Short term bond fund question

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golfer292
Posts: 16
Joined: Mon Mar 13, 2017 8:40 am

Short term bond fund question

Post by golfer292 » Sat Jan 13, 2018 5:54 pm

I am looking for a relatively safe place to put 50k for 2 years. Down to two choices

A https://fundresearch.fidelity.com/mutua ... /40169J705

or

B https://fundresearch.fidelity.com/mutua ... e=o-NavBar

To me the better choice is A. Am i right?

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Alexa9
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Joined: Tue Aug 30, 2016 9:41 am

Re: Short term bond fund question

Post by Alexa9 » Sat Jan 13, 2018 6:09 pm

In taxable you might use municipal bonds:

https://www.bogleheads.org/wiki/Tax-eff ... _placement

https://www.bogleheads.org/wiki/Bond_basics

If you want a very safe place I'd use an Ally CD.

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arcticpineapplecorp.
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Joined: Tue Mar 06, 2012 9:22 pm

Re: Short term bond fund question

Post by arcticpineapplecorp. » Sat Jan 13, 2018 8:19 pm

golfer292 wrote:
Sat Jan 13, 2018 5:54 pm
I am looking for a relatively safe place to put 50k for 2 years. Down to two choices

A https://fundresearch.fidelity.com/mutua ... /40169J705

or

B https://fundresearch.fidelity.com/mutua ... e=o-NavBar

To me the better choice is A. Am i right?
depends on how you define "better". If you're looking for a short term bond then A is definitely shorter term than B (the average duration of A is 0.74 years and B's duration is 5.82 years. So B has more interest rate sensitivity than A.

But that's not the only consideration. Expense is also a consideration. And while I won't compare the expenses between A and B because we're comparing apples with oranges, I will say that if you start with the premise that since A is shorter term than B and end with "then I'll just buy A" then you've missed the point of comparing like funds from the perspective of expenses (which in my mind is very important).

So what's the expense for A? 0.76% per year (net expense ratio).

But what if you were to compare that with say:
C. Vanguard Ultra Short Term Bond Fund Admiral Shares (https://personal.vanguard.com/us/funds/ ... true#tab=2)

This fund's average duration is 0.9 years so closer to A's interest rate sensitivity, but way cheaper at only 0.12% expense ratio and has 707 bonds in it unlike fund A's fund which has 477 bonds in it.

What's funny is that at fidelity's own website it lists the expense ratio (according to morningstar) as "high". Why would you want to pay high fees for something, when there are similar, more diversified and cheaper options available?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Kevin M
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Re: Short term bond fund question

Post by Kevin M » Sat Jan 13, 2018 8:28 pm

If you're trying to match a liability in two years, I would not use a fund. I would use a good 2-year CD, perhaps 2-year Treasuries, or depending on your marginal tax rates a few 2-year AAA or even AA-rated municipal bonds. I have been finding AAA rate munis in the 2-year maturity ballpark with taxable-equivalent yields (for me) in the 2.5% ballpark, which beats any CD I know of.

Kevin
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Mitchell777
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Joined: Mon May 21, 2007 6:32 am

Re: Short term bond fund question

Post by Mitchell777 » Sat Jan 13, 2018 8:29 pm

Have you considered a CD. I've been seeing rates inch up in my area and banks and credit unions offering "specials" for one year and 18 month certificates. No loss if you hold to maturity. www.depositaccounts.com/cd

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