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Bogleheads
Investing Advice Inspired by Jack Bogle
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natureexplorer
Joined: 03 Sep 2009
Posts: 105
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 Posted: Sat Nov 07, 2009 6:38 pm Post subject: Why does Vanguard not have a Total Municipal Bond Fund? |
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Why does Vanguard not have a Total Municipal Bond Market Fund similar to the Total Bond Market Fund with all sorts of maturities and maybe even a slightly wider span of credit qualities?
Or does anyone know of any good alternatives? I have a Vanguard and Wells Trade account. I'd like to make contributions to such a fund automatically 26 times a year via paycheck direct deposit.
Vanguard works great for the automatic purchase feature through direct deposit. I am not really sure if and how this would work at Wells Trade.
Right now I need to choose between four different muni funds at Vanguard (short, limited, intermediate, and long).
Last edited by natureexplorer on Sat Nov 07, 2009 6:45 pm; edited 1 time in total |
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mfen
Joined: 21 Jun 2009
Posts: 394
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| Posted: Sat Nov 07, 2009 6:43 pm Post subject: |
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I have made this same suggestion to Vanguard. Maybe if enough interest is expressed in this forum they will give it further consideration.
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Alex Frakt
Site Admin
Joined: 23 Feb 2007
Posts: 3630
Location: Chicago
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| Posted: Sat Nov 07, 2009 6:51 pm Post subject: |
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| Just use the intermediate. |
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stratton
Joined: 04 Mar 2007
Posts: 6216
Location: Puget Sound
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| Posted: Sat Nov 07, 2009 7:18 pm Post subject: |
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| Alex Frakt wrote: | | Just use the intermediate. |
If you look at the contents of intermediate muni it's essentially a TBM for munis.
It has shorter and longer term durations and some lower grade credit quality. Just like TBM.
Paul |
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natureexplorer
Joined: 03 Sep 2009
Posts: 105
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| Posted: Sat Nov 07, 2009 7:24 pm Post subject: |
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| stratton wrote: | | Alex Frakt wrote: | | Just use the intermediate. |
If you look at the contents of intermediate muni it's essentially a TBM for munis.
It has shorter and longer term durations and some lower grade credit quality. Just like TBM.
Paul |
Everyone, thanks for your comments.
Paul and Alex, is the intermediate really though a good representation of the total market?
Comparing Intermediate and Long-Term Tax-Exempt, it looks like the Long-Term Fund is actually more diversified:
Intermediate-Term Tax-Exempt Fund
Distribution by maturity
Under 1 Year 11.4%
1 - 3 Years 13.1%
3 - 5 Years 13.5%
5 - 10 Years 52.2%
10 - 20 Years 9.2%
20 - 30 Years 0.5%
Over 30 Years 0.1%
Total 100.0%
Long-Term Tax-Exempt Fund
Distribution by maturity
Under 1 Year 13.0%
1 - 3 Years 8.6%
3 - 5 Years 12.2%
5 - 10 Years 45.0%
10 - 20 Years 12.6%
20 - 30 Years 6.3%
Over 30 Years 2.3%
Total 100.0%
I am wondering though what maturity distributions would more closely represent Total Market weights.
The long-term one also seems to be more diverisifed in terms of the credit quality, but again I am wondering which one is closer to Total Market weights.
Intermediate has a yield to maturity of 2.8% and long-term has a yield to maturity of 3.6%, which seems like quite a big difference considering the first has an average dureation of 5.5 years and the latter of 6.9 years. The average credit quality is listed as AA- for both funds, even though a closer look reveals that the long-term one actually hasa slightly lower credit quality.
2.8% versus 3.6% might make a difference with one resulting in a negative real return versus the other one in a positive real return over the next few decades. I do expect to hold the fund / not need the money for decades.
Anymore advise or information would be appreciated. |
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spam
Joined: 10 Jun 2008
Posts: 642
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| Posted: Sun Nov 08, 2009 1:19 pm Post subject: |
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With the exception of Treasuries, there is no central clearing house for bonds that is like the NYSE. Once Treasuries get to the secondary market, then there is no central clearing house for those either.
Muni's pose an even greater challange because they could be issued by any one of thousands of municipalities nation wide. Then there is the issue of taxes and the liability will change from person to person.
The bond market is huge and fragmented. This is even more true if you include CD's. It would be difficult to understand cap weights in such a market when nobody even knows everything that is out there already. |
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stratton
Joined: 04 Mar 2007
Posts: 6216
Location: Puget Sound
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| Posted: Sun Nov 08, 2009 5:48 pm Post subject: |
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Muni bonds aren't that liquid. In addition to the premium/discount problem with muni bond etfs the other knock on them is they have to invest in only the most liquid bonds making them less diversified than an open ended mutual muni fund like Vanguards.
The closest you're likely to get to a TBM in muni bonds are huge funds like Vanguards which can afford to hold relatively illiquid ones.
Paul |
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natureexplorer
Joined: 03 Sep 2009
Posts: 105
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| Posted: Sun Nov 08, 2009 6:15 pm Post subject: |
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| stratton wrote: | Muni bonds aren't that liquid. In addition to the premium/discount problem with muni bond etfs the other knock on them is they have to invest in only the most liquid bonds making them less diversified than an open ended mutual muni fund like Vanguards.
The closest you're likely to get to a TBM in muni bonds are huge funds like Vanguards which can afford to hold relatively illiquid ones.
Paul |
Wouldn't the requirement of sticking with liquid munis only be more difficult to meet when limiting oneself to certain maturity ranges? |
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stratton
Joined: 04 Mar 2007
Posts: 6216
Location: Puget Sound
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| Posted: Mon Nov 09, 2009 2:18 am Post subject: |
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I have no idea. I don't care. I'm letting the fund managers or indexes do their thing with bonds.
Paul |
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Alex Frakt
Site Admin
Joined: 23 Feb 2007
Posts: 3630
Location: Chicago
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| Posted: Mon Nov 09, 2009 12:38 pm Post subject: |
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| natureexplorer wrote: | | stratton wrote: | | Alex Frakt wrote: | | Just use the intermediate. |
If you look at the contents of intermediate muni it's essentially a TBM for munis.
It has shorter and longer term durations and some lower grade credit quality. Just like TBM. |
Everyone, thanks for your comments.
Paul and Alex, is the intermediate really though a good representation of the total market? |
For non-munis it's a good representation of the average of the toal market (look at TBM versus Intermediate Index) so I assumed the same was true for munis. But based on your questions, I decided to double check and according to the most recent data on the S&P AMT-free Municipal Bond Index, the average duration of the total muni market is 8.17 years and yield to maturity is 3.90%. Thus it's even longer than Vanguard's long fund. Maybe that's why Vanguard doesn't offer a Total Muni fund, it would be inevitable that people would buy into it thinking it is less risky than their long term fund.
Still, that leaves the question of what you should invest in. For the long term holder (as opposed to those betting on interest rates), intermediate term bonds are normally considered the sweet spot in the risk/return spectrum. |
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natureexplorer
Joined: 03 Sep 2009
Posts: 105
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| Posted: Mon Nov 09, 2009 1:15 pm Post subject: |
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| Alex Frakt wrote: | | natureexplorer wrote: | | stratton wrote: | | Alex Frakt wrote: | | Just use the intermediate. |
If you look at the contents of intermediate muni it's essentially a TBM for munis.
It has shorter and longer term durations and some lower grade credit quality. Just like TBM. |
Everyone, thanks for your comments.
Paul and Alex, is the intermediate really though a good representation of the total market? |
For non-munis it's a good representation of the average of the toal market (look at TBM versus Intermediate Index) so I assumed the same was true for munis. But based on your questions, I decided to double check and according to the most recent data on the S&P AMT-free Municipal Bond Index, the average duration of the total muni market is 8.17 years and yield to maturity is 3.90%. Thus it's even longer than Vanguard's long fund. Maybe that's why Vanguard doesn't offer a Total Muni fund, it would be inevitable that people would buy into it thinking it is less risky than their long term fund. |
Alex, thanks a lot!
Maybe the following index is actually a better total municipal bond market representation (no restrcition to AMT-free; which is not needed in my case):
http://www2.standardandpoors.c....tsheet.pdf
It seems like its parameters are even closer to Vanguard's long-term tax-exempt fund. It does seem to exclude non-investmend grade munis though.
They also have an interesting paper on munis indices here:
http://www2.standardandpoors.c....2009_2.pdf
| Alex Frakt wrote: |
Still, that leaves the question of what you should invest in. For the long term holder (as opposed to those betting on interest rates), intermediate term bonds are normally considered the sweet spot in the risk/return spectrum. |
Yes, that's the big question - for me at least.
Also, how is intermediate normally defined as far as the sweet spot for risk/return in terms of average duration/maturity? The average durations for intermediate muni versus other intermediate funds seem to be quite different.
I feel comfortable with TSM and FTSE ex-US for stocks as I feel like I am not really betting on anything but the market in total. My tax rate is only 28%, but I do need a significant portion of bonds in a taxable account. Even with maxing out my tax-advantaged contributions (401k, I-Bonds - is there anything else for me?), my Taxable to Tax-Advantaged ratio will only increase at my current contribution levels. Furthermore, even though at 28% the advantage of munis over non-muni bonds seems to be small, I'd like to stay away from corporate bonds, as I already own their stocks as I see this as diversification. |
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Alex Frakt
Site Admin
Joined: 23 Feb 2007
Posts: 3630
Location: Chicago
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| Posted: Mon Nov 09, 2009 2:26 pm Post subject: |
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| Remember that the point of bonds is to preserve your capital for the long term (in real terms, which is why you use bonds instead of cash). If you need growth, rather than just capital preservation, you'll have higher expected returns by allocating more to equities instead of extending the duration or decreasing the quality of your bonds. That's why the traditional recommendation for the bond portion of a retirement portfolio runs only from short to intermediate in terms of duration and treasuries to high-grade corporates in terms of quality. I would not recommend breaking this "rule" unless your particular situation greatly differs from the usual. Certainly, I would not recommend breaking it for a theoretical diversification benefit. |
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natureexplorer
Joined: 03 Sep 2009
Posts: 105
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| Posted: Mon Nov 09, 2009 2:59 pm Post subject: |
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| Alex Frakt wrote: | | Remember that the point of bonds is to preserve your capital for the long term (in real terms, which is why you bonds instead of cash). |
Alex, thanks for your comments! Okay, I am on the same page that one cannot expect a significant positive real return from bonds unless in a deflationary scenario. What I am more concerned about is that it seems to be really difficult to achieve capital preservation with bonds in a taxable account. Or am I missing something? For example if inflation were to be 3% going forward, the long-term fund would have a small but positive real return while the intermediate-term fund would have small but negative real return - at least for the duration of those funds. Probably I am simply missing something, because the recommendation for intermediate munis seems to be quite unanimous here. So as always, any clarification would be appreciated.
| Alex Frakt wrote: | | If you need growth, rather than just capital preservation, you'll have higher expected returns by allocating more to equities instead of extending the duration or decreasing the quality of your bonds. |
Okay, I understand that I look for growth with equities - even more so in a taxable account I guess. However, for me it is just very vague what the difference is between long, intermediate, short really means in terms of actual years. Does any know? How is this justified quantitively?
| Alex Frakt wrote: | | That's why the traditional recommendation for the bond portion of a retirement portfolio runs only from short to intermediate in terms of duration and treasuries to high-grade corporates in terms of quality. |
Yes, but do those recommendations more often than not apply to tax-advantaged accounts? If I can expect a positive real return with short to intermediate bonds in a tax-advantaged account, of course there is not need to take additional duration risk.
| Alex Frakt wrote: | | I would not recommend breaking this "rule" unless your particular situation greatly differs fro the usual. |
I don't think there is anything special about my situation.
| Alex Frakt wrote: | | Certainly, I would not recommend breaking it for a theoretical diversification benefit. |
I believe you are saying using munis versus non-muni bonds provides an insignificant diversification. Still, munis seem have a slight edge tax-wise in my case. Or am I missing something? Or would you recommend non-muni bonds (corporate, treasuries) in a taxable account so as to be not too heavy on munis? I have about 7% of my total portfolio in non-muni bonds in my tax-advantaged account. But my target allocation for bonds in total is 30%. |
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dbr
Joined: 04 Mar 2007
Posts: 3455
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| Posted: Mon Nov 09, 2009 4:05 pm Post subject: |
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| State tax is a big part of the picture for many with taxable bonds. In my case state income tax is more than 1/3 of the total income tax burden in most years. In this situation state specific muni funds play a role. |
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alec
Joined: 02 Mar 2007
Posts: 1135
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| Posted: Mon Nov 09, 2009 4:21 pm Post subject: |
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As to why Vanguard started the ST, IT, and LT muni funds, see Bogle's speech Giving the Bond Fund Investor a Fair Shake:
| Quote: | Then, in 1976, came Vanguard's first opportunity to change not merely the structure of fixed-income management in mutual funds but its very nature. In June, Congress passed a law making it possible for mutual funds to flow through to their shareholders the tax-exempt character of municipal bond interest. The new law quickly spawned the creation of the first municipal bond funds, and within a year a score had come into existence. All were garden-variety municipal bond funds, with their managers implicitly focusing on long-term bonds while implying that maturities would be adjusted opportunistically in anticipation of changes in interest rates. I simply couldn't buy that strategy. Ever the contrarian, I was deeply skeptical that any manager could consistently forecast interest rates with accuracy, and thus significantly outpace the famously efficient bond market over the long run.
The Three-Tier Municipal Bond Fund
It quickly occurred to me that, with our mutual structure, combining low operating expenses with the rock-bottom fees that we were in a position to negotiate, we could offer a municipal bond fund that could deliver to our investors the highest net yields in the field. Winning the performance derby, not by genius but by combining a less active approach to bond management with exceptionally low cost, quickly led to an idea so simple and obvious as to defy description. The proverbial lightbulb that turned on was the concept of creating not a single "managed" municipal bond fund but three separate funds: A long-term fund; a short-term fund (essentially the first tax-exempt money market fund); and—you guessed it!—an intermediate-term fund. Each would own high-grade tax-exempt bonds, rigorously maintain a defined maturity range, employ professional managers, and minimize portfolio turnover. And the shareholders would be rewarded with top performance.
It would be difficult to be very proud of such an elemental conception. Yet it took years before this simple basic notion was established as the industry norm, as it has now become, for tax-exempt and taxable bond funds alike. The strategy may have been obvious, but the obvious has been in many respects my stock in trade. One writer, determined to explain Vanguard's leadership in fund innovation, pointed to my "uncanny ability to recognize the obvious," a wonderful paradox, since the obvious is, by definition, something anyone can recognize. In that sense, the three-tier, high-quality, low-cost, fixed-income strategy we developed in 1977 had the same genesis as our 1975 pioneering of the index stock fund: The simple insight that it is the costs of investing that determine the gap between the returns the stock and bond markets provide and the returns investors as a group receive. Conclusion: To the victors—the shareholders of the lowest-cost funds—belong the spoils. |
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"You will never correct by logic a man's error, if that error did not get into his mind by logic" - Mark Twain |
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