This instrument invests in Fannie, Freddie, and Ginnie Mae debt which is now "guaranteed" by the U.S. government - yet it's been getting (mostly) whipped like an ugly duckling the past few few months. We were looking for a safe "debt type" ETF with a nice yield (in this case 8%ish) and instead we got an entity that promptly dropped from $9.20s (where we bought) to as low as $7.20s. Now we are getting a rebound back to the $9.50s so we're finally "up" on the position with a little yield to boot. But I am still confused as to why the ETF has acted so poorly.
We're cutting this from 4.1% stake to 2.4% with a sale just under $9.60. I don't know if technicals work very well on an ETF like this but you can see the chart. I'm selling more on a general cloud of confusion on it's behavior relative to what I thought it "would" do, than any specific price point. I have to re-assess and figure out what I did wrong with this ETF and why it acted so badly; this was my first time purchasing this type of instrument so I clearly misjudged something. I know a couple of readers invest primarily in these type of ETFs so feel free to shoot me an email or a comment on where I went wrong with this one.Ironically, we were looking for something with a nice yield at the time and the other instrument I was debating adding that day in October was iShares Investment Grade Bond (LQD) which was yielding 5% at the time - we wanted to get some high quality corporate debt in "best of breed" companies that had zero chance of default (or government debt). LQD has simply exploded upward the past few days. We obviously made the wrong strategic choice between these two - LQD was in the $87s at the time, has never fallen sharply since and now has exploded north of $100. So that's a 15% gain on the ETF plus the yield on top of it. Instead we went for government backed mortgage paper and made 2%. Bummer.
Long PIMCO Strategic Global Government Fund in fund; no personal position
2 comments:
At work, so not much time. Corporate has taken off since the rate cut in a scramble for yield, much like the demand for the long dated treasuries.
http://acrossthecurve.com/?p=2325
In october everything got taken out and shot. I really don't keep up with the agency debt much. You might scour John's blog (above) for hints if no one replies.
Jason
Mark: I copy an email I sent to you when you bought this fund – as I mentioned, it is a Close-end Fund, not an ETF per se. CFs can trade at huge premiums or discounts and the underlying securities can be secondary to the traditional band in which they trade. That’s the problem with RCS:
Oct. 31
I see you are now delving into closed-end funds, and for bonds as well. I’ve been “doing” CEs
for a long time. They are among the most volatile investments as they are more subject to emotion than normal equities. When investors want to get out, they
can sell at huge discounts and likewise when an asset class is popular, they sell at premiums. I only use limit orders for both buying and selling and usually
CEs are not very liquid. Also, watch out for leverage “distribution rate” which can distort the return.
If you check RCS on my favorite site http://www.etfconnect.com/select/FindAFund.aspx you’ll note that is says the distribution rate is 8.4% -- that can include return of capital so it is not necessarily yield as shown on Yahoo. If it is actually yield, the fund would have to sell at a discount, not
a premium, or it would have to have leverage, or mostly have very high yielding junk bonds in its
portfolio.
Also, note the discount history at the bottom. It has sold at a discount and usually during tax selling time – CE investors frequently sell for tax reasons and
replace with another, similar fund.
In general, I’d say be careful, particularly of funds selling at substantial premiums.
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