could you please help me understand how ETFs tracking US treasury bonds (e.g. IE00BDFK1573) work/perform compared to buying individual bonds directly on the secondary market (e.g. US912797FH58).
I understand the latter as: I buy the bond at a specific price in USD (with a premium/discount vs. 100USD/pcs) with a given maturity and collect the coupon (if any) semi-anually, and will (if the counterparty does not default) get back the principal (100USD/pcs) at maturity. As an European Investor (in my case with domicile Switzerland, investing EUR) converting currency to USD and back is inconvenient, so is dealing with US withholding tax (I understand I can reduce taxation from 30% to 15% by submitting a W-8BEN form via my broker and offset the remainder vs. Swiss income tax, although I have not done that myself yet).
Given these complications the concept of buying an ETF directly in EUR on an European exchange (such as IE00BDFK1573) that tracks performance of US Treasuries seems interesting. However, I have been unable to find much explanation of what to expect from such a product (or the underlying index) in times of changing treasury yields.
Here are my questions:
- Can I expect the ETF to return the current average yield of the treasury bonds in it's time-range? In other words: given that current 1 year T-bills return ca. 5%pa, would an ETF such as IE00BDFK1573 provide a similar return?
- I understand the ETF buys and holds individual bonds in it's time-range and then sells them once they drop out. Does that mean that a 3 year bond bought 2 years ago is still part of the "basket"? Given the much lower yields 2 years ago, does that "drag down" the performance of the ETF (I understand bond prices fall if interests rise)? If I buy that ETF now, is that effect already priced in, i.e. reflected in lower ETF prices?
- can you point me towards any good book/blog/site with information on that topic (in-dept discussions welcome)