Vanguard Bond Funds decision

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Runalong
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Vanguard Bond Funds decision

Post by Runalong » Thu Dec 17, 2015 1:28 pm

My specific questions are about choosing between the following:

VBMFX - total bond index fund (yield 2.35, exp 0.2)
BND- total bond index etf (yield 2.44, exp 0.07)
VFICX - intermediate fund (yield 2.06, exp 0.2)
BIV - intermediate etf (yield 2.65, exp 0.1)

1. Over the long term they all move largely in sync, except for VFICX which lags a bit. There are small short-term variations but they even out over 5 years or more (recent history). I'm leaning toward BIV as it tracks BND with a better yield and only negligibly larger expense ratio. Thoughts?

2. Is there any reason I'm not seeing to choose either fund over its corresponding etf?

RipkenFan08
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Re: Vanguard Bond Funds decision

Post by RipkenFan08 » Thu Dec 17, 2015 3:21 pm

Couple things going on here.

First, past performance isn't necessarily a good gage for bonds going forward so I wouldn't put too much weight on your historical analysis. Going back to the early 80's rates were north of 15% and now the 10 yr treasury is at 2.238% now. The next 30 years will most likely look a little different than the past 30 years.

There is a little more to picking out a bond fund than just the yield and expense ratio. There are 2 main risks with bonds (or bond funds). Interest rate risk and credit risk. When assessing the 2 different funds you're looking at, they both look very similar. The total bond market has a duration of 5.72 and an average credit quality of AA. The intermediate index has a duration of 5.50 and an average credit quality of A. Very little difference between the two funds.

It's hard to recommend one over the other without knowing your situation and why you're looking at these 2 funds. As for choosing the fund or the ETF, ETF's are my preference. They're more tax friendly and efficient. But, at the end of the day, both dots will end up just next to each other on a long-term basis.

livesoft
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Re: Vanguard Bond Funds decision

Post by livesoft » Thu Dec 17, 2015 3:49 pm

There are reasons to choose the mutual fund over the ETF. Most are listed in the wiki:
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

I will start off by saying I own both VBTLX and BND. I own VBLTX at Vanguard and BND at other brokers.

Some random thoughts:

1. VBTLX can be purchased in any dollar amount and all one's money goes into it. BND one must buy integral number of shares, so one may leave some money sitting in cash doing nothing.

2. VBTLX can be purchased on an automatic periodic investing plan. BND no.

3. Reinvesting dividends can be done with both, but VBTLX pays its dividend and reinvests on the last day of the month, so you see in your account on the first day of the month. BND pays a few days later and the reinvestment is done after that, so you see it at the end of the first week of the month. If you like doing monthly updates, the ETF share class is always out of sync it seems. Your broker determines the reinvested price that you buy shares with. At least with VBTLX, you are guaranteed to get a fair price every time.

4. BND is easier to trade when it goes up by more than 0.6% intraday (sell) or down by more than 0.6% intraday (buy), so it is more suitable for market timing that VBTLX. This is very useful around news announcement when anomalous things happen that you can take advantage of. But you should be making trades when the market is open which you may not be able to do. If you want a fair price on every order, then use VBTLX instead. BND is good when you want to take advantage of the other guy. Don't be the other guy though.
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Runalong
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Re: Vanguard Bond Funds decision

Post by Runalong » Thu Dec 17, 2015 5:08 pm

thank you for those responses.

some clarification: I am looking for a buy and hold bond fund. it's an IRA account so taxes aren't an issue.

it appears that the lower fees make the etf option preferable with no downside.

is there any reason to expect that BIV would perform significantly different than a total bond fund? it looks like a coin flip to me.

thanks again.

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ogd
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Re: Vanguard Bond Funds decision

Post by ogd » Thu Dec 17, 2015 5:14 pm

Runalong wrote:it appears that the lower fees make the etf option preferable with no downside.
Have you read the wiki article that livesoft linked to? https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds . Including the sample absolute ER calculation at the end. Lower fees is a very small factor for this decision.
Runalong wrote:is there any reason to expect that BIV would perform significantly different than a total bond fund? it looks like a coin flip to me.
Not particularly. There are small differences in yield and risk factors, but you can reasonably call them "tradeoffs" and say that either is acceptable.

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Runalong
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Re: Vanguard Bond Funds decision

Post by Runalong » Thu Dec 17, 2015 5:41 pm

thanks ogd (auto-correct wants to make a "god" out of you!).

yes, I read it. all in all it looks like this isn't a decision that I should spend much time on, they're all pretty much the same in the long run.

livesoft
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Re: Vanguard Bond Funds decision

Post by livesoft » Thu Dec 17, 2015 7:43 pm

Try the ETFs I also say. Since it is an IRA, if you find out that your personality is not suited to the ETFs, then it is trivial to switch the mutual fund shares.
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DSInvestor
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Re: Vanguard Bond Funds decision

Post by DSInvestor » Thu Dec 17, 2015 7:48 pm

VBMFX Total Bond Market Investor shares er=0.20% has another share class VBTLX Admiral shares er=0.07% which is exactly the same expense ratio as the BND share class. VBTLX has a $10K minimum initial investment. If you have enough to meet this minimum initial investment, I'd suggest going with admiral shares rather than the ETF share class.

BTW, BIV ETF is the ETF share class of Intermediate Term Bond Index Investor share VBIIX er=0.20% and Admiral shares VBILX er=0.10%
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