WSJ - Avoid Vanguard Total Bond Fund ?

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Re: "Abandoning well thought out long term plans."

Postby Doc » Sun Jan 27, 2013 6:43 pm

Taylor Larimore wrote: If investors think that adding additional bond funds to already diversified Total Bond Market Index Fund is worth the complexity, they could be right (or wrong). I don't know.


I think a distinction should be made between a diversified fund and a diversified portfolio. Vanguard Total Bond Market fund is certainly diversified. But I believe Taylor himself has argued that adding TIPS to TBM adds to the diversification for example.

The problem we are running into here in this period of low yields is that people want to increase their bond yield while maintaining their diversification. But then we run into another problem. Are we trying to maintain the diversity of our FI portfolio or the diversity of the entire portfolio. The reason so many of us seem to cross swords in these discussions is often because we have not agreed up front what kind of diversity (or its counterpart risk reduction) we are addressing. Hence we are much too often addressing different questions without knowing it.

In the CAPM sense anything we do to increase return must also increase risk and therefore reduce diversity. We all or at least most of us believe in CAPM when we are talking about equities and then for FI we "forget about it". :shock:
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Austintatious » Sun Jan 27, 2013 8:06 pm

livesoft wrote:Who knows? Maybe this time it's different?


Well, the individual this forum honors by using his name clearly thinks "this time its different"; at least, that's what he's said on a number of occasions over the past several months, describing the present investing environment as the worst he's seen in his 80 plus years. This time is different, according to Jack Bogle, and I believe that's been the essence of what so many have been saying on this forum. That difference is what's driving all these discussions about a bond bubble, and what we ought to be buying with the proceeds from those long and intermediate bonds we've absolutely got to unload as fast as we can before the interest rates lurch upward. And it's why some are even agreeing with WSJ writers that we ought to avoid a remarkably diversified bond fund like Total Bond. So the individual who gave us low cost index funds and investing mantras like "keep it simple" and "stay the course" is telling investors that it's quite reasonable to try something a little different, like throwing in some longer investment grade corporate bonds to compliment the paltry returns from all those treasuries in Total Bond (73%?), maybe even as long as 15 years. Now, I see that advice as still something remarkably simple and that essentially stays the course, offered in response to a very different kind of bond environment. Of course, that's just my opinion, and a woefully inexperienced and minimally educated opinion, it is. Getting better, though, having stumbled across the Bogleheads forum.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Bustoff » Mon Jan 28, 2013 8:08 am

Austintatious wrote:
livesoft wrote:Who knows? Maybe this time it's different?


So the individual who gave us low cost index funds and investing mantras like "keep it simple" and "stay the course" is telling investors that it's quite reasonable to try something a little different, like throwing in some longer investment grade corporate bonds to compliment the paltry returns from all those treasuries in Total Bond (73%?), maybe even as long as 15 years.


Bogle's advice is to lengthen duration. WSJ and other "experts" advice is to shorten duration.

What do these opposing views have in common ?
Answer: Tea Leaves

What do all the opposing views on durations and bond funds tell me ?
It tells me that big money flows are being invested into a broad array of durations and bond funds.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Mon Jan 28, 2013 1:14 pm

It's not your father's Total bond Index anymore. (Or even Jack Bogles)

Rethinking The Barclays Aggregate As An Investment

Fixed-income portfolio management is very much an index-relative game: Incremental sector, quality and duration bets are all made with an eye to how the index is constructed. Very rarely is a benchmark-unconstrained fixed-income manager seen.


but

Most investors are well aware of the impact such astronomical borrowing has on the country’s budget, but few have considered the impact these programs have had on this fixed-income benchmark—an impact that highlights one of the index’s key problems.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Bustoff » Mon Jan 28, 2013 1:47 pm

Doesn't this tell all we need to know ?

Image
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Munir » Mon Jan 28, 2013 1:52 pm

Is there a wise conclusion from the informative discussion on this subject? Avoid, retain, or sell the Total Bond Index fund?
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What Vanguard says about Treasuries.

Postby Taylor Larimore » Mon Jan 28, 2013 2:17 pm

Munir wrote:Is there a wise conclusion from the informative discussion on this subject? Avoid, retain, or sell the Total Bond Index fund?


Munir:

The greatest Bogleheads concern about Total Bond Market Index Fund appears to be its overweight in Treasuries and government guaranteed bonds. This article by Vanguard's Chief Economist, Joe Davis, should put to rest many of our worries:

Why I Still Own Treasuries

Best wishes.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Beat The Street » Mon Jan 28, 2013 2:29 pm

I think one solution is to own foreign bonds for a portion of your fixed income. I own PIMCO Foreign Bond USD Hedged and it has outperformed TB Index since I bought it. Is it more risk? Probably, duration is close to 6. I think it gives another level of diversification to my fixed income though. Yields are higher outside the US, it is an actively managed fund so proceed at your own risk.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby YDNAL » Mon Jan 28, 2013 2:45 pm

Bustoff wrote:Doesn't this tell all we need to know ?

[deleted image] - a pet peeve of mine when I see the same HUGE image copied 3 or 4 times in one thread. :P

Good one!

Thread after thread you see a lack of understanding that temporary drops in FI investments are first mitigated - over duration - by increased income. Then, just AS important, compounding effect of interest on interest over time. If my eyes didn't fail me, it looks like $1 million grows to $2 million and about $400K of this growth is interest on interest.

BTW, in case anyone hasn't noticed, Vanguard IT Bond Index (VBIIX) has dropped 5% in NAV since beginning-November 2012. A $1 million investment would be worth $950K - or more than 1 year's withdrawal at 4%.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby papito23 » Mon Jan 28, 2013 3:34 pm

Bustoff wrote:Doesn't this tell all we need to know ?

[image deleted]


Aren't you missing interest earning on interest earned on interest?

Snark aside, don't forget what that nearly $2m bought you at the end:
Image

That is, diversified bond investing was essentially a 0% fixed I-Bond :? You didn't get hammered, but you didn't make any money either.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Jay69 » Mon Jan 28, 2013 5:42 pm

One of those little pesky things I don't care for about Vanguards Total Bond Fund VBTLX/BND with its 5.2 years average duration is those pesky longer bonds.

10 - 20 Years 4.1%
20 - 30 Years 9.8%
Over 30 Years 0.4%

Overall will it make a difference, no clue?
"Out of clutter, find simplicity” Albert Einstein
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Cut-Throat » Mon Jan 28, 2013 5:49 pm

papito23 wrote:That is, diversified bond investing was essentially a 0% fixed I-Bond :? You didn't get hammered, but you didn't make any money either.


Not getting 'hammered' in a period of rising inflation and plunging stock prices looks pretty damn good to me !
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby NYBoglehead » Mon Jan 28, 2013 5:58 pm

^The danger lies in not receiving enough interest to cover inflation. If you're getting enough to cover inflation, then you are maintaining purchasing power, which in my book ain't too bad. The risk lies in not getting enough to cover inflation and watching your purchasing power gradually erode.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Mon Jan 28, 2013 6:08 pm

Jay69 wrote:One of those little pesky things I don't care for about Vanguards Total Bond Fund VBTLX/BND with its 5.2 years average duration is those pesky longer bonds.

10 - 20 Years 4.1%
20 - 30 Years 9.8%
Over 30 Years 0.4%

Overall will it make a difference, no clue?



Something is really really screwy here. Morningstar has as of 9/30/12 for VBTIX and 1/25/13 for AGG. Jay's number are from Vanguad as of 12/31/12.

Code: Select all
                  VBTIX    AGG
10-20     years   8.87%     9.55
20-30     years  29.41     34.19
over 30   years   5.07      2.83
Duration          4.97      4.59

AGG is iShares Core Total US Bond Market ETF AGG (Bar Cap Agg Index)

If the older M* data and the more current AGG data are correct the problem of the long bonds is even worse than you think.

In any case you could use IShares GVI - Bar Cap Intermediate (1-10) Gov/Credit - with a duration of only 3.85 years. You would have to add an MBS fund like GNMA if you wanted mrotgage backed. (I don't.)
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby pingo » Mon Jan 28, 2013 7:18 pm

I have yet to be able to reconcile the discrepancies between Vanguard's breakdown of Total Bond with Morningstar. I have no idea how much it holds in longer-term bonds.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby dkturner » Mon Jan 28, 2013 7:39 pm

Doc wrote:
Jay69 wrote:One of those little pesky things I don't care for about Vanguards Total Bond Fund VBTLX/BND with its 5.2 years average duration is those pesky longer bonds.

10 - 20 Years 4.1%
20 - 30 Years 9.8%
Over 30 Years 0.4%

Overall will it make a difference, no clue?



Something is really really screwy here. Morningstar has as of 9/30/12 for VBTIX and 1/25/13 for AGG. Jay's number are from Vanguad as of 12/31/12.

Code: Select all
                  VBTIX    AGG
10-20     years   8.87%     9.55
20-30     years  29.41     34.19
over 30   years   5.07      2.83
Duration          4.97      4.59

AGG is iShares Core Total US Bond Market ETF AGG (Bar Cap Agg Index)

If the older M* data and the more current AGG data are correct the problem of the long bonds is even worse than you think.

In any case you could use IShares GVI - Bar Cap Intermediate (1-10) Gov/Credit - with a duration of only 3.85 years. You would have to add an MBS fund like GNMA if you wanted mrotgage backed. (I don't.)


Probably depends on how the person doing the calculating approaches mortgage pass through securities. One that doesn't have a firm grip on the concept of how a mortgage is amortized might classify a 30 year mortgage just like a 30 year Treasury bond, because that how time will pass before it goes away. When the guy in the next cubicle calculates the duration for this 30 year mortgage he tracks the actual cash flow and determines it has a duration of only, say, 7 years. We still haven't got to the guy in the third cubicle who adjusts the duration calculation for the impact of prepayment risk.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Austintatious » Mon Jan 28, 2013 7:54 pm

pingo wrote:I have yet to be able to reconcile the discrepancies between Vanguard's breakdown of Total Bond with Morningstar. I have no idea how much it holds in longer-term bonds.


Vanguard says that just under 15% are longer than 10 years maturity, with 28% in the 5-10 year range.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby rj49 » Mon Jan 28, 2013 7:58 pm

Bustoff wrote:Doesn't this tell all we need to know ?

Image



No it doesn't tell us all we need, because it omits the period of high, unexpected inflation in 1972-73, which would result in higher capital losses to start off with, so that chart is bad cherry picking. It's like showing a chart of just the 1990s, with stocks coming back after the 1994 recession to shoot up, and saying that tells us all we need to know about stocks. A more telling one would be the last time interest rates were similarly low, and effect on wealth of steadily increasing interest rates, particularly without reinvested dividends, which is causing a lot of the fear among retirees today who expect it to provide decent dividends and mostly capital gains, as in the past.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby hoops777 » Mon Jan 28, 2013 9:30 pm

Why is it that we are suppose to invest in the total stock market because it covers all stocks but we do not hold the total bond market to the same scrutiny?It would seem logical to add the types of bonds that are missing to truly be diversified,with the exception of junk.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Jay69 » Mon Jan 28, 2013 11:09 pm

dkturner wrote:
Doc wrote:
Jay69 wrote:One of those little pesky things I don't care for about Vanguards Total Bond Fund VBTLX/BND with its 5.2 years average duration is those pesky longer bonds.

10 - 20 Years 4.1%
20 - 30 Years 9.8%
Over 30 Years 0.4%

Overall will it make a difference, no clue?



Something is really really screwy here. Morningstar has as of 9/30/12 for VBTIX and 1/25/13 for AGG. Jay's number are from Vanguad as of 12/31/12.

Code: Select all
                  VBTIX    AGG
10-20     years   8.87%     9.55
20-30     years  29.41     34.19
over 30   years   5.07      2.83
Duration          4.97      4.59

AGG is iShares Core Total US Bond Market ETF AGG (Bar Cap Agg Index)

If the older M* data and the more current AGG data are correct the problem of the long bonds is even worse than you think.

In any case you could use IShares GVI - Bar Cap Intermediate (1-10) Gov/Credit - with a duration of only 3.85 years. You would have to add an MBS fund like GNMA if you wanted mrotgage backed. (I don't.)


Probably depends on how the person doing the calculating approaches mortgage pass through securities. One that doesn't have a firm grip on the concept of how a mortgage is amortized might classify a 30 year mortgage just like a 30 year Treasury bond, because that how time will pass before it goes away. When the guy in the next cubicle calculates the duration for this 30 year mortgage he tracks the actual cash flow and determines it has a duration of only, say, 7 years. We still haven't got to the guy in the third cubicle who adjusts the duration calculation for the impact of prepayment risk.



Ok, now that did not make me feel better!

The duration could be worse than I thought + the pictures of a bunch of Dilberts in a cube that don't a have a grip on the concepts doing the math!

I do like the looks of GVI I will admit. I think Larry's not a big fan of GNMA if I recall, I really need to read his book!
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Tue Jan 29, 2013 2:25 pm

Jay69 wrote: Ok, now that did not make me feel better!

The duration could be worse than I thought + the pictures of a bunch of Dilberts in a cube that don't a have a grip on the concepts doing the math!

I do like the looks of GVI I will admit. I think Larry's not a big fan of GNMA if I recall, I really need to read his book!


I am losing my faith in Index Fuds that claim to "follow" the Bar Cap Aggregate Bond Index. Maybe they have low tracking error but the maturity and duration "error" is a lot more than I would ever have expected. (I decided to keep the spelling error "Fuds".)

Code: Select all
Ticker   Name         % 20 to 30 yr   Duration   As of
FBIDX   Spartan (Fidelity    16.4             4.76      11/30/12
VBMFX   Vanguard             28.41            4.97       9/30/12
TBIIX   TIAA-CREF            33.37            4.74      11/30/12
WFBIX   Blackrock            19.05            4.33      10/31/12
AGG    IShares ETF           34.19            4.59       1/25/13


Aside: The last time I got Larry's book out of the public library my wife asked me why I didn't use my own copy. Getting old is a bitch.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby YDNAL » Tue Jan 29, 2013 2:53 pm

dkturner wrote:Probably depends on how the person doing the calculating approaches mortgage pass through securities. One that doesn't have a firm grip on the concept of how a mortgage is amortized might classify a 30 year mortgage just like a 30 year Treasury bond, because that how time will pass before it goes away. When the guy in the next cubicle calculates the duration for this 30 year mortgage he tracks the actual cash flow and determines it has a duration of only, say, 7 years. We still haven't got to the guy in the third cubicle who adjusts the duration calculation for the impact of prepayment risk..

DK is right. This is Vanguard Total Bond's top holdings ($40B +) and the top $24B all have maturity xx/xx/xx - xx/xx/2042 (roughly). Anyways, lots of Mortgage stuff!!!
Code: Select all
Holding                          Coupon   Maturity                  Face Value   Market Value
Federal National Mortgage Assn.   4.00%   06/01/2018-10/01/2042   $2,409,470,616    $2,599,300,703
Government National Mortgage Assn.   4.50%   04/20/2018-11/01/2042   $1,983,114,643    $2,188,005,545
Federal National Mortgage Assn.   3.50%   10/01/2018-10/01/2042   $2,005,570,678    $2,147,341,945
Federal National Mortgage Assn.   4.50%   02/01/2018-10/01/2042   $1,956,089,932    $2,122,549,065
Federal National Mortgage Assn.   5.00%   03/01/2017-10/01/2042   $1,669,722,348    $1,830,396,795
Government National Mortgage Assn.   4.00%   08/15/2018-10/01/2042   $1,492,734,854    $1,643,906,137
Federal National Mortgage Assn.   5.50%   02/01/2014-07/01/2041   $1,446,995,161    $1,596,052,547
Government National Mortgage Assn.   5.00%   01/15/2017-06/20/2042   $1,337,307,898    $1,481,781,906
Federal Home Loan Mortgage Corp.   4.00%   07/01/2013-10/01/2042   $1,345,906,595    $1,444,461,817
Federal Home Loan Mortgage Corp.   4.50%   11/01/2013-10/01/2042   $1,296,902,303    $1,397,390,544
Government National Mortgage Assn.   3.50%   09/20/2025-10/01/2042   $1,171,988,153    $1,280,461,905
Federal Home Loan Mortgage Corp.   5.00%   04/01/2014-10/01/2042   $1,075,513,988    $1,168,355,283
Federal National Mortgage Assn.   6.00%   03/01/2013-10/01/2040   $1,038,881,732    $1,153,158,216
Federal Home Loan Mortgage Corp.   5.50%   12/01/2013-06/01/2041   $1,029,728,838    $1,125,178,492
Federal National Mortgage Assn.   3.00%   12/01/2026-10/01/2042   $911,128,753    $964,663,398
United States Treasury Note/Bond   6.25%   8/15/2023   $657,265,000    $954,164,746
Federal Home Loan Mortgage Corp.   3.50%   06/01/2019-10/01/2042   $893,866,280    $953,832,735
United States Treasury Note/Bond   0.63%   4/30/2013   $815,100,000    $817,268,166
United States Treasury Note/Bond   1.88%   2/28/2014   $780,635,000    $798,808,183
United States Treasury Note/Bond   1.00%   5/15/2014   $734,615,000    $743,680,149
Federal Home Loan Mortgage Corp.   6.00%   10/01/2012-10/01/2042   $664,111,539    $731,874,987
United States Treasury Note/Bond   0.38%   6/15/2015   $715,650,000    $717,102,770
Government National Mortgage Assn.   5.50%   03/15/2015-08/20/2041   $593,008,318    $661,409,124
United States Treasury Note/Bond   0.25%   2/15/2015   $657,653,000    $657,140,031
United States Treasury Note/Bond   0.38%   4/15/2015   $649,725,000    $651,043,942
United States Treasury Note/Bond   2.13%   11/30/2014   $609,914,000    $634,121,487
United States Treasury Note/Bond   4.50%   8/15/2039   $455,749,000    $614,194,697
United States Treasury Note/Bond   1.88%   4/30/2014   $558,225,000    $572,616,041
United States Treasury Note/Bond   0.25%   7/15/2015   $566,460,000    $565,661,291
United States Treasury Note/Bond   2.75%   10/31/2013   $548,722,500    $563,812,369
United States Treasury Note/Bond   4.25%   8/15/2014   $504,930,000    $542,562,433
United States Treasury Note/Bond   0.13%   7/31/2014   $538,350,000    $537,257,150
United States Treasury Note/Bond   3.50%   5/15/2020   $452,328,000    $529,716,798
United States Treasury Note/Bond   4.63%   2/15/2040   $377,451,000    $518,700,713
United States Treasury Note/Bond   0.25%   8/15/2015   $519,465,000    $518,654,635
United States Treasury Note/Bond   2.50%   6/30/2017   $472,050,000    $514,388,165
United States Treasury Note/Bond   4.75%   8/15/2017   $420,505,000    $504,345,287
United States Treasury Note/Bond   3.00%   9/30/2016   $452,335,000    $497,853,471
United States Treasury Note/Bond   2.00%   11/15/2021   $462,328,500    $482,846,639
United States Treasury Note/Bond   1.75%   5/15/2022   $470,509,000    $477,274,919
United States Treasury Note/Bond   3.38%   11/15/2019   $411,383,000    $477,138,459
United States Treasury Note/Bond   0.50%   8/15/2014   $462,000,000    $464,236,080
Federal Home Loan Mortgage Corp.   3.00%   10/01/2026-10/01/2027   $426,393,498    $450,382,947
United States Treasury Note/Bond   3.88%   5/15/2018   $381,008,000    $446,910,954
United States Treasury Note/Bond   4.38%   11/15/2039   $334,296,000    $442,317,066
Government National Mortgage Assn.   6.00%   10/15/2013-03/20/2041   $389,988,736    $442,225,547
United States Treasury Note/Bond   2.63%   11/15/2020   $398,914,000    $440,612,480
United States Treasury Note/Bond   4.75%   5/15/2014   $405,403,000    $435,050,121
United States Treasury Note/Bond   1.63%   8/15/2022   $431,570,000    $431,233,375
United States Treasury Note/Bond   2.38%   6/30/2018   $387,575,000    $422,336,602
                                                    $40,770,538,863    $44,355,778,857
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Sunny Sarkar » Tue Jan 29, 2013 3:56 pm

While we are it (interest rate market timing mode), wouldn't the short term TIPS fund drop even less compared to the short term nominal bond funds?
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby baw703916 » Tue Jan 29, 2013 5:04 pm

Sunny Sarkar wrote:While we are it (interest rate market timing mode), wouldn't the short term TIPS fund drop even less compared to the short term nominal bond funds?


Yes. One way to calculate this is to compare the difference in yields to the inflation rate. If we compare Vanguard Short Term Inflation Protectes Securities Admiral Shares (2.5 year duration, 10 bp expense ratio, yield of -1.40%) to Short Term Treasury Admiral Shares (2.3 year duration, 10 bp expense ratio, yield of 0.23%) we get an Implied inflation rate of 1.63% (neglecting the slight difference in average duration).

Over the last 7 years the inflation rate has been:

2006 2.5%
2007 4.1%
2008 0.1%
2009 2.7%
2010 1.5%
2011 3.0%
2012 1.7%

Average: 2.2%

Unless the inflation rate during the next few years is considerably less than its recent average, TIPS will be the better investment. Particularly since they are less risky to begin with.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Tue Jan 29, 2013 8:00 pm

YDNAL wrote: DK is right. This is Vanguard Total Bond's top holdings ($40B +) and the top $24B all have maturity xx/xx/xx - xx/xx/2042 (roughly). Anyways, lots of Mortgage stuff!!![code]Holding Coupon Maturity Face Value Market Value
...


All these funds have lots of "mortgage stuff" but that shouldn't affect the maturity breakdown of their portfolio. (The duration is another matter because of prepayment assumptions.)

As long as we are addressing "mortgage stuff" the MBS part of these five funds is all over the place:

~16% (2 funds), 26% (1 fund), ~30% (2 funds)

According to Barclays the Index was 32.7% securitized (which is mostly MBS) as of June 29, 2012. https://ecommerce.barcap.com/indices/ac ... =9&collar=

The worrisome aspect is that while all five of these funds may track the Index based on total return they do this using widely different portfolios. In a calm market they all perform equally well but in a market upheaval who can tell. Schwab bond funds behaved pretty much like their Vanguard counterparts despite their higher e/r until '08 when they didn't.

The title of this thread was "Avoid Vanguard Total Bond Fund?" From the discussion any bond fund which uses the Bar Cap Agg Index should also be questioned. When we buy an S&P 500 fund we know pretty much what we are getting. With a TBM fund we are getting a pig in a poke and it may be a sick pig at that.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby dkturner » Wed Jan 30, 2013 7:55 am

Doc wrote:
The worrisome aspect is that while all five of these funds may track the Index based on total return they do this using widely different portfolios. In a calm market they all perform equally well but in a market upheaval who can tell. Schwab bond funds behaved pretty much like their Vanguard counterparts despite their higher e/r until '08 when they didn't.



Do all five funds use "widely different portfolios" or widely different methods for determining the average maturity, and duration, of the securities in their portfolios?
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Wed Jan 30, 2013 10:22 am

dkturner wrote:
Doc wrote:
The worrisome aspect is that while all five of these funds may track the Index based on total return they do this using widely different portfolios. In a calm market they all perform equally well but in a market upheaval who can tell. Schwab bond funds behaved pretty much like their Vanguard counterparts despite their higher e/r until '08 when they didn't.



Do all five funds use "widely different portfolios" or widely different methods for determining the average maturity, and duration, of the securities in their portfolios?


I believe it is widely different portfolios.

It is my understanding that there exists a "standard" for reporting fund portfolios. You see this in the annual reports in the holding section - page after page of detail that hardly anyone looks at. Morningstar uses this data which the funds submit to it and summarizes it based on Morningstar's own criteria. Hence the data I showed which is Morningstar's is calculated on a consistent basis. If you go to a funds website you may see different data because the fund uses it's own criteria for the summaries. One big discrepancy is often in duration as there seems to be no consistent basis - average, effective, whatever.

The biggest problem I have with Morningstar is the time lag often seen in reporting. It can be over three months old. But I belive this is a fund issue as you see ETFs with only a day or two lag where you can see Vanguard's data with a three month plus lag at times.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby dkturner » Wed Jan 30, 2013 2:45 pm

Doc wrote:
dkturner wrote:
Doc wrote:
The worrisome aspect is that while all five of these funds may track the Index based on total return they do this using widely different portfolios. In a calm market they all perform equally well but in a market upheaval who can tell. Schwab bond funds behaved pretty much like their Vanguard counterparts despite their higher e/r until '08 when they didn't.



Do all five funds use "widely different portfolios" or widely different methods for determining the average maturity, and duration, of the securities in their portfolios?


I believe it is widely different portfolios.

It is my understanding that there exists a "standard" for reporting fund portfolios. You see this in the annual reports in the holding section - page after page of detail that hardly anyone looks at. Morningstar uses this data which the funds submit to it and summarizes it based on Morningstar's own criteria. Hence the data I showed which is Morningstar's is calculated on a consistent basis. If you go to a funds website you may see different data because the fund uses it's own criteria for the summaries. One big discrepancy is often in duration as there seems to be no consistent basis - average, effective, whatever.

The biggest problem I have with Morningstar is the time lag often seen in reporting. It can be over three months old. But I belive this is a fund issue as you see ETFs with only a day or two lag where you can see Vanguard's data with a three month plus lag at times.


The returns data for most years (except, as you have noted, 2008) is consistent with the index return, less estimated expense ratios. A lot of crazy #€}% happened in late 2008. The market for most of the mortgage pass throughs dried up and the fund management crews were using various formulas to estimate the values of their portfolios. Also, back in 2008 the smaller TBM funds were heavily into statistical sampling in constructing their portfolios.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Wed Jan 30, 2013 4:48 pm

dkturner wrote: The returns data for most years (except, as you have noted, 2008) is consistent with the index return, less estimated expense ratios. A lot of crazy #€}% happened in late 2008. The market for most of the mortgage pass throughs dried up and the fund management crews were using various formulas to estimate the values of their portfolios. Also, back in 2008 the smaller TBM funds were heavily into statistical sampling in constructing their portfolios.


The bond market has changed because of the '08 crisis and subsequent recession and arguably unprecedented fiscal and monetary attempts to mitigate the negative effect. US government debt outstanding has increased by some 50%. The portion of that debt that was not sold to the Chinese was bought up by the Federal Reserve. (Exaggeration alert.) Mortgage backed securities issued by non governmental related agencies have all but disappeared. The underlying return boost from 30 years or so of declining interest rates has come an end. They can't go much below zero and have to start rising again sometime. In short the Total Bond Market has changed and it is not going to be what it was for a long time. Basing investment decisions on past history of the Bar Cap Aggregate Bond Index under these changed conditions is suspect at best.

In his classic paper The Arithmetic of Active Management William Sharpe stated
A passive investor always holds every security from the market, with each represented in the same manner as in the market.


For retail investors that market is basically the sum of all mutual funds that we have access to. Take a look at the portfolios. Vanguard's TBM fund VBTIX has 73% AAA securities while the M* category average is only 48%. VBTIX has 46% government while the category average is only 29%. http://portfolios.morningstar.com/fund/ ... ture=en-US

The Bar Cap Aggregate Bond index no longer satisfies Sharpe's criteria. We should stop using it as the gold standard. You can't "stay the course" if your compass is broken. We need a new compass.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby YDNAL » Thu Jan 31, 2013 7:44 am

Doc wrote:The Bar Cap Aggregate Bond index no longer satisfies Sharpe's criteria. We should stop using it as the gold standard. You can't "stay the course" if your compass is broken. We need a new compass.

Doc,

As I posted earilier, Vanguard TBM ($116.7 Billion total assets) holds mortgage-back securities (about $24B, 20.6%) as top holdings. It also holds about $20B, 17.1% in Treasuries in those top holdings. There's another $73B, 62.3% in holdings that I don't care to look into further - but whomever owns TBM should. You get what you get, you know what you get.

I'm unsure what you are tyring to say.
1. Bond Market has changed and Bar Cap Agg has changed. ???
2. Bond Funds have changed and not necessarily follow Bar Cap Agg. ???
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Thu Jan 31, 2013 12:16 pm

YDNAL wrote:
Doc wrote:The Bar Cap Aggregate Bond index no longer satisfies Sharpe's criteria. We should stop using it as the gold standard. You can't "stay the course" if your compass is broken. We need a new compass.

Doc,

As I posted earilier, Vanguard TBM ($116.7 Billion total assets) holds mortgage-back securities (about $24B, 20.6%) as top holdings. It also holds about $20B, 17.1% in Treasuries in those top holdings. There's another $73B, 62.3% in holdings that I don't care to look into further - but whomever owns TBM should. You get what you get, you know what you get.

I'm unsure what you are tyring to say.
1. Bond Market has changed and Bar Cap Agg has changed. ???
2. Bond Funds have changed and not necessarily follow Bar Cap Agg. ???


I'm saying both.

The Bar Cap Agg Index has changed as a result of the market changes coming out of '08. Rethinking The Barclays Aggregate As An Investment

While index funds/ETFs that benchmark to the Bar Cap Agg Index might all attempt to have low tracking error based on total returns they seem to be less concerned with trying to match the other characteristics of the index like sector and maturity weightings. This might lead to higher tracking error at times during market disruptions. I'm not criticizing the funds for this approach. It is spelled out in their prospectus. It just makes it a little difficult to compare one of these funds with another or to use the portfolio of one of these funds to model one's own slice & dice FI Portfolio. If all you own is one FI fund it does not matter. But if you want to use part of your FI portfolio as an emergency or opportunity fund or have to split it between taxable and tax-advantaged knowing the benchmarks portfolio would be helpful. This info is not available from Barclays itself at least on their open site.

I use the Bar Cap Intermediate (1-10) Index as a guide myself but many of the "problems" with the Aggregate Index still apply.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby baw703916 » Thu Jan 31, 2013 1:04 pm

It's worth remembering that about 15 years ago, Vanguard TBM had a large divergence from the index.

More generally, do the arguments for total market weighting apply to debt in the same way as they do for equities? In some sense the market weight of debt isn't really set by the market, it's a function of how much debt some entity want to take on. Will holding the market weight of say, MBS backed by subprime loans, always assure me of being on the efficient frontier? I'm not sure that it will.
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Re: WSJ - Avoid Vanguard Total Bond Fund ?

Postby Doc » Thu Jan 31, 2013 1:51 pm

baw703916 wrote:It's worth remembering that about 15 years ago, Vanguard TBM had a large divergence from the index.

More generally, do the arguments for total market weighting apply to debt in the same way as they do for equities? In some sense the market weight of debt isn't really set by the market, it's a function of how much debt some entity want to take on. Will holding the market weight of say, MBS backed by subprime loans, always assure me of being on the efficient frontier? I'm not sure that it will.


That's a whole different issue. Somewhere I saw some discussion on it but I don't remember where.
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