My IRA bond allocation is split between:
- 2/3: Vanguard Intermediate-Term Corporate Bond EFT (VCIT) - SEC yield=3.11%, Duration=6.50 years, Expense Ratio=0.07%
- 1/3: Vanguard Short-Term Corporate Bond ETF (VCSH) - SEC yield=2.15%, Duration=2.85 years, Expense Ratio=0.07%
The reason for the split is to have a more risky higher-yielding investment-grade bond fund (VCIT) as a long-term holding, riding out market downswings, and a less risky bond fund (VCSH) available for rebalancing into equity (VTI/VXUS) when/if the opportunity arises. However, during downturns, I realize that corporate bond funds have downside risk as well. While VCSH wasn't around in 2008, its close relative, Vanguard Short-Term Investment-Grade Fund (VFSTX) was, and it dropped quite significantly at that time.
So I'm looking to give up a bit on yield in return for safety and replace VCSH with something else. I don't want a short-term government bond fund, since those get a better state tax treatment in a taxable account (I reside in a high-tax state), and that's where I hold those funds. Instead, I have been attempting to evaluate two other ETF's:
- iShares Short Maturity Bond ETF (NEAR) - SEC yield=1.51%, Duration=0.46 years, Expense Ratio=0.25%
- PIMCO Enhanced Maturity Short ETF (MINT) - SEC Yield=1.47%, Duration=0.33 years, Expense Ratio=0.35%
Both of these seem too good to be true - a very short duration investment-grade holdings with only a small reduction in SEC yield. I have attempted to review the fund prospectuses (prospectii?), but am still confused. Many of their holdings appear to have a much longer duration than that of the overall fund. They both employ some level of derivatives, but nothing that seems outlandish (MINT states that the fund "will disclose all portfolio holdings on a daily basis, and will not use options, futures, or swaps").
Neither fund has been around very long, but their price record so far is one of better price stability than VCSH. So what's the catch? I am unclear how they would be expected to perform in a 2008 scenario. On the one hand, I could see their holdings bid down in a panic, but the short duration implies limited downside.
Can anyone help me understand the relative risk of these funds relative to VCSH? Thanks.
Downside Risk of Ultra-Short Credit Bond Funds
- PriceOfFreedom
- Posts: 91
- Joined: Mon Sep 03, 2012 12:53 pm
Re: Downside Risk of Ultra-Short Credit Bond Funds
The downside risk corporate bonds funds in 2008 was driven by credit risk, not duration risk. Switching to shorter term bonds doesn't really remove that risk.
Actually, longer-term credit funds did better than shorter term ones in '08. VG LT investment grade was up slightly in '08 while short-term investment grade took a hit.
If you're looking for bonds that will do well in bad times, your two answers are Treasuries and CDs. Holding treasuries in an IRA is a perfectly sensible thing to do and most Bogleheads do so.
Going back to the funds you asked about, they are less risky overall than VCSH. There is nothing particularly wrong with them. I just don't see what advantage they provide over, say, the 11 Month no-penalty CD at Ally yielding 1.5%.
Actually, longer-term credit funds did better than shorter term ones in '08. VG LT investment grade was up slightly in '08 while short-term investment grade took a hit.
If you're looking for bonds that will do well in bad times, your two answers are Treasuries and CDs. Holding treasuries in an IRA is a perfectly sensible thing to do and most Bogleheads do so.
Going back to the funds you asked about, they are less risky overall than VCSH. There is nothing particularly wrong with them. I just don't see what advantage they provide over, say, the 11 Month no-penalty CD at Ally yielding 1.5%.
- PriceOfFreedom
- Posts: 91
- Joined: Mon Sep 03, 2012 12:53 pm
Re: Downside Risk of Ultra-Short Credit Bond Funds
Hi stlutz, thank you for the reply. I agree that the Ally CD would be a better choice. I have IRA's at both Vanguard and TD Ameritrade, but I don't see the option to purchase this Ally CD in either account. In both cases, I am looking at their CD tab and don't see the Ally 11-month CD listed. Is it possible to purchase the CD in either IRA?
Re: Downside Risk of Ultra-Short Credit Bond Funds
Not in those IRAs. You would need to open a new IRA at Ally and transfer the money over. Some people (i.e. me) find that to be too much work and therefore haven't done so. Others find it well worth the trouble.
In my IRA I only hold treasury bond funds and brokered CDs on the fixed income side.
In my IRA I only hold treasury bond funds and brokered CDs on the fixed income side.
Re: Downside Risk of Ultra-Short Credit Bond Funds
You might want to consider the Vanguard Ultra Short Term Bond Admiral Shares (VUSFX) as the ER is just .12% and current SEC yield is 1.50% (duration of roughly one year). I also looked at NEAR and MINT but prefer mutual fund with Vanguard. Much easier for me than short CD particularly since the yield has been rising.PriceOfFreedom wrote:Hi stlutz, thank you for the reply. I agree that the Ally CD would be a better choice. I have IRA's at both Vanguard and TD Ameritrade, but I don't see the option to purchase this Ally CD in either account. In both cases, I am looking at their CD tab and don't see the Ally 11-month CD listed. Is it possible to purchase the CD in either IRA?
https://personal.vanguard.com/us/funds/ ... IntExt=INT
- PriceOfFreedom
- Posts: 91
- Joined: Mon Sep 03, 2012 12:53 pm
Re: Downside Risk of Ultra-Short Credit Bond Funds
Thanks, MCSquared. VUSFX might just wok fine in my Vanguard IRA. Mutual fund commissions would be a drag in the TD Ameritrade account. I guess I'll have to look into brokered CDs there, or take a chance on MINT or NEAR if I want instant liquidity.
Re: Downside Risk of Ultra-Short Credit Bond Funds
I am considering VFSTX (not an ETF), VCSH, IGSB, FLOT, FLRN, NEAR, MINT, MBB, ICSH, ULST for better cash management (money market replacement) and immediate access to cash in my IRA account. My cash is currently split between VUSXX and VMFXX. Please advise.
PS: E*TRADE does not offer VUSFX online.
PS: E*TRADE does not offer VUSFX online.