Hi Shiny,
I’m considering investing in LQD etf, especially after the backstop provided by Fed. With 3% pa dividend yield it looks attractive and also the options market provides an opportunity for deploying covered call strategy to improve the returns. What can potentially go wrong for this etf and should be considered before investing ? Currently, invested in ABF which I’m selling on rally.
Nope nope nope nope nope, I’m gonna stop you riiiiiiiiiiight there.
Here’s what can go wrong:
1) Currency risk. LQD is denominated in USD, and because it owns bonds, it effectively gives you exposure to the USDSGD FX rate. If SGD recovers from its current weak levels, you could lose that 3% in a week;
2) You’re too slow. The corporate bond market priced in that Fed backstop already; professional bond and ETF traders are much faster than you;
3) Selling covered calls is going to blow you up in two ways:
3a) If we get a crisis and yields collapse, you’ll get your shares called away and you’ll lose that phat dividend;
3b) If we get a crisis and defaults increase, you’ll be stuck with LQD that you don’t want;
4) On top of everything, I think LQD is considered a US asset for the purposes of estate tax. If you buy LQD and then get hit by a bus the next day—30-40% of your holdings is going to the US taxman.
Do not do this.
Can I ask, what is the basis of this statement? And whether it is right to assume that what works in US will work also well in Singapore?
Yep. The default assumption should be that relationships like that one (“corporate bonds deliver better returns than govvies even after defaults”) hold unless there’s some reason for them not to hold. It’d be a bit nihilistic to say “oh, this relationship holds in US markets, but I’m going to assume it
doesn’t work in Singapore”; it’s safe to say “OK, this relationship holds in US markets, it probably works in Singapore unless there’s some structural reason why it doesn’t”.
(A good example of one that
doesn’t hold is “bond yields go up as maturities increase”, which doesn’t always work in the UK: there’s so much demand for long-dated GBP bonds from UK pension funds that some extremely-long-dated GBP bonds trade at a lower yield than shorter-dated bonds.)
Sounds like hindsight bias to me, just stating my views. The reason why I dlslike Singapore market (yes STI, the bond etfs) so much is that the underlying securities these indexes are based on is so freaking small, its not decent diversification. And it is going to get worse, as our fewer companies choose to list here.
MBH doesn’t just include “bonds issued by Singaporean companies”, it includes “bonds issued in SGD by any corporate issuer”.
So you get the big three banks, LTA, and HDB, because they’re big SGD issuers; but you also get other companies with active cross-currency issuance programs: ANZ Bank, my old shop Commerzbank, Exim Bank of Korea, China Huarong, LBBW, Manulife, Westpac...
And companies are going to keep issuing in SGD as long as there are giant Singaporean mutual fund companies lining up to buy bonds.
Just wondering is it alright not to based any of my investment in SGD?
Allthough I'm now in my early thirties, I have no clue where I might want to retire in future. Seems like a better choice to put all my investment in a strong currency like USD, and many S.E.A countries readily exchange their currency for USD.
Do you think is a good idea to base all my investment in USD?
I wouldn’t recommend this for most people, but if you’re genuinely contemplating pulling the ripcord from the little red dot, then yes—in that circumstance, and only in that circumstance, it’d make sense to have just global stocks + global bonds, and no allocation to Singapore stocks/bonds.
Do you guys save a warchest to buy a lump sum when there is a significant dip in the market to lower down your average cost?
I understand that ST don't advocating timing the market, but these dips that happen in 2008, 2011, 2016 and now 2020, could significantly average down ur cost significantly.
There are two tricky things to this. Let’s assume that you do this, you need to be able to answer two questions:
1) What counts as a “dip”? A 5% drawdown? 10%? 20%? Set it too big and you’ll never get invested.
2) When the dip comes, will you really be able to buy? You’ve seen people in this forum over the last two months running around asking “should I sell everything? Is the sky falling in? The sky is falling in, why aren’t I allowed to sell? I want to sell, I want the bleeding to stop!”. That’s the natural reflex, and keeping a war chest assumes that you’ll be able to go against the natural instinct to run for cover in a crash.
