Honing In On Bond Funds And Sell Stops

Using sell stops with dividend paying bond funds works the same as with any other equity mutual fund/ETF. Reader Joe had this to say:

My question today deals with setting stops on junk bond and short term bond funds.

A large element of their performance is their dividend, which may be 6 or 7%. How do you account for dividends in setting stops on these types of funds?

For example, if the highest price in the period I’ve held the fund is $10.00, with a 7% stop, it looks like I should sell the fund when it hits 9.30. However, with the dividends going to purchase additional shares, in dollar terms I may be “down” only 4.5 or 5% with the price at 9.30.

Any thoughts on this?

As I mentioned before, whenever a fund/ETF distribution occurs, you need to reduce the high price of your sell stop by the amount of the dividend. As in your example, if your high price is $10.00, and a divided of, say, 0.11 is paid, your new high price becomes 9.89 from which to calculate the 7% trailing stop loss point.

That is not only important for dividend paying bond funds, but also for equity funds, which will all declare their yearend distributions within the next 30 days. To be accurate with your trailing sell stops, you need to reduce your high price by this amount, no matter whether it consists of dividends or capital gains.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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