the factors is the duration will shorten as the future approaches maturity. As the futures are rolled, the bond will also change as the new future will have different deliverable bonds. The ETF is a portfolio of bonds.
$endgroup$
– AlRacoon
1 hour ago
$begingroup$
@CamiloAvella The future is a derivative instrument that has a fixed pool of bonds that qualify to be delivered to settle the future at maturity. Usually the cheapest bond to deliver will be how the future trades (However there is some optionality in that cheapest to deliver can change). As a single bond, the future is most sensitive to drivers of return for this bond. One of the factors is the duration will shorten as the future approaches maturity. As the futures are rolled, the bond will also change as the new future will have different deliverable bonds. The ETF is a portfolio of bonds.
$endgroup$
– AlRacoon
1 hour ago
$begingroup$
@AIRacoon Thanks. Do you have any comments on the differential rate of financing mentioned in the other answer?
$endgroup$
– Camilo Avella
54 mins ago
$begingroup$
@AIRacoon Thanks. Do you have any comments on the differential rate of financing mentioned in the other answer?
$endgroup$
– Camilo Avella
54 mins ago
add a comment |
$begingroup$
I don't have a formal answer, more of a hypothesis:
If the implied repo rate for the cheapest to deliver is < than the 3 month treasury bill. You are better off with the future. Specially adding the tax burden on ordinary income from holding the Bond ETF vs the hybrid rate of futures.
Right now the 3m rate is 2.45% and the implied repo rate for the cheapest to deliver is 2.35%
answered 1 hour ago
hernanavellahernanavella
1365
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
I don't have a formal answer, more of a hypothesis:
If the implied repo rate for the cheapest to deliver is < than the 3 month treasury bill. You are better off with the future. Specially adding the tax burden on ordinary income from holding the Bond ETF vs the hybrid rate of futures.
Right now the 3m rate is 2.45% and the implied repo rate for the cheapest to deliver is 2.35%
answered 1 hour ago
hernanavellahernanavella
1365
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
I don't have a formal answer, more of a hypothesis:
If the implied repo rate for the cheapest to deliver is < than the 3 month treasury bill. You are better off with the future. Specially adding the tax burden on ordinary income from holding the Bond ETF vs the hybrid rate of futures.
Right now the 3m rate is 2.45% and the implied repo rate for the cheapest to deliver is 2.35%
answered 1 hour ago
hernanavellahernanavella
1365
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
I don't have a formal answer, more of a hypothesis:
If the implied repo rate for the cheapest to deliver is < than the 3 month treasury bill. You are better off with the future. Specially adding the tax burden on ordinary income from holding the Bond ETF vs the hybrid rate of futures.
Right now the 3m rate is 2.45% and the implied repo rate for the cheapest to deliver is 2.35%
answered 1 hour ago
hernanavellahernanavella
1365
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
answered 1 hour ago
hernanavellahernanavella
1365
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
answered 1 hour ago
hernanavellahernanavella
1365
answered 1 hour ago
hernanavellahernanavella
1365
1365
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
hernanavella is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
add a comment |
add a comment |
Camilo Avella is a new contributor. Be nice, and check out our Code of Conduct.
Camilo Avella is a new contributor. Be nice, and check out our Code of Conduct.
Camilo Avella is a new contributor. Be nice, and check out our Code of Conduct.
Camilo Avella is a new contributor. Be nice, and check out our Code of Conduct.
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