VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

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MrFlish
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VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by MrFlish »

Struggling to decide which to partner with VTSAX (60) in a 60/40 portfolio with 10-15 year investment period. Which one of the two would you choose and why?


Thanks for the advice...
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Taylor Larimore
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Re: VBILX vs VBTLX

Post by Taylor Larimore »

MrFlish wrote:Struggling to decide which to partner with VTSAX (60) in a 60/40 portfolio with 10-15 year investment period. Which one of the two would you choose and why?
Thanks for the advice...
Mr. Flish:

Bonds are primarily for safety when the total stock market (VTSAX) plunges. In the last 2008 bear market, Total Bond Market gained +5% (most bond funds declined). TBM has never declined more than -2.66%. It is the bond fund that Mr. Bogle recommends in his "Little Book of Common Sense Investing." It is my only bond fund held since 1986. I am very pleased with it.

Having said the above, I believe ANY good-quality, low-cost, diversified, bond fund with a short- or intermediate term maturity will do the job of providing safety in the next bear market for stocks.

Don't look at bond fund returns. The higher the return the greater the risk. Increase your stock allocation for higher return.

Best wishes.
Taylor
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alec
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Re: VBILX vs VBTLX

Post by alec »

VBILX = int term bond index admiral - roughly 50/50 treasury bonds and corporate bonds
VBTLX = total bond index admiral - roughly 75% treasury and mortgage backed bonds, 25% corporate bonds

Hence, VBILX has a higher yield, but more credit risk, which is why VBILX lost more money in the financial crisis than VBTLX. Hence, VBTLX could be a better diversifies for equities.

If you don't mind mortgage backed bonds, VBTLX should be fine.

Personally, I think it's kinds of a toss up.

-Alec
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MrFlish
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Re: VBILX vs VBTLX

Post by MrFlish »

Taylor Larimore wrote:
MrFlish wrote:Struggling to decide which to partner with VTSAX (60) in a 60/40 portfolio with 10-15 year investment period. Which one of the two would you choose and why?
Thanks for the advice...
Mr. Flish:

Bonds are primarily for safety when the total stock market (VTSAX) plunges. In the last 2008 bear market, Total Bond Market gained +5% (most bond funds declined). TBM has never declined more than -2.66%. It is the bond fund that Mr. Bogle recommends in his "Little Book of Common Sense Investing." It is my only bond fund held since 1986. I am very pleased with it.

Having said the above, I believe ANY good-quality, low-cost, diversified, bond fund with a short- or intermediate term maturity will do the job of providing safety in the next bear market for stocks.

Don't look at bond fund returns. The higher the return the greater the risk. Increase your stock allocation for higher return.

Best wishes.
Taylor
Thank you for the concise point. I feel like I'm splitting hairs at a this point. Your stated purpose is exactly what I'm intending to do.
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Re: VBILX vs VBTLX

Post by jhfenton »

Either fund is great for your proposed use, but if I could only own one bond fund in that situation, it would be VBILX. VBTLX has mortgage-backeds and a few too many treasuries for it to be my choice.

(Fortunately, that is not the case.)
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Re: VBILX vs VBTLX

Post by mcraepat9 »

You are overthinking this.
Amateur investors are not cool-headed logicians.
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Re: VBILX vs VBTLX

Post by jhfenton »

MrFlish wrote:
Taylor Larimore wrote:
MrFlish wrote:Struggling to decide which to partner with VTSAX (60) in a 60/40 portfolio with 10-15 year investment period. Which one of the two would you choose and why?
Thanks for the advice...
Mr. Flish:

Bonds are primarily for safety when the total stock market (VTSAX) plunges. In the last 2008 bear market, Total Bond Market gained +5% (most bond funds declined). TBM has never declined more than -2.66%. It is the bond fund that Mr. Bogle recommends in his "Little Book of Common Sense Investing." It is my only bond fund held since 1986. I am very pleased with it.

Having said the above, I believe ANY good-quality, low-cost, diversified, bond fund with a short- or intermediate term maturity will do the job of providing safety in the next bear market for stocks.

Don't look at bond fund returns. The higher the return the greater the risk. Increase your stock allocation for higher return.

Best wishes.
Taylor
Thank you for the concise point. I feel like I'm splitting hairs at a this point. Your stated purpose is exactly what I'm intending to do.
You are splitting hairs, but it's important to understand why you make your choice. As long as you stick with either, you'll be fine. :beer
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Re: VBILX vs VBTLX

Post by lack_ey »

The intermediate-term fund takes a bit more term and credit risk, and it doesn't have MBS, but for actual returns and risk you're probably not really going to notice the difference. So maybe the riskier fund is slightly better? Of course, you can extend this argument indefinitely (slightly more return but it feels like about the same risk!) and you'd never stop and end up in a stupid place.

This is actually a fairly commonly asked question, with plenty of previous threads, for example
viewtopic.php?t=193400
viewtopic.php?t=115221
viewtopic.php?t=169873
viewtopic.php?t=125830
viewtopic.php?t=209717

Backtesting these funds probably doesn't add much value or tell you much, and it's hard to fairly control for duration (all else equal longer duration is generally unusually good over the last 30+ years but may not stay that way if the bond bull market ends), but here you can kind of see the performance if mixed with some amounts of Vanguard Short-Term Investment Grade Fund:
Image
https://www.portfoliovisualizer.com/bac ... tion4_1=40

So before taxes—in a tax-advantaged account, hypothetically—there was some small advantage taking the additional credit risk or avoiding MBS or whatever the difference actually was. Probably not much and I wouldn't make too much of it.

Personally I'm not terribly convinced about the long-term bonds in total bond either. So that would be a slight recommendation for the intermediate-term fund.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by fundseeker »

Mr Flish, It looks to me like apparently most people prefer Total Bond (VBTLX), based on that fund having approx. $143 billion more in total net assets than Intermediate (VBILX).

VBILX
Fund total net assets $29.9 billion as of 01/31/2017

VBTLX
Fund total net assets $173.6 billion as of 01/31/2017
Bogel0048
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Bogel0048 »

I agree it's a pretty close call. Given that both funds qualify as a responsible bond choice, e.g., not chasing returns by picking a long term bond fund for the "safe" component of your portfolio, I go with VBILX. A Vanguard CFP recommended it to me twenty years ago (Investor shares only at that time, I guess), and I have stayed with it ever since.

Having said that, I am also a bit eccentric in that I don't have any international. My (our) savings are 75% VTSAX and 25% VBILX and cash. Family finances is one of the few areas where my boss lets me take the lead.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Gauntlet »

One more opinion here. I agree that it doesn't matter much. Personally, I like VBILX. Mainly, because I don't want to own Mortgage-backed or long-term bonds. I like to keep my fixed-income as simple as possible and I don't completely understand how asset-backed bonds work. How they are pooled together, when they can be paid off early, etc.? And like many here, I don't like taking much risk with my fixed income so I don't like long-term bonds. Having said that, when you look at the past results, total bond as done great in all kinds of market swings.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Munir »

I think there is a significant difference other than the MBS holdings, long term bonds, and different allocations to corporates and US government instruments. The significant difference to me in this rising interest rates environment is duration. Most experts agree that longer duration is a disadvantage in a rising rate environment. VBTLX (Total Bond) has a duration of 6.1 (has been lengthening recently) and VBILX (Interemdiate Bond Index) is 6.5 . A better option is the Intermediate Investment Grade (VFIDX) with a duration of 5.4 but it is quite high in corporates. You can choose a mix of these funds that meet your needs such as VBTLX and VFIDX to shorten your duration which would simulate VBILX in its mix of US Treasuries and corporates but with a shorter duration..
Last edited by Munir on Tue Feb 21, 2017 3:49 pm, edited 1 time in total.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by nomas »

We use VBILX for some of the reasons noted in the previous replies (no MBS or long-term bonds, and the higher percentage of corporate bonds). We combine it with the Short-Term Bond Index (VBIRX) to shorten the overall duration. The Short-Term fund does hold a higher percentage of US government bonds (64% vs the 50:50 ratio in VBILX).
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

Either fund is great for your proposed use, but if I could only own one bond fund in that situation, it would be VBILX. VBTLX has mortgage-backeds and a few too many treasuries for it to be my choice.
VBILX has a larger allocation to treasuries (51%) than VBTLX (42%).

VBILX has a longer duration than VBTLX and is generally the more volatile of the two, due to its increased sensitivity to interest rates.

Authors who don't like mortgage-backed bonds like corporate bonds even less, and VBILX has a larger allocation to corporate bonds (49% vs 38%).

Treasuries, mortgage-backed bonds, and corporate bonds are not fully correlated, so there is an opportunity to diversify some of their risks by holding all three.

Since the OP's intention is to diversify equity risk, I would prefer VBTLX as its lower interest rate risk, lower credit risk, and superior diversification make it the fund with the lower risk of the two. Additionally, the higher exposure to credit may increase the observed correlation of VBILX to stocks-- that was the case in fall 2008.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by ruralavalon »

Either fund is very good for your purposes.

We Use Vanguard Intermediate-term Bond Index Fund (VBILX), we like it's 50/50 government/corporate mix and the absence of mortgage backed securities.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by BigJohn »

I struggled with the same question. I think that in 20+ years the difference in your portfolio using one vs the other will be minimal and no way to tell which will be "better". However, a choice needs to be made and I opted for VBILX. I was leaning this way because VBTLX has a high percentage of mortgage backed securities. But what ended up being the deciding factor is that the make-up of VBTLX moves around a good bit based on actions by the Fed which moves the composition of the index.

A great graphic to illustrate this here viewtopic.php?p=2163801#p2163801.

Ultimately I preferred the more stable 50/50 composition of VBILX.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by lack_ey »

BigJohn wrote:I struggled with the same question. I think that in 20+ years the difference in your portfolio using one vs the other will be minimal and no way to tell which will be "better". However, a choice needs to be made and I opted for VBILX. I was leaning this way because VBTLX has a high percentage of mortgage backed securities. But what ended up being the deciding factor is that the make-up of VBTLX moves around a good bit based on actions by the Fed which moves the composition of the index.

A great graphic to illustrate this here viewtopic.php?p=2163801#p2163801.

Ultimately I preferred the more stable 50/50 composition of VBILX.
The intermediate-term fund is not 50/50 by design. It just happens to be around that right now. The same forces that shift the composition of total bond will do the same for this (actually, maybe fractionally even less, as Vanguard's total bond float adjusts out government holdings of bonds). And that is mostly not about Fed action regardless.

The similar short-term index fund has 64% US government, the intermediate-term has 51%, and the long-term has 38.8%.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Munir »

BigJohn wrote:I struggled with the same question. I think that in 20+ years the difference in your portfolio using one vs the other will be minimal and no way to tell which will be "better". However, a choice needs to be made and I opted for VBILX. I was leaning this way because VBTLX has a high percentage of mortgage backed securities. But what ended up being the deciding factor is that the make-up of VBTLX moves around a good bit based on actions by the Fed which moves the composition of the index.

A great graphic to illustrate this here viewtopic.php?p=2163801#p2163801.

Ultimately I preferred the more stable 50/50 composition of VBILX.
Are you concerned about the longer duration of VBILX in view of a continuing rising rate environment?
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by BigJohn »

lack_ey wrote:The same forces that shift the composition of total bond will do the same for this (actually, maybe fractionally even less, as Vanguard's total bond float adjusts out government holdings of bonds). And that is mostly not about Fed action regardless.
While there is no doubt that it moves, I think it moves less because there are fewer moving parts. Looking at graph on total bond I was really taken back by the growth in MBS as the government choose to get more into that business starting in the 80's (agree it's not the Federal Reserve necessarily but the US government). In a near tie between the two, the more simple composition without MBS broke the tie.
Munir wrote:Are you concerned about the longer duration of VBILX in view of a continuing rising rate environment?
VBILX is 6.5 years while VBTLX is 6.1 years which are close enough that I consider them the same. I expect you'll get more variation between the two from the different bond composition than from the duration difference.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

VBILX is 6.5 years while VBTLX is 6.1 years which are close enough that I consider them the same. I expect you'll get more variation between the two from the different bond composition than from the duration difference.
Historically vbilx has been noticeably more sensitive to interest rate changes.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by BigJohn »

Took a quick look at what happened when rates increased late last year. VBTLX dropped about 4%, VBILX dropped about 5%. So a noticeable difference but to me at least not one that is significant or worrisome.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Munir »

BigJohn wrote:Took a quick look at what happened when rates increased late last year. VBTLX dropped about 4%, VBILX dropped about 5%. So a noticeable difference but to me at least not one that is significant or worrisome.
For me, both VBILX and VBTLX have longer than desirable durations. I suggest adding VFIDX (Intermediate Investment grade) to one of these two funds to lower the duration and increase total return with minimal risk.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by ruralavalon »

Munir wrote:
BigJohn wrote:Took a quick look at what happened when rates increased late last year. VBTLX dropped about 4%, VBILX dropped about 5%. So a noticeable difference but to me at least not one that is significant or worrisome.
For me, both VBILX and VBTLX have longer than desirable durations. I suggest adding VFIDX (Intermediate Investment grade) to one of these funds to lower the duration and increase total return with minimal risk.
Vanguard has so many good intermediate-term bond funds, I sometimes think they did that just to make it hard for us to choose :wink:
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by aristotelian »

Munir wrote:
BigJohn wrote:Took a quick look at what happened when rates increased late last year. VBTLX dropped about 4%, VBILX dropped about 5%. So a noticeable difference but to me at least not one that is significant or worrisome.
For me, both VBILX and VBTLX have longer than desirable durations. I suggest adding VFIDX (Intermediate Investment grade) to one of these two funds to lower the duration and increase total return with minimal risk.
I want my bond holdings to produce or at least tread water during down years for stocks, but VFIDX is mostly corporate bonds. What about VWLTX to accomplish both longer duration/total return and hedging against stock decline?
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by BigJohn »

aristotelian wrote:I want my bond holdings to produce or at least tread water during down years for stocks, but VFIDX is mostly corporate bonds. What about VWLTX to accomplish both longer duration/total return and hedging against stock decline?
VWTLX has an even longer duration so more interest rate sensitivity. In addition, it's all muni bonds so not appropriate to use in a tax deferred or tax paid account. In terms of stability when stock are down it looks like VWTLX had both larger and longer declines in 2008 than either VBTLX or VBILX.

Depending on what you mean by treading water, it's really not possible to achieve both price stability and higher return as all the things that give you returns at/near inflation add risk and therefore volatility.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by betablocker »

The premium you get historically for coporate bonds is minuscule for the risk. Since bonds are for safety use intermediate term treasuries. Evidence shows that is the sweet spot for return and safety. Are you going to lose a bunch in a diversified bond fund with corporates and MBS? Most likely no but you risk adjusted return is better for 5 year treasuries.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by lack_ey »

betablocker wrote:The premium you get historically for coporate bonds is minuscule for the risk. Since bonds are for safety use intermediate term treasuries. Evidence shows that is the sweet spot for return and safety. Are you going to lose a bunch in a diversified bond fund with corporates and MBS? Most likely no but you risk adjusted return is better for 5 year treasuries.
Minuscule based on what? How much additional risk is there?

Did you see my comparison upthread, also this thread? And some related discussions.
viewtopic.php?f=10&t=209748

I don't think the answer is that clear on corporate bonds, not in the direction you suggest. I used to think it was like you said but taking a look through some different things, I'm not sure but if anything lean the other direction.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

Between 6/1/2008 and 11/1/2008, total returns per Morningstar for VBTLX, VBILX, and VFIDX were:

vbtlx: -2.9%
vbilx: -7%
vfidx: -12.64%

vfidx, the corporate bond fund was hit hard just when stocks were crashing, and the higher corporate bond exposure of vbilx led to a significantly larger drawdown than was experienced by vbtlx. Credit spreads recovered fairly rapidly, but there was no guarantee they would. If responses to the credit crisis had been ineffectual, equities and credit could have both been under water for a much longer period of time.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by jhfenton »

And the last three posts touch on the reasons I own Intermediate Government Bond Index and Short-Term Corporate Bond Index. I'm just not a fan of the higgledy-piggledy commingled bond funds.

From 6/1/08 to 11/1/08, Vanguard Intermediate Treasury was up 1.7%. That's good for rebalancing. (Intermediate Government Bond Index didn't exist, but should perform similarly.)

Short-term Corporate Bond Index didn't exist either, and it would undoubtedly have taken a temporary hit. But the yield spread of short corporates over short treasuries is compelling. And the long-term numbers on short corporates are better than longer corporates. And I don't need to have all treasuries for rebalancing.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Munir »

I think what some consider a minuscule difference in return is not that small if 60-70% of your portfolio is in bond funds. Looking at total returns of different periods of the past decade should be one of the factors that can help in choosing a fund. The Intermediate Investment Grade fund had a transient dip in 2008 and recovered quickly enough so that its two-year return over 2008-2009 was superior to treasuries and the Total Bond Market fund- if my memory serves me correctly. This would not work for those who panic and want to rush and balance immediately if there is a dip in some of their holdings.
I don't know why there isn't enough emphasis in discussions in this forum on total return and duration when intermediate bond funds are being compared but most of the talk is about 2008!
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by betablocker »

This is a good summary of the issue from Larry Swedroe: http://www.etf.com/sections/index-inves ... nopaging=1

Basically corporates have either underperformed or only outperformed by a bit and that is before state and local tax benefits of treasuries or the usually higher rates for CDs. Still, I wouldn't say high grade corporates are the end of the world.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by lack_ey »

betablocker wrote:This is a good summary of the issue from Larry Swedroe: http://www.etf.com/sections/index-inves ... nopaging=1

Basically corporates have either underperformed or only outperformed by a bit and that is before state and local tax benefits of treasuries or the usually higher rates for CDs. Still, I wouldn't say high grade corporates are the end of the world.
Thanks. I'm familiar with what he's written on the subject and don't agree. Also, his stance is softer when it comes to shorter-term corporate bonds.

In this thread we're comparing bond funds, not CDs, and I think in a tax-advantaged account or people would be talking munis instead. Of course if you want to use CDs those can be superior (greater yield than with Treasuries but similar risk for those under FDIC limits), and if there's a state tax consideration then that weighs against corporates as well.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

I don't know why there isn't enough emphasis in discussions in this forum on total return and duration when intermediate bond funds are being compared but most of the talk is about 2008!
I think that is because many investors hold bonds to offset the risk in equities. A bond fund that is down 14% during an equity bear market is not diversifying equity risk very well.

Going back to the mid 1990's so as to include both recent major bear markets in equities, a portfolio of 33% US equities and 67% intermediate treasuries had a higher return and a lower maximum drawdown than vficx, vanguard's intermediate corporate bond fund. This suggests that one may not really be taking more risk holding 60% stocks and 40% intermediate treasuries in comparison with holding 40% stocks and 60% corporate bonds, but getting substantially more reward (can't really say anything definitive with such a test and sample).
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Munir »

jalbert wrote:
I don't know why there isn't enough emphasis in discussions in this forum on total return and duration when intermediate bond funds are being compared but most of the talk is about 2008!
I think that is because many investors hold bonds to offset the risk in equities. A bond fund that is down 14% during an equity bear market is not diversifying equity risk very well.

Going back to the mid 1990's so as to include both recent major bear markets in equities, a portfolio of 33% US equities and 67% intermediate treasuries had a higher return and a lower maximum drawdown than vficx, vanguard's intermediate corporate bond fund. This suggests that one may not really be taking more risk holding 60% stocks and 40% intermediate treasuries in comparison with holding 40% stocks and 60% corporate bonds, but getting substantially more reward (can't really say anything definitive with such a test and sample).
It still seems strange to me that an investor would decide about the long term asset allocation solely on what happened in a period of one year or less (e.g. 2008) instead of using longer periods of performance for such an evaluation.
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by BFive55 »

I've decided to put approximately 10% or a little more (I like rounding my investment money up, a bit weird I know) and I can't decide between these two. It would go into a Roth.

I like the advise early on about not looking at a bond fund for returns... and invest in more index funds for greater returns (as a total percentage of a portfolio) but investing on bonds should at least return an amount above inflation so I'm not losing money?
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

It still seems strange to me that an investor would decide about the long term asset allocation solely on what happened in a period of one year or less (e.g. 2008) instead of using longer periods of performance for such an evaluation.
I don't think investors do that. The point of looking at 2008 is to better understand the risks of corporate bonds, just like people might look at the same period to better understand what a bear market for equities looks like.

In fact, I think it is only by looking at short term variance that corporates bonds appear to reward risk adequately. When a long-term view is taken, a mix of equities and treasuries, such as the 33/67 mix I presented above, may be significantly more generously rewarded, both in risk-adjusted and absolute terms. Of course we don't know whether backtested results will generalize, and an retiree taking regular withdrawals might care more about short-term variance than long-term risk adjusted return.
lack_ey
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by lack_ey »

But is 2008 what even happens normally? Markets do change, but again, this seems like kind of a once-in-a-generation event. Of course in some sense you could say a 50% market drop is a one-in-a-generation event and it just happened twice in a decade.

Looking at returns history, the dataset/conditions from the other thread, excess stock and government bond returns defined as returns relative to T-bills, with credit excess return being corporate bond returns above equivalent duration government bonds:

Image

On longer timescale, 5-month periods, not overlapping (date shown is the last day of the period, e.g. 2008-11-28 covers July through November 2008):

Image

There are a lot of driving forces behind stock and bond returns and this misses a lot, and credit risk can show up and respond in different timescales, but again, any way you look at it, empirically doesn't seem to support 2008 an ordinary equity bear market. Do you really allocate based on this one event, or maybe a few others in history?

If you do take the longer view, looking at fund results as in this previous post:
viewtopic.php?f=1&t=211680#p3248281

some others, returns in other countries, etc., what does it say?
Northern Flicker
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

Risk is about what could happen, not what you think will happen. When a risk has materialized in the past, it certainly is a legitimate risk. Events of 2008 show that corporate bonds may not always be a useful diversifier of equity risk.

More worrisome for including credit in a long-term asset allocation is the comparison of a corporate bond portfolio to a mix of stocks and treasuries, and the max drawdown of vficx was during 2008. While I would not assume this backtest is generalizable to future results, comparing vficx (corporate bonds) to a mix of 27% vtsmx (US stocks) and 73% vfitx (intermediate treasuries) on portfoliovisualizer gives me pause. Available data there is Nov 1993 to present.

VFICX:
CAGR = 5.81% | SDEV = 4.82% | Sharpe = 0.69
Max drawdown = -14.2%

VTSMX+VFITX:
CAGR = 6.79% | SDEV = 4.84% | Sharpe = 0.88
Max drawdown = -8.53%

I do get that this was a period of falling inflation and falling interest rates that provided a robust tailwind to treasuries. Thus, this may not be representative moving forward, and corporate credit could end up being the best performing asset class in the foreseeable future, but it is a significant concern.
lack_ey
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by lack_ey »

jalbert wrote:Risk is about what could happen, not what you think will happen. When a risk has materialized in the past, it certainly is a legitimate risk. Events of 2008 show that corporate bonds may not always be a useful diversifier of equity risk.
The risk can materialize, and there are plenty of risks that are real that have never really been manifested as problems yet, but if problems hardly ever do show up and 2008 is the single best example in 80 years, what are you losing on average most of the time? The goal of diversification is not drawdown protection but getting a better spread of possible outcomes over the long term. You don't seem to run into trouble every business cycle, though that could change. If a risk shows up once every few decades (or so) but you're more than compensated the rest of the time, it seems worth taking.
jalbert wrote:More worrisome for including credit in a long-term asset allocation is the comparison of a corporate bond portfolio to a mix of stocks and treasuries, and the max drawdown of vficx was during 2008. While I would not assume this backtest is generalizable to future results, comparing vficx (corporate bonds) to a mix of 27% vtsmx (US stocks) and 73% vfitx (intermediate treasuries) on portfoliovisualizer gives me pause. Available data there is Nov 1993 to present.

VFICX:
CAGR = 5.81% | SDEV = 4.82% | Sharpe = 0.69
Max drawdown = -14.2%

VTSMX+VFITX:
CAGR = 6.79% | SDEV = 4.84% | Sharpe = 0.88
Max drawdown = -8.53%

I do get that this was a period of falling inflation and falling interest rates that provided a robust tailwind to treasuries. Thus, this may not be representative moving forward, and corporate credit could end up being the best performing asset class in the foreseeable future, but it is a significant concern.
VFICX - Vanguard Intermediate-Term Investment Grade Fund
VFITX - Vanguard Intermediate-Term Treasury Fund
VTSMX - Vanguard Total Stock Index Fund

The problem here is that this comparison doesn't explore the relationship between VFICX and the VTSMX+VFITX combination. Of course two largely uncorrelated assets when mixed can produce a better Sharpe ratio than a single other asset. We also know that VTSMX+VFITX has a correlation of 1 with VTSMX+VFITX.

It's a smaller difference even over this period in a whole portfolio context:
https://www.portfoliovisualizer.com/bac ... tion3_2=50

As for 1993-present specifically, we know corporate spreads started off pretty low (that said, it's not very high now, but it was lower then), and it included of course 2008. A lot of the pre-1993 data looks better.
TropikThunder
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by TropikThunder »

jalbert wrote:Risk is about what could happen, not what you think will happen. When a risk has materialized in the past, it certainly is a legitimate risk. Events of 2008 show that corporate bonds may not always be a useful diversifier of equity risk.

More worrisome for including credit in a long-term asset allocation is the comparison of a corporate bond portfolio to a mix of stocks and treasuries, and the max drawdown of vficx was during 2008. While I would not assume this backtest is generalizable to future results, comparing vficx (corporate bonds) to a mix of 27% vtsmx (US stocks) and 73% vfitx (intermediate treasuries) on portfoliovisualizer gives me pause. Available data there is Nov 1993 to present.

VFICX:
CAGR = 5.81% | SDEV = 4.82% | Sharpe = 0.69
Max drawdown = -14.2%

VTSMX+VFITX:
CAGR = 6.79% | SDEV = 4.84% | Sharpe = 0.88
Max drawdown = -8.53%

I do get that this was a period of falling inflation and falling interest rates that provided a robust tailwind to treasuries. Thus, this may not be representative moving forward, and corporate credit could end up being the best performing asset class in the foreseeable future, but it is a significant concern.
That's not a fair comparison, though. Since 1993 equities and bonds have had different low-correlation growth rates during different time intervals, so comparing a blended allocation to one or the other pure allocation is not meaningful. Of course the inclusion of 27% equities increases the CAGR of VTSMX+VFITX, while the mix of equities and bonds provided downside protection. A better comparison I think would be VTSMX+VFITX vs VTSMX+VFICX:

VTSMX+VFITX
CAGR = 6.81% | SDEV = 4.84% | Sharpe = 0.88 | Market Correlation = 0.68
Max drawdown = -8.53%

VTSMX+VFICX
CAGR = 7.02% | SDEV = 5.79% | Sharpe = 0.78 | Market Correlation = 0.79
Max drawdown = -19.59%

You're still correct though that Treasuries offered better diversification, lower volatility, and better downside protection at only 21bp lower return during this time period.
Small Law Survivor
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Small Law Survivor »

Why are mortgage backed bonds seemingly disfavored by some of the posters in this thread?

Small Law Survivor
72 yrs. mostly-retired lawyer. Boglehead since day 1 (and M* Diehard long before that) under various names
lack_ey
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by lack_ey »

Small Law Survivor wrote:Why are mortgage backed bonds seemingly disfavored by some of the posters in this thread?

Small Law Survivor
We're mostly talking about agency MBS here, with private-label MBS being a smaller part of the market.

Some think the risk/return is unfavorable relative to other bonds, despite it being a large, very well-traded market. These have less upside potential and greater downside risk than some other bonds*, and some don't think this is sufficiently compensated by the additional yield in the base case. A number of writers and other influencers like Yale's David Swensen and advisor Larry Swedroe (who posts here) don't like them.

*If rates go up, people may keep their mortgages longer and suddenly you're holding onto longer-term bonds than you thought, paying lower coupons (rather, the price decrease is greater from the yield movement than for other bonds). If rates go down, people may refinance, and you no longer get the higher rates you thought you had (rather, the price increase from the yield movement is less than for other bonds).
Northern Flicker
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

The problem here is that this comparison doesn't explore the relationship between VFICX and the VTSMX+VFITX combination. Of course two largely uncorrelated assets when mixed can produce a better Sharpe ratio than a single other asset.
The point was that if bonds are held to diversify the risk of equities, you can hold a larger allocation to equities if the bonds are treasuries and not corporates. It is an interesting exercise to pair equities with different types of bond portfolios and vary the equity allocations so that volatility is held constant across the portfolios, and then compare return and max drawdown.

But the behavior of the next 20 years is likely to be different from the last 20 years, as I also alluded to above.
Northern Flicker
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

Of course the inclusion of 27% equities increases the CAGR of VTSMX+VFITX, while the mix of equities and bonds provided downside protection.
The point was that over the last 20 years anyway (which may be highly biased and not generalizable) the substitution of 27% equities and 72% treasuries for corporate bonds did not increase volatility while improving CAGR and significantly reducing max downdraft.
lack_ey
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by lack_ey »

jalbert wrote:
The problem here is that this comparison doesn't explore the relationship between VFICX and the VTSMX+VFITX combination. Of course two largely uncorrelated assets when mixed can produce a better Sharpe ratio than a single other asset.
The point was that if bonds are held to diversify the risk of equities, you can hold a larger allocation to equities if the bonds are treasuries and not corporates. It is an interesting exercise to pair equities with different types of bond portfolios and vary the equity allocations so that volatility is held constant across the portfolios, and then compare return and max drawdown.

But the behavior of the next 20 years is likely to be different from the last 20 years, as I also alluded to above.
jalbert wrote:
Of course the inclusion of 27% equities increases the CAGR of VTSMX+VFITX, while the mix of equities and bonds provided downside protection.
The point was that over the last 20 years anyway (which may be highly biased and not generalizable) the substitution of 27% equities and 72% treasuries for corporate bonds did not increase volatility while improving CAGR and significantly reducing max downdraft.
Over this period or any other, comparing directly to VTSMX+VFITX doesn't really answer the question about whether it would help. If you were talking about commodities, for example, I think it's clear that you can have cases where the asset class has poor Sharpe but can improve portfolios. Your comparison is more valid for corporate bonds, but still, they are not the same thing as stocks+government bonds.

In Nov 1993-present, 50% Dodge & Cox Income (DODIX) and 50% Vanguard Long-Term Investment Grade (VWESX) had lower return, higher vol, and higher max drawdown than your 27% stock / 73% IT Treasuries combination, as seen here. It also had worse Sharpe than Vanguard Intermediate-Term Investment Grade (VFICX):
https://www.portfoliovisualizer.com/bac ... tion5_3=50

But when combined with a portfolio containing VTSMX+VFITX, the DODIX+VWESX combination added to performance (lower vol at equal return and max drawdown):
https://www.portfoliovisualizer.com/bac ... tion5_3=11
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alec
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by alec »

Small Law Survivor wrote:Why are mortgage backed bonds seemingly disfavored by some of the posters in this thread?

Small Law Survivor
Oh, the debate goes back many years. Here's a convo from Morningstar from 2002 with Rick and Larry:

Rick Ferri--Why GNMAs?

... and now I feel old. :annoyed

here's one from 2009 Larry Swedroe on Total Bond
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
Northern Flicker
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

Over this period or any other, comparing directly to VTSMX+VFITX doesn't really answer the question about whether it would help.
One way to frame the question is that if choosing an allocation to equities and nominal bonds, does limiting the bond portfolio to treasuries enable a larger allocation to equities, and if so, does it lead to a higher return at less risk? From 1994 to present, the answer was yes. Equities plus GNMAs produced a similar benefit.

The point is if holding equities + corporate bonds you could have replaced the corporate bonds with additional equities and treasuries enabling a higher equity allocation, higher return, and less risk over the particular time period in question.
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Munir
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Munir »

jalbert wrote:
Over this period or any other, comparing directly to VTSMX+VFITX doesn't really answer the question about whether it would help.
One way to frame the question is that if choosing an allocation to equities and nominal bonds, does limiting the bond portfolio to treasuries enable a larger allocation to equities, and if so, does it lead to a higher return at less risk? From 1994 to present, the answer was yes. Equities plus GNMAs produced a similar benefit.

The point is if holding equities + corporate bonds you could have replaced the corporate bonds with additional equities and treasuries enabling a higher equity allocation, higher return, and less risk over the particular time period in question.
How does a higher equity position produce less risk? Does raising the equity position while lowering corporate bonds and raising treasuries produce less overall risk? How could corporate bonds be equal to equities in risk?
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

How does raising the equity position while lowering corporate bonds and raising treasuries produce less overall risk?
Over the period in question, when equities declined, treasuries appreciated while corporates declined. Treasuries thus diversified equity risk, but corporates did not, leading to the described behavior. Again, this was during a period of declining interest rates. We cannot assume the same behavior will hold up in the next 20 years.
Northern Flicker
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Re: VBILX vs VBTLX [Vanguard Intermediate-Term vs. Total Bond]

Post by Northern Flicker »

That's not a fair comparison, though. Since 1993 equities and bonds have had different low-correlation growth rates during different time intervals, so comparing a blended allocation to one or the other pure allocation is not meaningful. Of course the inclusion of 27% equities increases the CAGR of VTSMX+VFITX, while the mix of equities and bonds provided downside protection. A better comparison I think would be VTSMX+VFITX vs VTSMX+VFICX:
What is interesting is that (at least for the time period in question) the effect is strongest for portfolios with lower equity allocations. Conventional wisdom may be that if one has a high equity allocation, treasuries are beneficial since one is already taking alot of risk on the equity side, while with a lower equity allocation, one can afford to take more risk on the bond side. This does not hold up for the time period in question.

Reminder that VTSMX is total US stock index, VFICX is intermediate corporate bonds, and VFITX is intermediate treasuries.

Consider a mix of VTSMX+VFICX with P1 the percentage of VTSMX. Suppose that is compared to VTSMX+VFITX with the percentage of VTSMX in the latter portfolio set to P2, where P2 is chosen so that the sample variances are matched for the two portfolios. Then P1 = 0 is just the case above of comparing exclusively VFICX to a mix of VTSMX+VFITX, and for the particular time period in question, P2 = 27, a 27 percentage point increase in equities.

For P1 = 40, I empirically find P2 = 48:

40% VTSMX + 60% VFICX:
CAGR = 7.51% | SDEV = 7.07% | Sharpe = 0.72
Max drawdown = -25.74%

48% VTSMX + 52% VFITX:
CAGR = 7.73% | SDEV = 7.08% | Sharpe = 0.75
Max drawdown = -20.33%

The portfolio with treasuries had a higher return and smaller max drawdown.

At P1 = 88, I find P2 = 90, i.e. only a 2 percentage point increase in equities:

88% VTSMX + 12% VFICX:
CAGR = 8.93% | SDEV = 13.4% | Sharpe = 0.53
Max drawdown = -46.31%

90% VTSMX + 10% VFITX:
CAGR = 9.0% | SDEV = 13.48% | Sharpe = 0.53
Max drawdown = -45.52%

Not a very significant difference.

Again, this is a time period particularly favorable for treasuries, and there is no guarantee this will apply to some other time period, but it does question the validity of using corporate bonds on account of a lower equity allocation.
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