FIBAX or IEF for Taxable Account [Fidelity or iShares US Treasury Bond]

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MikeMak27
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FIBAX or IEF for Taxable Account [Fidelity or iShares US Treasury Bond]

Post by MikeMak27 »

I was wondering what would be better for a taxable account FIBAX (Intermediate term US treasury fund from fidelity) or IEF (7-10 year US Treasury Bond ETF from Ishares). The goal for this would be to help rebalance my aggressive stock positions of small cap value, IJS, and emerging market, IEMG & VWO, in this account, as well as to eventually use for a down payment on a house if I were to buy one down the road (5-7 years). I had heard that etf's were more tax efficient in taxable accounts, but then I hear that some bond etf's suffer from liquidity in financial market selloffs.
Both trade free at fidelity and have low expense ratios (.09 FIBAX and .15 IEF) and they have fairly similar durations. Plus treasuries are state income tax free, IL resident, 3.75% currently and likely 4.95% soon with our fiscal emergency.
Any insight or knowledge would be greatly appreciated.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)
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saltycaper
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Re: FIBAX or IEF for Taxable Account

Post by saltycaper »

MikeMak27 wrote:
I had heard that etf's were more tax efficient in taxable accounts, but then I hear that some bond etf's suffer from liquidity in financial market selloffs.
I could be mistaken, but I believe the potential liquidity issue is with corporate bond ETFs. Since IEF includes zero corporate bonds, I don't think it would be impacted by this issue.
Quod vitae sectabor iter?
lack_ey
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Re: FIBAX or IEF for Taxable Account [Fidelity or iShares US Treasury Bond]

Post by lack_ey »

saltycaper wrote:
MikeMak27 wrote:
I had heard that etf's were more tax efficient in taxable accounts, but then I hear that some bond etf's suffer from liquidity in financial market selloffs.
I could be mistaken, but I believe the potential liquidity issue is with corporate bond ETFs. Since IEF includes zero corporate bonds, I don't think it would be impacted by this issue.
Yeah, you have to consider both the liquidity of the ETF itself and then the liquidity of the underlying holdings. It's going to be potentially worse the less traded the securities are and perhaps the more they are liable to lose value in a risk-off environment. So lower-grade corporate bonds and probably muni bonds, some other types the more vulnerable. Investment-grade corporate bond ETFs might be okay. It really depends.

FWIW if seeking to invest in Treasuries for this purpose, you can also just hold the Treasuries yourself. They trade at $0 commissions at Fidelity, both at auction and then on the secondary market. These individual issues are likely to be liquid under any scenario. You don't gain any credit risk diversification for using a fund or ETF to own Treasuries, and it's not like you really need coverage across the yield curve, do you? If you were seeking to own 7-10 yr Treasuries in an ETF, that is honestly not going to behave much different from a single Treasury bond with ~8.5 yr until maturity (okay, 8.4, now that I look up the actual average for IEF), and the difference is variously slightly positive or negative. Or own a few.

It may only require a couple trades a year to manage, or less. Depends on what you need.
stlutz
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Re: FIBAX or IEF for Taxable Account [Fidelity or iShares US Treasury Bond]

Post by stlutz »

They both have their disadvantages.

FIBAX can and does have capital gain distributions which you sometimes don't want in the year that it has them.

IEF engages in a fair amount of bond lending to generate extra income. The problem with this is that it substitutes Treasury interest with payments in lieu of interest which are not state tax free. As such, it's commonly the case that only 50-75% of the income from IEF is state tax free.

Other options are just buying the bonds yourself, which is somewhat more complicated but is commission free at Fidelity. If your purchase lots are large enough to justify the $5 commission, then just buying SCHR should be considered, as it is the best ETF in the class in my opinion--it has the lowest ER, does no share lending, and has never had a capital gain distribution.
Topic Author
MikeMak27
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Re: FIBAX or IEF for Taxable Account [Fidelity or iShares US Treasury Bond]

Post by MikeMak27 »

stlutz wrote:They both have their disadvantages.

FIBAX can and does have capital gain distributions which you sometimes don't want in the year that it has them.

IEF engages in a fair amount of bond lending to generate extra income. The problem with this is that it substitutes Treasury interest with payments in lieu of interest which are not state tax free. As such, it's commonly the case that only 50-75% of the income from IEF is state tax free.

Other options are just buying the bonds yourself, which is somewhat more complicated but is commission free at Fidelity. If your purchase lots are large enough to justify the $5 commission, then just buying SCHR should be considered, as it is the best ETF in the class in my opinion--it has the lowest ER, does no share lending, and has never had a capital gain distribution.
Would the capital gain tax on FIBAX be substantial enough to eat a large portion of the yield I am getting?

If I buy the treasury bond directly at Fidelity, can I easily sell it at market value to rebalance my portfolio with out selling it for below par value?

The total Dollar amount I would buy is about 88k, so buying SCHR at $5 is no biggie. I just worry that the duration and maturity is too short of a time frame to be the most effective rebalancing partner.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)
stlutz
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Re: FIBAX or IEF for Taxable Account [Fidelity or iShares US Treasury Bond]

Post by stlutz »

Note that the capital gain tax is really pushing a gain you would get taxed on at some point in the future to today. So, you're moving taxes forward as opposed to paying taxes you otherwise wouldn't have to pay. So it's not an issue worth overstating (just as I wouldn't overstate my concerns about IEF).

Fidelity lists recent distributions from FIBAX on it's website so you can calculate the extra tax you would have had to pay in 2016 had you owned it.

Fidelity shows the price spread between buying and selling Treasury securities in its bond search page. The exact spread depends on the size of your purchase/sale as well as the specific issue(s) you are interested in. Treasury spreads are relatively small compared to other types of bonds. Individual bonds is somewhat more complex that just buying a fund or ETF. If learning about bond trading doesn't sound like "fun" to you, I'd probably just skip that option. :happy
Topic Author
MikeMak27
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Joined: Fri Jul 03, 2015 4:37 am

Re: FIBAX or IEF for Taxable Account [Fidelity or iShares US Treasury Bond]

Post by MikeMak27 »

I guess I'll just go with IEF then, even with its slightly higher expense ratio, and potential tax inefficiencies. It has the most risk since it has the longer duration, but that could also make it the best tax loss harvesting partner with the equity portion. I just wanted to make sure it was a decent fund.

Buying treasury bonds individually may be the best option, but if it is not easy to buy and sell to rebalance when I hit my rebalance bands, then IEF may be better.
Mak 3 fund portfolio: 50% US small cap value & US Small cap (IJS, IJR), 40% Emerging Markets (IEMG, VWO, FPADX), 10% US REIT (VNQ)
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