I am planning to sell a High Yield Bond fund that has an annual distribution (about 8% I expect) on Dec 31. Is there any point waiting for this distribution or would the price of the fund drop by a similar amount the day after the distribution?
Selling a High Yield Bond fund before distribution.
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minor point: does this bond fund only distribute once a year ? many distribute quarterly, some even monthly.
with respect to the monthly distributors among the high-yield bond ETFs, notionally speaking and irrespective of market forces, their prices will rise towards the distribution date, then fall on the x-date. In reality this trajectory is blurred by market forces.
however, what i've found is that monthly-distributing junk bond ETFs typically have intramonth trading swings that are considerably greater than the distribution amount. If one pays attention, it's possible to trade in & out of these things without ever collecting a distribution, meanwhile collecting a modest capital gain with each swing that can easily annualize to a return of 7 or 8%, with only half of such a return being taxable.
i do this in the cash-equivalent portion of the portfolio. It's more work and riskier than the good old days when a T-bill yielded 5%, but hey, times have changed.
there is the risk that one's strategy will backfire and one will be left holding the bond ETF - the bag as it were - on distribution day. This is a relatively gentle alternative scenario. A bond fund - even a high-yield bond fund - is highly unlikely to go bankrupt, and generally its trading pattern will not be as volatile as a major stock index.
with respect to the monthly distributors among the high-yield bond ETFs, notionally speaking and irrespective of market forces, their prices will rise towards the distribution date, then fall on the x-date. In reality this trajectory is blurred by market forces.
however, what i've found is that monthly-distributing junk bond ETFs typically have intramonth trading swings that are considerably greater than the distribution amount. If one pays attention, it's possible to trade in & out of these things without ever collecting a distribution, meanwhile collecting a modest capital gain with each swing that can easily annualize to a return of 7 or 8%, with only half of such a return being taxable.
i do this in the cash-equivalent portion of the portfolio. It's more work and riskier than the good old days when a T-bill yielded 5%, but hey, times have changed.
there is the risk that one's strategy will backfire and one will be left holding the bond ETF - the bag as it were - on distribution day. This is a relatively gentle alternative scenario. A bond fund - even a high-yield bond fund - is highly unlikely to go bankrupt, and generally its trading pattern will not be as volatile as a major stock index.
Thank you for the insight. I had not thought of the tax implications between Income and Capital Gains. Unfortunately, I have this fund in an RRSP. I will keep this advice in mind for the future.
It is the Chou Bonds fund. It does pay its distribution yearly, it was 12% last year; I am expecting it to be about 8% this year because its price has gone-up by 35%. In October 2008, it has dropped much more than the other High Yield Bond funds. This volatility makes me nervous and its use of US bonds appears to me as a weakness. I am thinking of switching to a High Yield Bond fund that is less volatile.
Ideally I would like to find a High Yield Bond fund with mostly international (non US) bonds. Any suggestions?
It is the Chou Bonds fund. It does pay its distribution yearly, it was 12% last year; I am expecting it to be about 8% this year because its price has gone-up by 35%. In October 2008, it has dropped much more than the other High Yield Bond funds. This volatility makes me nervous and its use of US bonds appears to me as a weakness. I am thinking of switching to a High Yield Bond fund that is less volatile.
Ideally I would like to find a High Yield Bond fund with mostly international (non US) bonds. Any suggestions?
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re repeat visits to the junkyard, aka short-term trading in high yield bond etfs in order to book capital gains.
there's a huge thirst for these products, which on the face of things do offer high returns. BMO has just brought out, among its brand-new family of etfs, a hi-yield bond etf which turns out to be a licensed canadian version of the US hi-yield bond etf JNK with a US dollar hedge thrown in. Not a bad idea.
another fund family recently brought out a hi-yield debenture fund that was oversubscribed, therefore is now bringing out a hi-yield bond fund.
hmmmn. Are these high yield funds a similar story to the mortgage-backed products of yesteryear, all catering to the same greed for what appears to be abnormally high income. Many convertible debentures, for example, have language written into the fine print stating that the issuer, at maturity, has the right to not redeem for cash but to issue a fixed number of common shares instead.
another worrying scenario is that a company can get bought out by an over-leveraged larger fish, and so the investor ends up owning different convertibles or other securities that are even weaker than those he had been holding.
overall, there is concern that, although junkyards can tolerate a certain proportion of bankruptcies, nevertheless this proportion could creep upwards to a percentage of the holdings that would drastically reduce the unit or share price by 30-50%.
one approach is to trade these etfs on an exceptionally tight leash. Some that pay monthly that i've looked at trade with intramonth price swings that are markedly greater than the distributions. Most tend to move up towards x-date & fall not long thereafter. So it's possible to trade these instruments aggressively on a short-term basis only, booking capital gains along the way whose annual aggregate is higher than the annual distribution. I'm hardly a day-trader, but recently held one of these etfs for less than 4 hours. I certainly don't feel comfortable stashing cash permanently in hi-yields under a buy-and-hold approach. Think they're being over-marketed to a perhaps gullible investing public.
all in all, i'd rather stash cash in top-rated short-term paper as one could even 2 years ago, but alas dem days are done like dinner.
there's a huge thirst for these products, which on the face of things do offer high returns. BMO has just brought out, among its brand-new family of etfs, a hi-yield bond etf which turns out to be a licensed canadian version of the US hi-yield bond etf JNK with a US dollar hedge thrown in. Not a bad idea.
another fund family recently brought out a hi-yield debenture fund that was oversubscribed, therefore is now bringing out a hi-yield bond fund.
hmmmn. Are these high yield funds a similar story to the mortgage-backed products of yesteryear, all catering to the same greed for what appears to be abnormally high income. Many convertible debentures, for example, have language written into the fine print stating that the issuer, at maturity, has the right to not redeem for cash but to issue a fixed number of common shares instead.
another worrying scenario is that a company can get bought out by an over-leveraged larger fish, and so the investor ends up owning different convertibles or other securities that are even weaker than those he had been holding.
overall, there is concern that, although junkyards can tolerate a certain proportion of bankruptcies, nevertheless this proportion could creep upwards to a percentage of the holdings that would drastically reduce the unit or share price by 30-50%.
one approach is to trade these etfs on an exceptionally tight leash. Some that pay monthly that i've looked at trade with intramonth price swings that are markedly greater than the distributions. Most tend to move up towards x-date & fall not long thereafter. So it's possible to trade these instruments aggressively on a short-term basis only, booking capital gains along the way whose annual aggregate is higher than the annual distribution. I'm hardly a day-trader, but recently held one of these etfs for less than 4 hours. I certainly don't feel comfortable stashing cash permanently in hi-yields under a buy-and-hold approach. Think they're being over-marketed to a perhaps gullible investing public.
all in all, i'd rather stash cash in top-rated short-term paper as one could even 2 years ago, but alas dem days are done like dinner.
I think that junk bonds have the same effective return as long term government bonds or investment grade corporate bonds. Their yield is computed by considering the default risk and adding it to the yield of a risk free asset class. The risk for junk bonds is very high and the risk for government bonds is very low. Junk bonds are positively correlated with the stock market so it does not add any diversification to a portfolio. Probably the expected return of a junk bond fond is the same as a stock index fund.
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ok but you're discussing tomatoes-botanically-are-fruits and i'm talking tomatoes-get-cooked-and-served-as-vegetables.
i'm trading my tomatoes, not as a stock proxy, but as part of a cash and cash-equivalent management strategy. Even if i held my tomatoes for income, they would still be a fairly short-term cash deployment for me. The lifetime of fresh tomatoes is only a few days.
just sold my tomatoes this am for the 4th time in 2 months. So far i'm up 3.17%, or about 19% annualized. Not that i expect to keep up that ripping rate for 12 months, but hey these days i'd be grateful for short-term cash and cash-equivalent returns of 5% per annum.
most equity funds don't pay every month. It's this monthly distribution that helps protect the downside risk in the tomatoes/capital gain trading strategy. And i do beg of you, even if you are a fund expert, and even if dozens of monthly-pay funds exist, please don't even think of telling me about them, because i dislike funds intensely and have no intention of ever owning any significant amount of them.
i have other cash at lower rates, but these days the tomatoes are the most profitable part of my cash kitchen garden. It's 1:11 pm here in eastern standard time. A little salad w sliced pomodoro, spanish olive oil, chopped basil, anyone ?
i'm trading my tomatoes, not as a stock proxy, but as part of a cash and cash-equivalent management strategy. Even if i held my tomatoes for income, they would still be a fairly short-term cash deployment for me. The lifetime of fresh tomatoes is only a few days.
just sold my tomatoes this am for the 4th time in 2 months. So far i'm up 3.17%, or about 19% annualized. Not that i expect to keep up that ripping rate for 12 months, but hey these days i'd be grateful for short-term cash and cash-equivalent returns of 5% per annum.
most equity funds don't pay every month. It's this monthly distribution that helps protect the downside risk in the tomatoes/capital gain trading strategy. And i do beg of you, even if you are a fund expert, and even if dozens of monthly-pay funds exist, please don't even think of telling me about them, because i dislike funds intensely and have no intention of ever owning any significant amount of them.
i have other cash at lower rates, but these days the tomatoes are the most profitable part of my cash kitchen garden. It's 1:11 pm here in eastern standard time. A little salad w sliced pomodoro, spanish olive oil, chopped basil, anyone ?
What I think is that you could have made the same amount over the last few months with peaches instead of tomatoes with an identical investing strategy. If you like tomatoes and know how to cook them, then that's ok.
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the problem with peaches is that they tend to be those sweet sticky equity funds that only pay out distributions once a quarter, sometimes only once a year. Put up as jam and conserves in mason jars, peaches sometimes risk to slip out of sight in the pantry.
tomatoes, on the other hand, simmer constantly on the back burner, dishing out a hi-yield ladle of tomato sauce every month, so it's easier to keep them under tight observation.
tomatoes, on the other hand, simmer constantly on the back burner, dishing out a hi-yield ladle of tomato sauce every month, so it's easier to keep them under tight observation.
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