Optimal Bond Fund in Taxable Account

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
mrwheelerdealer
Posts: 89
Joined: Wed Apr 09, 2014 7:35 pm

Optimal Bond Fund in Taxable Account

Post by mrwheelerdealer » Wed Jul 13, 2016 10:51 pm

Bogleheads,

I am currently reviewing my portfolio and after doing some poking around on the forum it seems that the consensus is that VWIUX (Vanguard Intermediate Term Tax-Exempt Bond Fund ) is the way to go for the bond choice for taxable accounts. I don't understand why it's better than what I currently have, VFITX ( Intermediate Term Treasury fund ). Both are only exempt from federal taxes, but not from state taxes. What am I missing here?

In addition, I live in NJ so I considered a NJ bond fund, since to my knowledge I will in fact be exempt from state taxes, but Vanguard only offers long term state specific bond funds. I am considering perhaps buying Fidelity's NJ municipal fund since they have an intermediate term. I know it's a mouthful but any direction is greatly appreciated.
The Biggest Risk is to not take one

User avatar
abuss368
Posts: 11644
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Optimal Bond Fund in Taxable Account

Post by abuss368 » Wed Jul 13, 2016 10:56 pm

A little backwards in terms of taxes. Muni's are exempt from Federal tax. Treasuries are exempt from state and local taxes.

If you like treasuries, there is no problem. They certainly do well in a crisis or downturn and do not follow stocks. If that is the cas, why not Total Bond which is 2/3 Treasuries or so?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

mrwheelerdealer
Posts: 89
Joined: Wed Apr 09, 2014 7:35 pm

Re: Optimal Bond Fund in Taxable Account

Post by mrwheelerdealer » Wed Jul 13, 2016 11:03 pm

abuss368 wrote:A little backwards in terms of taxes. Muni's are exempt from Federal tax. Treasuries are exempt from state and local taxes.

If you like treasuries, there is no problem. They certainly do well in a crisis or downturn and do not follow stocks. If that is the cas, why not Total Bond which is 2/3 Treasuries or so?


The bond portion of my portfolio is purely to balance out the returns. I therefore want the fund that most purely does that. Also, I've read from Larry Swedroe that corporates are not really "better" than treasuries, b/c they have call risk, default risk, etc. For the little bit of extra yield it doesn't seem worth it. I would rather hold more equities.

If treasuries are exempt from both, why do many on this forum recommend VWIUX for taxable?
The Biggest Risk is to not take one

User avatar
abuss368
Posts: 11644
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Optimal Bond Fund in Taxable Account

Post by abuss368 » Wed Jul 13, 2016 11:07 pm

mrwheelerdealer wrote:
abuss368 wrote:A little backwards in terms of taxes. Muni's are exempt from Federal tax. Treasuries are exempt from state and local taxes.

If you like treasuries, there is no problem. They certainly do well in a crisis or downturn and do not follow stocks. If that is the cas, why not Total Bond which is 2/3 Treasuries or so?


The bond portion of my portfolio is purely to balance out the returns. I therefore want the fund that most purely does that. Also, I've read from Larry Swedroe that corporates are not really "better" than treasuries, b/c they have call risk, default risk, etc. For the little bit of extra yield it doesn't seem worth it. I would rather hold more equities.

If treasuries are exempt from both, why do many on this forum recommend VWIUX for taxable?


Never had a problem with Total Bond. Increased during financial crisis. Never heard Larry's thoughts on that.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
Phineas J. Whoopee
Posts: 6656
Joined: Sun Dec 18, 2011 6:18 pm

Re: Optimal Bond Fund in Taxable Account

Post by Phineas J. Whoopee » Wed Jul 13, 2016 11:27 pm

Hi mrwheelerdealer,

I support abuss's factual observation about federal vs. state taxability of municipal bonds, including that Treasuries are only exempt from state and local income taxes, not federal.

mrwheelerdealer wrote:...
In addition, I live in NJ so I considered a NJ bond fund, since to my knowledge I will in fact be exempt from state taxes, but Vanguard only offers long term state specific bond funds. I am considering perhaps buying Fidelity's NJ municipal fund since they have an intermediate term. ...

I don't know of any problems with Fidelity's fund, but it's important to note not everybody agrees on the cutoff point between intermediate- and long-term. To wit:

Fidelity New Jersey Municipal Income Fund, FNJHX, ER 0.48%: Average duration 6.05 years.

Vanguard New Jersey Long-Term Tax-Exempt Fund Investor Shares, VNJTX, ER 0.20%: Average duration 6.3 years.

In terms of duration difference it looks as if there isn't any there there.

Furthermore, both fund families provide a way to adjust the average duration of your NJ tax-exempt fixed income portfolio, by offering NJ tax-exempt money market funds. You can dial in any average duration you like, less than 6.05 years or 6.3 years, respectively, by mixing in either of these:

Fidelity New Jersey Municipal Money Market Fund, FNJXX, ER 0.08%.

Vanguard New Jersey Tax-Exempt Money Market Fund, VNJXX, ER 0.16%.

You have full portfolio flexibility to select anything under about 6 years average duration from either sponsor.

Hope the additional information is helpful.

PJW

looking
Posts: 613
Joined: Thu Mar 01, 2007 7:14 pm
Location: morgan hill ,ca

Re: Optimal Bond Fund in Taxable Account

Post by looking » Thu Jul 14, 2016 12:03 am

seems treasury is way to go

mrwheelerdealer
Posts: 89
Joined: Wed Apr 09, 2014 7:35 pm

Re: Optimal Bond Fund in Taxable Account

Post by mrwheelerdealer » Thu Jul 14, 2016 8:44 am

abuss368 wrote:
mrwheelerdealer wrote:
abuss368 wrote:A little backwards in terms of taxes. Muni's are exempt from Federal tax. Treasuries are exempt from state and local taxes.

If you like treasuries, there is no problem. They certainly do well in a crisis or downturn and do not follow stocks. If that is the cas, why not Total Bond which is 2/3 Treasuries or so?


The bond portion of my portfolio is purely to balance out the returns. I therefore want the fund that most purely does that. Also, I've read from Larry Swedroe that corporates are not really "better" than treasuries, b/c they have call risk, default risk, etc. For the little bit of extra yield it doesn't seem worth it. I would rather hold more equities.

If treasuries are exempt from both, why do many on this forum recommend VWIUX for taxable?


Never had a problem with Total Bond. Increased during financial crisis. Never heard Larry's thoughts on that.


I'll have to find where I saw it in Larry's writings. But I do remember that David Swensen is not fond of corporate, and in his model portfolio he doesn't recommend them. He makes a very strong argument against them in Unconventional Success.
The Biggest Risk is to not take one

mega317
Posts: 1097
Joined: Tue Apr 19, 2016 10:55 am

Re: Optimal Bond Fund in Taxable Account

Post by mega317 » Thu Jul 14, 2016 12:45 pm

Phineas J. Whoopee wrote:Furthermore, both fund families provide a way to adjust the average duration of your NJ tax-exempt fixed income portfolio, by offering NJ tax-exempt money market funds. You can dial in any average duration you like, less than 6.05 years or 6.3 years, respectively, by mixing in either of these:

Fidelity New Jersey Municipal Money Market Fund, FNJXX, ER 0.08%.

Vanguard New Jersey Tax-Exempt Money Market Fund, VNJXX, ER 0.16%.

You have full portfolio flexibility to select anything under about 6 years average duration from either sponsor.

Hope the additional information is helpful.

PJW


Wouldn't you rather just use a 1% savings account instead of getting 0.26% untaxed from the money market?

Longtermgrowth
Posts: 427
Joined: Thu Nov 26, 2015 1:59 pm

Re: Optimal Bond Fund in Taxable Account

Post by Longtermgrowth » Thu Jul 14, 2016 2:01 pm

abuss368 wrote:Never had a problem with Total Bond. Increased during financial crisis. Never heard Larry's thoughts on that.


I'm pretty sure I've read in a few of his posts that he doesn't like the high percentage of government mortgage-backed securities in Total Bond. I'm not sure I've seen a Vanguard bond fund recommendation from him though.

I guess the closest fund to Total Bond Market, without the mortgage-backed securities, would be Vanguard Intermediate Term Bond Index (VBILX)?

User avatar
abuss368
Posts: 11644
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Optimal Bond Fund in Taxable Account

Post by abuss368 » Thu Jul 14, 2016 2:17 pm

Longtermgrowth wrote:
abuss368 wrote:Never had a problem with Total Bond. Increased during financial crisis. Never heard Larry's thoughts on that.


I'm pretty sure I've read in a few of his posts that he doesn't like the high percentage of government mortgage-backed securities in Total Bond. I'm not sure I've seen a Vanguard bond fund recommendation from him though.

I guess the closest fund to Total Bond Market, without the mortgage-backed securities, would be Vanguard Intermediate Term Bond Index (VBILX)?


Perhaps. My understanding is that fund is approximately one half Treasuries and one half corporate. The yield may be higher as a result of the higher risks.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

BHUser27
Posts: 593
Joined: Mon Jan 18, 2016 3:07 pm
Location: A Midwestern Town

Re: Optimal Bond Fund in Taxable Account

Post by BHUser27 » Thu Jul 14, 2016 2:21 pm

For what it is worth, here is M*'s tax analysis for VFITX and VWIUX. You can see the tax drag on VFITX.
Keep in mind this assumes highest fed income tax bracket - actual numbers depend on your individual situation.

Code: Select all

(06/30/2016)
Tax Analysis

      1-Yr    3-Yr    5-Yr    10-Yr   15-Yr
Pretax Return                                                 
VFITX   5.97    3.45    3.40    5.30    5.21
VWIUX   6.95    5.05    4.74    4.79    4.52

Tax-adjusted Return                                                 
VFITX   5.00    2.58    2.41    3.98    3.69
VWIUX   6.95    5.05    4.74    4.79    4.51

BHUser27
Posts: 593
Joined: Mon Jan 18, 2016 3:07 pm
Location: A Midwestern Town

Re: Optimal Bond Fund in Taxable Account

Post by BHUser27 » Thu Jul 14, 2016 2:25 pm

BHUser27 wrote:For what it is worth, here is M*'s tax analysis for VFITX and VWIUX. You can see the tax drag on VFITX.
Keep in mind this assumes highest fed income tax bracket - actual numbers depend on your individual situation.


You can see similar tax analysis on Vanguard's fund page by scrolling down to the after-tax returns section: https://personal.vanguard.com/us/funds/snapshot?FundId=0035&FundIntExt=INT#tab=1
Last edited by BHUser27 on Tue Jul 19, 2016 9:48 am, edited 1 time in total.

User avatar
Phineas J. Whoopee
Posts: 6656
Joined: Sun Dec 18, 2011 6:18 pm

Re: Optimal Bond Fund in Taxable Account

Post by Phineas J. Whoopee » Thu Jul 14, 2016 4:06 pm

mega317 wrote:...
Wouldn't you rather just use a 1% savings account instead of getting 0.26% untaxed from the money market?

Thank you. I neglected to add the sentences I usually do when state funds being long-term comes up: I'm not recommending any particular action. I'm merely pointing out the option.

In the context of Vanguard's state tax exempt funds only being long term, the answer is it's mix and match with a state tax exempt money market fund. I'm responding to and expounding on OP's question, not making a portfolio recommendation.

But yes, I do usually include the two sentences I neglected this time.

Thanks again.

PJW

Post Reply