Vanguard vs higher cost bond funds

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chuckieboy
Posts: 7
Joined: Wed Feb 15, 2017 9:37 am

Vanguard vs higher cost bond funds

Post by chuckieboy » Fri May 26, 2017 8:47 am

My company recently replaced the index funds to lower cost Vanguard funds (500, small, mid cap) in our 401K choices which is awesome. But unfortunately, they did not replace their index bond fund with a lower cost fund.

The total bond is currently Prudential Total Return Bond Q (PTRQX) with a .44% expense ratio.

When I talked to the guy who advises our company and helps the HR team choose the funds in our choices has said that the managed funds such as Prudential are one of the few that outperform the standard index funds such as Vanguard VBTIX. This is why he did not advise our company to replace the bond index funds with Vanguard. PTRQX at .44 vs VBTIX as .04 is huge difference in expense ratios. But he then sent me a report from Morningstar that does show PTRQX doing quite a bit better than VBTIX over over 10, 5, 3, and 1 year.

So what is a Boglehead to think here? Is this one case where some additional expenses are worth it?

Nate79
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Location: Portland, OR

Re: Vanguard vs higher cost bond funds

Post by Nate79 » Fri May 26, 2017 9:13 am

chuckieboy wrote:My company recently replaced the index funds to lower cost Vanguard funds (500, small, mid cap) in our 401K choices which is awesome. But unfortunately, they did not replace their index bond fund with a lower cost fund.

The total bond is currently Prudential Total Return Bond Q (PTRQX) with a .44% expense ratio.

When I talked to the guy who advises our company and helps the HR team choose the funds in our choices has said that the managed funds such as Prudential are one of the few that outperform the standard index funds such as Vanguard VBTIX. This is why he did not advise our company to replace the bond index funds with Vanguard. PTRQX at .44 vs VBTIX as .04 is huge difference in expense ratios. But he then sent me a report from Morningstar that does show PTRQX doing quite a bit better than VBTIX over over 10, 5, 3, and 1 year.

So what is a Boglehead to think here? Is this one case where some additional expenses are worth it?
Do you consider PTRQX and VBTIX to have similar risk and holdings?

my name
Posts: 542
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Location: NJ

Re: Vanguard vs higher cost bond funds

Post by my name » Fri May 26, 2017 9:54 am

As I wrote elsewhere, my bonds have a big chunk in the taxable area. Vanguard's tax exempt state and federal muni funds have over the decade I've had them have done better than the taxable bond funds, even without tax consideration. No tax and no limit like savings plans.

chuckieboy
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Joined: Wed Feb 15, 2017 9:37 am

Re: Vanguard vs higher cost bond funds

Post by chuckieboy » Fri May 26, 2017 10:03 am

There holdings are different with a high vs low Morningstar risk. Unfortunately, we only have a very small number of funds that that we can choose from and PTRQX is the only total bond fund that we can choose from in our 401K. The VBTIX was the sample fund that the adviser sent me as a comparable US Intermediate Term Bond.
Nate79 wrote:
chuckieboy wrote:My company recently replaced the index funds to lower cost Vanguard funds (500, small, mid cap) in our 401K choices which is awesome. But unfortunately, they did not replace their index bond fund with a lower cost fund.

The total bond is currently Prudential Total Return Bond Q (PTRQX) with a .44% expense ratio.

When I talked to the guy who advises our company and helps the HR team choose the funds in our choices has said that the managed funds such as Prudential are one of the few that outperform the standard index funds such as Vanguard VBTIX. This is why he did not advise our company to replace the bond index funds with Vanguard. PTRQX at .44 vs VBTIX as .04 is huge difference in expense ratios. But he then sent me a report from Morningstar that does show PTRQX doing quite a bit better than VBTIX over over 10, 5, 3, and 1 year.

So what is a Boglehead to think here? Is this one case where some additional expenses are worth it?
Do you consider PTRQX and VBTIX to have similar risk and holdings?

chuckieboy
Posts: 7
Joined: Wed Feb 15, 2017 9:37 am

Re: Vanguard vs higher cost bond funds

Post by chuckieboy » Fri May 26, 2017 10:08 am

Very interesting. So if I move all of my 401K to the Vanguard stock indexes and then buy into Vanguard tax exempt bonds for the proportion that I want in bonds this would accomplish the same as having bond funds in my 401K? Does tax free means no tax on withdrawals which makes it equivalent to a Roth?
my name wrote:As I wrote elsewhere, my bonds have a big chunk in the taxable area. Vanguard's tax exempt state and federal muni funds have over the decade I've had them have done better than the taxable bond funds, even without tax consideration. No tax and no limit like savings plans.

aristotelian
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Re: Vanguard vs higher cost bond funds

Post by aristotelian » Fri May 26, 2017 10:09 am

I have seen some research suggesting that managed funds are more likely to outperform with bonds than with stocks. The trouble is, you never know which ones. Ideally, the employer would give both options and let you choose. If the managed fund is the only option, I would be open to it as long as it has a decent track record and reasonable expense ratio. If it makes you feel better, your 0.44% ER for a managed bond fund is better than the lowest ER bond index option in my employer plan.

aristotelian
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Re: Vanguard vs higher cost bond funds

Post by aristotelian » Fri May 26, 2017 10:11 am

chuckieboy wrote:Very interesting. So if I move all of my 401K to the Vanguard stock indexes and then buy into Vanguard tax exempt bonds for the proportion that I want in bonds this would accomplish the same as having bond funds in my 401K? Does tax free means no tax on withdrawals which makes it equivalent to a Roth?
Muni bonds dividends are all federal tax exempt. If the fund is for your state, they are all state tax exempt too.

I believe capital gains would be taxable, but for a bond fund cap gains are likely to be minimal compared to stock funds.

GLState
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Re: Vanguard vs higher cost bond funds

Post by GLState » Fri May 26, 2017 10:29 am

If you look at the PTRQX asset allocation on Morningstar you'll see that its bond holdings are 181.51% long, 85.98% short, for a net of 95.82% bonds. In the past, PTRQX has been "worth it" if return is your only concern. PTRQX is a "Total Return" bond fund, which has different goals than a "Total Bond" index fund.

rkhusky
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Re: Vanguard vs higher cost bond funds

Post by rkhusky » Fri May 26, 2017 11:05 am

PTRQX is riskier than Total Bond, so you may want to reduce your percentage of stocks a bit, perhaps by 5-10%.
You could reduce PTRQX in your 401K and buy Tax Exempt in taxable and/or buy Total Bond in your IRA. I would be less inclined to do the latter if the IRA was a Roth.

In 2008, PTRQX lost 3.5%, while Total Bond gained 5%, but in 2009, PTRQX gained 20%, while Total Bond gained 6%.

my name
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Location: NJ

Re: Vanguard vs higher cost bond funds

Post by my name » Fri May 26, 2017 11:37 am

chuckieboy wrote:Very interesting. So if I move all of my 401K to the Vanguard stock indexes and then buy into Vanguard tax exempt bonds for the proportion that I want in bonds this would accomplish the same as having bond funds in my 401K? Does tax free means no tax on withdrawals which makes it equivalent to a Roth?
my name wrote:As I wrote elsewhere, my bonds have a big chunk in the taxable area. Vanguard's tax exempt state and federal muni funds have over the decade I've had them have done better than the taxable bond funds, even without tax consideration. No tax and no limit like savings plans.
i kind of did things backwards. From 1998 to 2009, for the 401k deferred funds, I maxed this out to get the full employer match. The 401k has institutional funds that can do better than "brand" funds with lower fees, and if also better performance they are winners. The best is the Total Stock Market and it beat Vanguard (the institutional Total Bond Market does not do as well). So 60% is the Total Stock Market, the rest is a great performing TIPS bond institutional fund. Now at age 70, the 401K is about 500k.

From the beginning of time (well, not really) I put $10k each year into the Vanguard tax exempt NJ fund, and I stayed with it because it kept besting the taxable bonds. It sailed through the recession just great. Now rates are rising but for a bond fund it is still doing better than other bond funds.

alex_686
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Re: Vanguard vs higher cost bond funds

Post by alex_686 » Fri May 26, 2017 11:49 am

Your HR rep is not off base on this. There are inefficiencies in the bond market that can be exploited. A class of semi-active funds beat their index even after expenses. By semi-active I mean they are matching the index on the major factors (duration, credit risk), but choosing cheaper comparable bonds that are not in the index. Mind you they are beating their underlying index by 10 to 30 bps, but still.

I don't know about Prudential Total Return Bond Q (PTRQX). From this thread it sounds like there is a serious mismatch between the fund and index so you have 2 things to consider. First, is the portfolio manager making the right macro choices - such as his choices on duration. Second, is the portfolio correctly implementing their strategy?

Lastly, money is fungible. So yes, you can load up on stock indexes in your 401k and buy bond funds in your individual accounts.

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