portfolio turnover

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mickeypd
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portfolio turnover

Post by mickeypd »

Why does Vanguard Total Bond Market Index Fund (VBMFX) have such a high turnover (74%) and is this a red flag? Do bond indexes traditionally have such high turnover? How does affect tax on returns? Thanks
gvsucavie03
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Re: portfolio turnover

Post by gvsucavie03 »

Probably due to maturities being reached. Why would you buy TBM in a taxable account?
pkcrafter
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Re: portfolio turnover

Post by pkcrafter »

mickeypd wrote:Why does Vanguard Total Bond Market Index Fund (VBMFX) have such a high turnover (74%) and is this a red flag? Do bond indexes traditionally have such high turnover? How does affect tax on returns? Thanks
Similar bond funds have over 200% turnover, Fidelity and PIMCO to name two. These bond funds are not tax-efficient, so should not be used in a taxable account.

Paul
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SimpleGift
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Re: portfolio turnover

Post by SimpleGift »

The primary reason is that most fixed income indices are rebalanced monthly — in contrast to most equity indices, which are rebalanced annually, I believe. These monthly bond index rebalancings involve various market changes, including new issues, bonds that have been called or paid down early, cash flow from coupon payments, etc. For example, this is a snapshot of the changes in the index used by Vanguard Total Bond Market Index:

Image
Source: Blackrock

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mickeypd
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Re: portfolio turnover

Post by mickeypd »

Dear Folks:

Thank you for your informative and friendly replies.

Best regards, Michael
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wshang
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Re: portfolio turnover

Post by wshang »

To carry the OP's question further, since turnover costs such as commission are not reflected in the expense ratio, isn't at some point advantage accruing to an investor with a laddered, diversified individual bond portfolio? I seem to remember Larry advocating a high quality bond holding over a bond fund.
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Tamales
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Re: portfolio turnover

Post by Tamales »

wshang wrote:To carry the OP's question further, since turnover costs such as commission are not reflected in the expense ratio...
I wonder why those costs don't have to be disclosed in the same way as expense ratios? I suppose the answer is Congress set up the requirements that way, but it seems like that should be disclosed since it's eating into returns in an unknown but similar way as management expenses.
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JoMoney
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Re: portfolio turnover

Post by JoMoney »

Tamales wrote:
wshang wrote:To carry the OP's question further, since turnover costs such as commission are not reflected in the expense ratio...
I wonder why those costs don't have to be disclosed in the same way as expense ratios? I suppose the answer is Congress set up the requirements that way, but it seems like that should be disclosed since it's eating into returns in an unknown but similar way as management expenses.
Commissions are disclosed in a mutual funds "Statement of Additional Information" (SAI).
https://personal.vanguard.com/pub/Pdf/s ... 2210090326
Vanguard Total Bond Market Statement of Additional Information wrote:... The types of securities in which the Funds invest are generally purchased and sold in principal transactions, meaning that the Funds normally purchase securities directly from the issuer or a primary market-maker acting as principal for the securities on a net basis. Explicit brokerage commissions are not paid on these transactions, although purchases of new issues from underwriters of securities typically include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market-makers typically include a dealer’s mark up (i.e., a spread between the bid and the asked prices). Brokerage commissions will also be paid in connection with opening and closing out futures positions.
As previously explained, the types of securities that each Fund purchases do not normally involve the payment of explicit brokerage commissions. ...

During the fiscal years ended December 31, ... [2013], the Fund [Total Bond Market Index Fund] paid the following approximate amounts in brokerage commissions: Less than $1,000
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jeffyscott
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Re: portfolio turnover

Post by jeffyscott »

pkcrafter wrote:Similar bond funds have over 200% turnover, Fidelity and PIMCO to name two.
and some have lower turnover, Dodge and Cox income (DODIX) 38%.
Geologist
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Re: portfolio turnover

Post by Geologist »

Another factor in the Total Bond Market turnover is that it engages in "mortgage dollar rolls". These increase the turnover ratio without really creating turnover. I'll leave it to you to read the Annual Report to see what these are. In 2013, if you exclude these, the turnover was only 28%.
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