Will the real Total Bond Index Fund please stand up?

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jestan
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Will the real Total Bond Index Fund please stand up?

Post by jestan » Thu Aug 16, 2012 1:15 pm

Surprised to learn from my Vanguard Flagship representative that the Total Bond Index Fund (VBTLX) has the following percentages of bonds based on maturity date:

Short Term (defined as all bonds up to but not including 5 years) 57%
Intermediate Term (defined as all bonds from 5 – 10 years) 29%
Long Term (defined as all bonds beyond 10 years) 14%

Interesting to note that Vanguard classifies the Total Bond Index Fund online as:
Asset class: Intermediate-Term Bond
Category: Intermediate-Term Bond

Am I missing and/or misunderstanding something or is this really mostly NOT an Intermediate-Term Bond Fund?

Since the per cent bonds seems to be weighted towards Short-Term, should one buy an additional Intermediate-Term Bond Index fund for broader diversification?

Thanks for the clarifiaction,

Jestan

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Re: Will the real Total Bond Index Fund please stand up?

Post by mackstann » Thu Aug 16, 2012 1:18 pm

Well, those "bucket" stats aren't enough to make the distinction. They're not specific enough. The average duration is 5.1 years and as far as I know, that is what matters.

Although you could certainly call it a "towards the short end of intermediate" bond fund.

Vanguard's intermediate fund has an average duration of 6.4 years, and it tends to be slightly riskier than TBM.
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Re: Will the real Total Bond Index Fund please stand up?

Post by Munir » Thu Aug 16, 2012 1:24 pm

Good question by OP. My Vanguard financial advisor told me that when I consider the duration criterion to think of TBM as three separate bond funds with different durations. I chose to add intermediate Investment Grade to TBM for my bond holdings and not Int. Bond Index because adding Bond Index would tilt the portfolio too heavily (for me) to government issues.

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Re: Will the real Total Bond Index Fund please stand up?

Post by abuss368 » Thu Aug 16, 2012 2:03 pm

I also noticed that their online analysis tool changed the fund from high quality to medium quality.
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Re: Will the real Total Bond Index Fund please stand up?

Post by nisiprius » Thu Aug 16, 2012 2:09 pm

If you plot its growth chart against those of the "short-term bond index fund" and the "intermediate term bond index fund" you'll find that both its return and its volatility (as seen visibly in the chart in the size of the fluctuations) is a) between the two, but much closer to the intermediate-term bond fund than to the short-term bond fund.

As a "total" bond fund tracking the Barcap Aggregate Index, it is indeed a mixture of maturities. But it seems to have behaved very much as you'd expect based on its average duration.

Whether the diversification involved in holding more kinds and maturities of bonds than the intermediate-term bond index fund holds is worth anything, I really don't know.
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Re: Will the real Total Bond Index Fund please stand up?

Post by Dale_G » Thu Aug 16, 2012 2:34 pm

I have no problem with the distribution of maturities/durations. Among other things it helps to reduce turnover and thus improves returns.

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Re: Will the real Total Bond Index Fund please stand up?

Post by Woodshark » Thu Aug 16, 2012 2:39 pm

I'm actually glad it is weighted towards the short term. Otherwise I would have to add another fund (short term bond) to my mix.

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Re: Will the real Total Bond Index Fund please stand up?

Post by Sidney » Thu Aug 16, 2012 2:41 pm

If they were forced to sell bonds as their maturity dropped below some "intermediate" threshold then the ER would start to climb. I don't think that is what anyone wants.
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Re: Will the real Total Bond Index Fund please stand up?

Post by dbr » Thu Aug 16, 2012 2:57 pm

jestan wrote:
Interesting to note that Vanguard classifies the Total Bond Index Fund online as:
Asset class: Intermediate-Term Bond
Category: Intermediate-Term Bond

Am I missing and/or misunderstanding something or is this really mostly NOT an Intermediate-Term Bond Fund?

Jestan
Clearly this fund is not a fund of intermediate term bonds. I would never make an investment decision based on labels applied to funds by a fund company.

That said, an investor might very appropriately choose either the total bond fund or an intermediate bond fund for roughly the same objectives even though they would not hold the same array of securities. Of course, there are other nuances among bond funds aside from simply labeling as "intermediate."

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Re: Will the real Total Bond Index Fund please stand up?

Post by SpringMan » Thu Aug 16, 2012 4:44 pm

abuss368 wrote:I also noticed that their online analysis tool changed the fund from high quality to medium quality.
I don't trust Vanguard's Portfolio Analysis tool. Looking under the Portfolio & Management tab it shows up as high quality.
https://personalp.vanguard.com/us/funds ... =INT#tab=2
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Re: Will the real Total Bond Index Fund please stand up?

Post by nisiprius » Thu Aug 16, 2012 4:58 pm

Morningstar, which I find reasonably reliable, recently revamped their methodology for computing average credit quality in a way that makes good sense. They now weight according to default rates, which means relatively small amounts of low-grade bonds will drag the average down disproportionately. Anyway, they classify Total Bond as "high" quality, average credit quality AA, and "moderate" interest rate sensitivity. AA is darned good, way above "investment grade" (BBB or higher).
Image
In contrast, they categorize Intermediate-Term Bond Index as having more interest rate sensitivity and lower credit quality:
Image
And here are the growth charts for Short-Term Bond Index, Total Bond, and Intermediate-Term Bond Index. I think it's very clear:
  • that there's an almost perfect risk-reward relationship--remember, this is a semilog plot so larger excursions on the chart mean larger percentages of fluctuation;
  • that Total Bond (orange) falls between Short-Term (green) and Intermediate-Term (blue);
  • that Total Bond is closer to Intermediate-Term than to Short-term.
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Re: Will the real Total Bond Index Fund please stand up?

Post by grabiner » Thu Aug 16, 2012 8:33 pm

jestan wrote:Surprised to learn from my Vanguard Flagship representative that the Total Bond Index Fund (VBTLX) has the following percentages of bonds based on maturity date:

Short Term (defined as all bonds up to but not including 5 years) 57%
Intermediate Term (defined as all bonds from 5 – 10 years) 29%
Long Term (defined as all bonds beyond 10 years) 14%

Interesting to note that Vanguard classifies the Total Bond Index Fund online as:
Asset class: Intermediate-Term Bond
Category: Intermediate-Term Bond

Am I missing and/or misunderstanding something or is this really mostly NOT an Intermediate-Term Bond Fund?
The average duration puts the fund in the intermediate-term range.

In addition, the average maturity and duration are higher than the median maturity and duration, because the long-term range is much larger. If you have $30,000 in short-term bonds with a 3-year duration, and $10,000 in long-term bonds with a 15-year duration, then your average duration is 6 years because the long-term bonds have a larger affect on the average.
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jestan
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Re: Will the real Total Bond Index Fund please stand up?

Post by jestan » Fri Aug 17, 2012 11:23 am

Dear Boggleheads,

Thanks for your responses to my quest for a better understanding of the Total Bond index Fund. As always the comments were educational and very helpful. My take on the comments is that it seems to behave as a fund somewhere between a true ST fund and IT fund, albeit with more characteristics of an IT fund. It appears to be well diversified and I don't think that I need to rush out and buy a separate IT fund to achieve diversification based upon maturity.

Thanks again,
Jestan

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Re: Will the real Total Bond Index Fund please stand up?

Post by Taylor Larimore » Fri Aug 17, 2012 12:21 pm

Hi Jestan:

In my opinion, your analysis and conclusion is correct.

Keep investing simple.

Best wishes.
Taylor
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Re: Will the real Total Bond Index Fund please stand up?

Post by The Wizard » Fri Aug 17, 2012 12:24 pm

jestan wrote:Dear Boggleheads....
That's "Bogle", not "Boggle".
Thank you...
Attempted new signature...

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Re: Will the real Total Bond Index Fund please stand up?

Post by JerseyBoy » Wed Aug 22, 2012 5:47 pm

Hello, folks! Vanguard recently completed a financial plan (i.e. asset allocation plan) for me. The financial planner used the following breakdown for Vanguard's Total Bond Market Index Fund: 40 percent short-term, 40 percent intermediate-term, and 20 percent long-term. When I questioned them about these figures, I was told that this is the historial target maturity distribution for the fund (I found this out earlier today). It should, therefore, be noted that Vanguard's financial planning group does NOT use the maturity distribution chart that is shown on their website.

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Re: Will the real Total Bond Index Fund please stand up?

Post by minskbelarus47 » Wed Aug 22, 2012 6:35 pm

What would be the affect of a .5% FOMC interest rate hike, and then a 1 % interest rate hike on this fund.

Whenever I (or anyone else) posits the question, the Bogles say then that I/we am trying to time the market, and they never answer the question. If the NAV is 11.00 or thereabouts what is the affect?

No, not a market timer, but I just would like an answer as it relates to this fund.

thanks in advance

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Re: Will the real Total Bond Index Fund please stand up?

Post by grabiner » Wed Aug 22, 2012 6:57 pm

minskbelarus47 wrote:What would be the affect of a .5% FOMC interest rate hike, and then a 1 % interest rate hike on this fund.

Whenever I (or anyone else) posits the question, the Bogles say then that I/we am trying to time the market, and they never answer the question.
This isn't a market-timing question; rather, it is an attempt to understand the risk, which is an important investing consideration.

The duration of a fund is a measure of the fund's interest-rate risk. If interest rates on the bonds in a fund rise, the fund's value will fall by the same amount multiplied by the duration. Thus, since Total Bond Market has a 5-year duration, it will lose 5% of value if rates on its bonds rise by 1% (and you will then make up that 5% from the higher yield if you hold the fund for 5 years).

Note the "its bonds". The FOMC primarily affects short-term interest rates; intermediate-term and long-term rates are often less volatile. Thus it is difficult to predict what would happen to an intermediate-term bond fund if short-term rates rise.
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Re: Will the real Total Bond Index Fund please stand up?

Post by staythecourse » Wed Aug 22, 2012 7:46 pm

Gotta say if one is arguing the effects of what amounts to 1 year on your duration of your bond component you are either doing a stellar job on evey other aspect of investing that matter more OR you are focusing on minor details and missing the bigger picture.

Good luck.
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Re: Will the real Total Bond Index Fund please stand up?

Post by nisiprius » Wed Aug 22, 2012 8:18 pm

grabiner wrote:The duration of a fund is a measure of the fund's interest-rate risk. If interest rates on the bonds in a fund rise, the fund's value will fall by the same amount multiplied by the duration. Thus, since Total Bond Market has a 5-year duration, it will lose 5% of value if rates on its bonds rise by 1% (and you will then make up that 5% from the higher yield if you hold the fund for 5 years).
Not arguing with that and not trying to put spin on this--or not too much spin, anyway!--but the correct statement would be "if interest rates on the bonds in a fund rise instantaneously, the fund's value will fall by the same amount multiplied by the duration."

Now, in the short run, interest rates do fluctuate quite rapidly. So the fund's value fluctuates rapidly in response, and the duration tells you how big those fluctuations will be. Useful.

But what people are concerned about these days is the possibility or likelihood of a long-term secular trend in interest rates, like the one that occurred from 1940 to 1980. Rates rose from 2% to 16%. That's an average of 0.35% per year, but it was rising slower at the beginning and faster at the end. I'll opine that 0.5% per year is a good number to think about.

Well, the practical impact of a rise of 5% spread out at 0.5% per year over ten years is considerably less than the impact of an instantaneous change of 5%. A bond's value must rise to par at maturity. A steadily rising interest rate at first causes a steadily decreasing value; the more the bond's value decreases, though, the stronger is the pull toward par, and an equilibrium is reached. Think of the rising rate as exerting a downward force on the bond's value that's proportional to its rate of rise, and the bond as having an upward force from the pull toward par that's proportional to how far below par it is.

In addition to that, the accumulating investor will see the flow of reinvestment from bond interest constantly raising the value of his holdings in the bond fund. I've tinkered with various scenarios and with numbers that seem realistic to me you don't even necessarily see any decrease at all--just a slower rate of increase.

The "drop in value = rise in interest rate times duration" is accurate as far as it goes, but I think it exaggerates the severity of what happens if the rise in interest rate is e.g. 0.5% per year for 10 years, rather than an instantaneous 5% step change.

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Last edited by nisiprius on Wed Aug 22, 2012 8:21 pm, edited 1 time in total.
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Re: Will the real Total Bond Index Fund please stand up?

Post by pingo » Wed Aug 22, 2012 8:20 pm

nisiprius wrote:Morningstar, which I find reasonably reliable...
Something that has had me perplexed for a couple months: Morningstar indicated that Total Bond (VBMFX) has way more long term bonds than Vanguard shows (based on the OP's definitions).

Short Term (defined as all bonds up to but not including 5 years) 35.49%
Intermediate Term (defined as all bonds from 5 – 10 years) 21.13%
Long Term (defined as all bonds beyond 10 years) 43.38%

What am I missing?

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Re: Will the real Total Bond Index Fund please stand up?

Post by jginseattle » Wed Aug 22, 2012 8:34 pm

pingo wrote:
nisiprius wrote:Morningstar, which I find reasonably reliable...
Something that has had me perplexed for a couple months: Morningstar indicated that Total Bond (VBMFX) has way more long term bonds than Vanguard shows (based on the OP's definitions).

Short Term (defined as all bonds up to but not including 5 years) 35.49%
Intermediate Term (defined as all bonds from 5 – 10 years) 21.13%
Long Term (defined as all bonds beyond 10 years) 43.38%

What am I missing?
Morningstar's information is dated 6/30/2012. Vanguard's is dated 7/31/2012.

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Re: Will the real Total Bond Index Fund please stand up?

Post by rustymutt » Wed Aug 22, 2012 8:45 pm

Sidney wrote:If they were forced to sell bonds as their maturity dropped below some "intermediate" threshold then the ER would start to climb. I don't think that is what anyone wants.

This fund in active management, right?
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Re: Will the real Total Bond Index Fund please stand up?

Post by rustymutt » Wed Aug 22, 2012 8:47 pm

jginseattle wrote:
pingo wrote:
nisiprius wrote:Morningstar, which I find reasonably reliable...
Something that has had me perplexed for a couple months: Morningstar indicated that Total Bond (VBMFX) has way more long term bonds than Vanguard shows (based on the OP's definitions).

Short Term (defined as all bonds up to but not including 5 years) 35.49%
Intermediate Term (defined as all bonds from 5 – 10 years) 21.13%
Long Term (defined as all bonds beyond 10 years) 43.38%

What am I missing?
Morningstar's information is dated 6/30/2012. Vanguard's is dated 7/31/2012.

Are you saying what I think you're saying, in that the TBM is going to change month to month on old bonds out, new bonds in type of turnover. I could see that as one batch on short term bonds come due, those could get replaced with bonds of a different duration.
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Re: Will the real Total Bond Index Fund please stand up?

Post by jginseattle » Wed Aug 22, 2012 8:56 pm

rustymutt wrote:
jginseattle wrote:
pingo wrote:
nisiprius wrote:Morningstar, which I find reasonably reliable...
Something that has had me perplexed for a couple months: Morningstar indicated that Total Bond (VBMFX) has way more long term bonds than Vanguard shows (based on the OP's definitions).

Short Term (defined as all bonds up to but not including 5 years) 35.49%
Intermediate Term (defined as all bonds from 5 – 10 years) 21.13%
Long Term (defined as all bonds beyond 10 years) 43.38%

What am I missing?
Morningstar's information is dated 6/30/2012. Vanguard's is dated 7/31/2012.



Are you saying what I think you're saying, in that the TBM is going to change month to month on old bonds out, new bonds in type of turnover. I could see that as one batch on short term bonds come due, those could get replaced with bonds of a different duration.
I don't know. Both Vanguard and Morningstar list the fund's average duration at about 5.1 years.

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Re: Will the real Total Bond Index Fund please stand up?

Post by grabiner » Wed Aug 22, 2012 10:17 pm

nisiprius wrote:Well, the practical impact of a rise of 5% spread out at 0.5% per year over ten years is considerably less than the impact of an instantaneous change of 5%. A bond's value must rise to par at maturity. A steadily rising interest rate at first causes a steadily decreasing value; the more the bond's value decreases, though, the stronger is the pull toward par, and an equilibrium is reached. Think of the rising rate as exerting a downward force on the bond's value that's proportional to its rate of rise, and the bond as having an upward force from the pull toward par that's proportional to how far below par it is.
Agreed. In a bond fund with a 2% yield and a 5-year duration, the fund would lose 0.5% in the first year under this scenario (2.5% loss in principal but 2% yield), then break even in the second year, gain 0.5% in the third, and so on up to a 4% gain in the last year (2.5% loss in principal subtracted from 6.5% yield).
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Re: Will the real Total Bond Index Fund please stand up?

Post by pingo » Wed Aug 22, 2012 10:42 pm

jginseattle wrote:
pingo wrote:Something that has had me perplexed for a couple months: Morningstar indicated that Total Bond (VBMFX) has way more long term bonds than Vanguard shows (based on the OP's definitions) [.]
Morningstar's information is dated 6/30/2012. Vanguard's is dated 7/31/2012.
Agreed, but the disparity has existed for at least 2 months. Tom T looked at Vanguard's website and posted the following on June 27, 2012:
On Wed Jun 27, 2012 Tom_T wrote:TBM covers the entire spectrum of maturities:

0-3 years: 27.8%
3-5 years: 27.9%
5-10 years: 29.9%
10-20 years: 4.1%
20-30 years: 10.0%
Over 30 years: 0.3%
I had gone to Morningstar the same day and posted the following:
On Wed Jun 27, 2012 pingo wrote:Vanguard's Total Bond Market Fund (VBLTX):

36% Short-Term (1-5)
28% Intermediate-Term (5-15)
36% Long-Term (15+)
I later went and confirmed Tom_T's information at Vanguard. I've been scratching my head ever since. :|

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Re: Will the real Total Bond Index Fund please stand up?

Post by Leif » Thu Aug 23, 2012 4:23 pm

jestan wrote:
Short Term (defined as all bonds up to but not including 5 years) 57%
Intermediate Term (defined as all bonds from 5 – 10 years) 29%
Long Term (defined as all bonds beyond 10 years) 14%

Jestan
Its a bit off topic, but is there a consensus on what is short term vs. intermediate term? I think Vanguard uses 5 years as the break. I've read and use 3 years as the breaking point.

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Re: Will the real Total Bond Index Fund please stand up?

Post by scorchf22 » Thu Aug 23, 2012 11:17 pm

rustymutt wrote:
Sidney wrote:If they were forced to sell bonds as their maturity dropped below some "intermediate" threshold then the ER would start to climb. I don't think that is what anyone wants.

This fund in active management, right?
No. It's an INDEX fund--passive management.

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Re: Will the real Total Bond Index Fund please stand up?

Post by woodedareas » Fri Aug 24, 2012 8:47 am

I am following this discussion and my take is that regardless of the mix, and investor in an index fund really has no control other than to observe the market and accept the consequences. Then why wouldn't it make more sense to buy individual corporates with a promised return and highly rated, so you could have greater control over your money. Once those $$ go into any fund they are out of your control. After all both bond and equity portions of a portfolio can go down at the same time.I realize Vanguard has some great funds but why would an older person accept additional risk when they have no method by which to replace their savings. Is it possible that we are so accustomed to past methods of investing that we are not reflecting the current economy. Is there a better way than the concept of mutual funds, and have they become a vestige of the past?

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Re: Will the real Total Bond Index Fund please stand up?

Post by jginseattle » Fri Aug 24, 2012 9:03 pm

woodedareas wrote:I am following this discussion and my take is that regardless of the mix, and investor in an index fund really has no control other than to observe the market and accept the consequences. Then why wouldn't it make more sense to buy individual corporates with a promised return and highly rated, so you could have greater control over your money. Once those $$ go into any fund they are out of your control. After all both bond and equity portions of a portfolio can go down at the same time.I realize Vanguard has some great funds but why would an older person accept additional risk when they have no method by which to replace their savings. Is it possible that we are so accustomed to past methods of investing that we are not reflecting the current economy. Is there a better way than the concept of mutual funds, and have they become a vestige of the past?
It's much more difficult to achieve diversification when investing in individual corporate bonds.

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