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Could someone explain accumulating bond ETFs
I understand how distributing bond etfs could work, you get part of the coupons when the etf distributes profits, which compensates somewhat for the price changes of the etf. Interest rates would affect the price of the etf but that would be partly compensated by the distribution.
But how does this work on accumulating etfs? If the profits are always reinvested in the fund, shouldn't the price of the fund always go up? Assuming all/most bonds dont default, interest rates would affect the price but that would be compensated by the reinvested profits?
I am missing something here, dont see the point of a bond etf if the price can change so much.
I'm far from an expert on bonds, but I found an explanation here.
I think you might be confused because you're looking at it as a source of income? Some people just want to invest and they don't want any money until they sell. If you don't get any payments then you don't pay any taxes.
This delays taxes until you sell, which you can do whenever you need to. If you sell a lot, it's more taxes to pay at once. It isn't always the best, but it's often what people want.
You might compare with owning a stock that doesn't have dividends. There's some volatility but less downside risk than stock, usually. The bond fund's price should usually go up except when interest rates rise, like happened recently.
(At least, that's how it works in the US. I'm not a tax expert either and it might not work that way where you are.)
Yes I get the accumulating ETFs in general, but then the stocks go up and down so the value of the ETF goes up and down. But with bonds, the underlying assets of the ETF should just go up unless the government/corp doesn't pay the bond back? I suppose it really is just betting on interest rates then, but then I don't really see the point, I could just buy some bonds and have some guaranteed return.
I'm still not a bond expert, but to think out loud about this:
A regular bond is a bet on interest rates too, but it's subtle.
If you hold a bond to maturity, you know what you'll get in the end. But if the price goes down along the way and then goes up again, that's telling you something about opportunity costs. You missed a chance to buy the bond on sale if you had waited. So buying a bond is a bet that interest rates won't go up so much that you would be able to buy the same bond later on sale.
Also, when you buy a bond and you don't actually know when you'll need the money, you might either have to replace it when it matures or sell it early. There's a risk that interest rates will be high and the bond price low when it's time to sell, and the time between when you sell the bond and its maturity date determines the interest rate risk.
You could think of owning a bond fund as doing the same thing you could do by buying a bunch of bonds, replacing them as they mature, and then selling them all at once. When you sell them all, the bonds won't be held to maturity. But suppose the fund buys one-year bonds and you end up holding it for three years. Most of the bonds that the fund buys are going to be held to maturity and replaced. When you sell the bonds, they will have less than a year to go. (Half a year on average.)
If you're concerned about needing the money suddenly and want to avoid having to sell at a low price then you probably want shorter-term bonds, which won't vary in price as much due to interest rate risk. This is a guess, but then again, you need to guess about which maturity date you want when you buy a bond anyway.
Thanks for that I think I understand it a bit better now. I guess it comes down to whether your are planning to hold the bonds to maturity or not
The main value of a bond is the principal which you receive at the end - and the present value of that is very sensitive to the assumed discount rate (time value of money)
To give a concrete example - let's say you have a 30y zero coupon bond, and the fed funds rate is 1%. Value of that would be principal / (1.01^30). Then after a hiking cycle and fed funds reaches 5%... suddenly you're looking at principal / (1.05^30). The value of your bond would crater, because essentially capital is more scarce and getting a higher bid, so by holding this you're sacrificing interest today for a principal repayment in 30y time. Not a problem when money is basically free... but a big problem when it isn't.
The value of bond ETFS can fluctuate due to market supply and demand. Premiums develop when share prices rise above the net asset value (NAV), and discounts develop when prices fall below NAV. There is a natural mechanism in place to keep a bond ETF's share price and NAV aligned: arbitrage
Full disclosure I just asked chat gpt. I saw your question and wanted to know as well!