Bond ETF suggestions

granta

My original questions were around bond ETFs, but having started reading some Monevator articles, would be interested to hear thoughts on Money Market funds/etfs as an additional strand of defensive holdings. Any pros/cons?

Lyxor Smart Overnight Return ETF (CSH2) 

Royal London Short Term Money Market fund

Currently, returns are better than the interest paid by my broker on residual cash in my ISA/SIPP, but at a fee cost. 

Why hold these over bonds?

masonic

granta said:

My original questions were around bond ETFs, but having started reading some Monevator articles, would be interested to hear thoughts on Money Market funds/etfs as an additional strand of defensive holdings. Any pros/cons?

Lyxor Smart Overnight Return ETF (CSH2) 

Royal London Short Term Money Market fund

Currently, returns are better than the interest paid by my broker on residual cash in my ISA/SIPP, but at a fee cost. 

Why hold these over bonds?

Short term money market funds are good when interest rates are rising, as they respond very quickly to the higher rates. They are less useful in a falling interest rate environment, but still good for money you need within a few months.

OldScientist

granta said:

My original questions were around bond ETFs, but having started reading some Monevator articles, would be interested to hear thoughts on Money Market funds/etfs as an additional strand of defensive holdings. Any pros/cons?

Lyxor Smart Overnight Return ETF (CSH2) 

Royal London Short Term Money Market fund

Currently, returns are better than the interest paid by my broker on residual cash in my ISA/SIPP, but at a fee cost. 

Why hold these over bonds?

Because STMMF are very short term (weighted maturities of months) their price, in nominal terms, will not fluctuate much with changes in interest rates (e.g., unlike longer maturity bond funds, they are unlikely to post a loss if yields rise).

It is modified duration that determines the response of the price of the fixed income fund to changes in yields. For example, if the modified duration is 5, then very roughly, a 1 percentage point change in yields will lead to a 5% change in price with increases in yields leading to a reduction in price and vice versa.

In general, longer duration fixed income has a higher yield than short duration (a 'non-inverted' yield curve) which makes longer maturity bonds attractive but more volatile in terms of price.

Historical research suggest that intermediate bonds (perhaps with maturities somewhere between 5 and 10 years) represent a useful compromise between returns and volatility.