Intermediate Treasury or Total Bond Fund?

[a2z]

I’m after advice on which fund to have in my portfolio- Vanguard Total Bond Market Fund VBMFX or Vanguard Intermediate Term Treasury Bond Fund VFITX.

BACKGROUND: My IPS calls for 30% TIPS and 30% other bonds. Both funds are in Traditional IRAs. I’m already invested 30% Vanguard Inflationary Protected Fund VIPSX and have yet to decide on Total Bond Fund-VBMFX or Intermediate Term Fund-VFITX. I like Larry Swedroe’s rationale to take my risk on the equity side as I own Vanguard Small Cap Value Index Fund-VISVX and additionally Vanguard All-World ex-US Small-Cap Index Fund-VFSVX. All are in Tax Deferred so no taxable events to consider. My time horizon is beyond 5 years.

I’ve compared my 2 possible scenarios in the Simba Back Test Spreadsheets, one with 30% VBMFX and the other with 30% VFITX. VFITX nudges out VBMFX slightly in both SD and CAGR. No doubt I’m dancing-on-the-head-of-a-pin but still want and value Bogleheads expertise. The questions are: which fund VBMFX or VFITX, and why? What am I missing? I’d like to stop dancing, set it and forget it.

Thanks in advance
a2z

[damjam]

Well, I take the advise of Annette Thau, author of The Bond Book which is recommended by Bogleheads.

If you are risk-averse, for most of your bond portfolio, two-to-five-year Treasuries and five-to-ten-year munis will provide the best combination of risk and return.

I highly recommend the book BTW.

[a2z]

Hi damjam

I'm not familiar with the bond book by Thau but I'll be checking it out at my library. Sounds consistent with Swedroe's advice. Thanks for your time and book reference.

a2z

[Taylor Larimore]

a2z:

I’m after advice on which fund to have in my portfolio- Vanguard Total Bond Market Fund VBMFX or Vanguard Intermediate Term Treasury Bond Fund VFITX.

Between the two, Total Bond Market is probably the better choice: 1) VBMFX is more diversified so you will not have all your bonds in a losing bond category. 2) VBMFX already holds Intermediate-Term Treasury bonds.

Past performance does not predict future performance (especially in bond funds).

Best wishes.
Taylor

[damjam]

I will just add that some believe it's silly to hold a Treasury Fund, the reason is that all Treasuries are the same (no company-specific risk) so you don't need to diversify by issuer. However, you would want to diversify by maturity date. You could fairly easily create your own ladder of Treasuries by buying individual issues in a brokerage account or TD account and save yourself the expense ratio. This is especially true since spreads on resale Treasuries tend to be small so there is little friction in the buy-sell process. Having said that, I just buy the fund. I guess I'm a lazy Boglehead.

[a2z]

Just when I'm getting close to deciding between VBMFX and VFITX along comes the newly announced
Vanguard Total International Bond Index Fund. Now what? I'm close to choosing VFITX because of its smaller correlation to stocks both US and INTL according to Simba 2012 backtested data. And yes, I do understand the past predicts only the past. As always, your thoughts welcomed and appreciated.

a2z

[nydad]

I went through the same decision process a few years ago. I was also convinced by Larry's rationale as elaborated in his book - unfortunately the only bond fund available in my 401k is the PIMCO bond fund (PMBIX), which holds a mix (sort of like total bond fund but with a higher expense ratio). My 401k also has the Vanguard TIPS fund.

So, I ended up splitting my bond allocation between TIPS/Nominal 50/50, and have filled up our IRAs with the Vanguard intermediate treasury fund, and filled up the 401k with the PIMCO and the TIPS, and then bought a muni fund in taxable to get to my full allocation of bonds. In your case, it seems like you'll have a much simpler 2-fund bond portfolio, which is great.

I'm also working on seeing if we can get the treasury fund into the 401k to replace PIMCO.

Every time I read a TIPS thread I start to doubt whether I really want 50/50 TIPS exposure, but I think I will nonetheless just stay the course.

In 30 years we will be able to tell whether treasuries or total bond fund was the right choice. Yes, treasuries backtest better, but as noted above that does not prove anything about the future. Taylor may be right, and I certainly respect his wisdom as well.

Re: laddering vs. fund: for me, the expense ratio (which you can get down to 0.1% in admiral, or $50/year on $50k) is worth paying to not have to deal with purchasing and maintaining a ladder. The more I read about bonds and bond purchasing the more I decide that this is best left for experts - even liquid treasuries. Try logging into the bond purchase screen on Vanguard and you'll see what I mean - it is not for the faint of heart. The fund on the other hand is fire and forget, and much easier to rebalance, etc.

It's interesting that Vanguard is adding international bonds to their target funds. I don't see the need to expose myself to currency risk, as I earn and will retire in the US, so don't see the value in diversifying on that front - again I bought into the argument made by Larry.

[bdpb]

It's interesting that Vanguard is adding international bonds to their target funds. I don't see the need to expose myself to currency risk, as I earn and will retire in the US, so don't see the value in diversifying on that front - again I bought into the argument made by Larry.

The new VG international bond fund is hedged, there is no currency risk. I'm not sure you're remembering Larry correctly with regards to intl bonds. I'm pretty sure Larry holds or has held in the past, short term intl bonds.

[nydad]

The new VG international bond fund is hedged, there is no currency risk. I'm not sure you're remembering Larry correctly with regards to intl bonds. I'm pretty sure Larry holds or has held in the past, short term intl bonds.

You may be right re: Larry - sorry about that - and good point about the currency hedging. I think I've now forgotten the arguments that convinced me to stay away from foreign bonds. Perhaps it was a desire for simplicity and safety in the fixed income portion of my portfolio, to balance the tilt to EM and small value.

[bdpb]

The new VG international bond fund is hedged, there is no currency risk. I'm not sure you're remembering Larry correctly with regards to intl bonds. I'm pretty sure Larry holds or has held in the past, short term intl bonds.

You may be right re: Larry - sorry about that - and good point about the currency hedging. I think I've now forgotten the arguments that convinced me to stay away from foreign bonds. Perhaps it was a desire for simplicity and safety in the fixed income portion of my portfolio, to balance the tilt to EM and small value.

It was probably due to costs and availability. I don't think there a lot of options out there and what is available is high cost (Larry has access to DFA funds). Hopefully, over time VG will solve this problem.

[a2z]

For some years now Simba’s backtests have been my go-to-financial-advisor. Blessings to Simba! Using Simba’s spreadsheets, I’ve compared VFITX-5 Year T Bills with VIPSX-Synthetic TIPS. To me the results are clear and definitive. VFITX has had higher Sharpe numbers, higher CAGR-Compound Annual Growth Rate and lower SD-Standard Deviation. Though not claiming to see the future, history does tend to repeat itself. I still have TIPS but less than my original 50%. Hopefully I'm tempering my portfolio’s short term swings with a small percentage of VFISX-2 Year Treasuries. I agree with Swedroe’s rationale of avoiding risk-taking on the bond side. Other than crossing busy streets at night, I put my risk in VSIVX-US Small Cap Value and VFSVX International Small Cap. For now Global Bonds are way too young and “foreign” to me.

Thanks for weighing in and helping clarify my decisions.

a2z