Which bond index funds to use

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macreel
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Joined: Fri Mar 30, 2018 4:14 pm

Which bond index funds to use

Post by macreel » Sat Mar 31, 2018 3:35 pm

I cannot decide between intermediate bond index, intermediate corporate bond index, total bond index, emerging bond index. Also, Burton Malkiel suggests dividend appreciation index can be used as a bond, any thoughts on that? Would using VDADX be smart in a roth ira account?

xenial
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Joined: Tue Feb 27, 2007 1:36 am
Location: USA

Re: Which bond index funds to use

Post by xenial » Sat Mar 31, 2018 3:47 pm

macreel wrote:
Sat Mar 31, 2018 3:35 pm
I cannot decide between intermediate bond index, intermediate corporate bond index, total bond index, emerging bond index.
The first three funds you mention are all reasonable core fixed income holdings. Emerging markets bonds, which are much riskier, are only appropriate for a smaller role in your portfolio.
macreel wrote:
Sat Mar 31, 2018 3:35 pm
Also, Burton Malkiel suggests dividend appreciation index can be used as a bond, any thoughts on that? Would using VDADX be smart in a roth ira account?
VDADX is a stock fund, which surprisingly has an SEC yield of only 1.86%. It has the full risk of a typical equity fund, and shouldn't be confused with a bond holding.

Marketman
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Location: Texas

Re: Which bond index funds to use

Post by Marketman » Sat Mar 31, 2018 4:14 pm

I seem to remember reading in Burton Malkiel's book about using stock dividend funds in place of bond funds. I don't agree with this one iota. Personally, I like high grade bonds funds for bonds. Mostly (or all) treasuries in tax free accounts and high grade munis where the tax situation dictates.

If your money is in a tax free account, I would go with an intermediate term treasury bond fund or perhaps the total bond index (which is very high grade). High grade bonds have a lower correlation with stocks than lower grade bonds. High grade bonds often zig when stocks zag.

Valuethinker
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Re: Which bond index funds to use

Post by Valuethinker » Sat Mar 31, 2018 4:55 pm

macreel wrote:
Sat Mar 31, 2018 3:35 pm
I cannot decide between intermediate bond index, intermediate corporate bond index, total bond index, emerging bond index. Also, Burton Malkiel suggests dividend appreciation index can be used as a bond, any thoughts on that? Would using VDADX be smart in a roth ira account?
If you are a purist, then Intermediate term US Treasury.

However Total Bond Market fund works very well.

For tax reasons you may have to investigate a municipal bond fund.

Bonds cannot be compared to stocks in a portfolio-- don't make that mistake of "reaching for yield".

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2pedals
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Re: Which bond index funds to use

Post by 2pedals » Sat Mar 31, 2018 5:13 pm

Have you considered Dodge & Cox Income (DODIX)? Dodge & Cox Income is a dependable and reasonably low fee managed bond fund.

Dominic
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Re: Which bond index funds to use

Post by Dominic » Sat Mar 31, 2018 6:07 pm

Regarding bonds, a general consensus is that bonds are for safety. There is still some variation in how Bogleheads construct their bond portfolios, but that idea is still central in most cases.

For this reason, a lot of Bogleheads would advise against holding emerging markets bonds. If crisis strikes, that isn't a safe place to be. Ditto for dividend stocks. They have a bond-like component, but they're stocks, and if the market tanks, dividend stocks will tank too.

So in general, Bogleheads stick to more "mainstream" bond index funds. From there, you have some diverging approaches. One takes the "bonds are for safety" to the extreme, and says to hold Intermediate-Term Treasury Index which has essentially zero credit risk, and tends to rise sharply when stocks crash. An alternative approach is to say that you should take on credit risk, because it's a unique form of risk which, although it is correlated to stock risk. Those people tend to like Total Bond Index or Intermediate-Term Bond Index. That call depends on whether you want exposure to government agency mortgage-backed bonds.

I don't think there's any material difference over the long term between the three options I mentioned above. Maybe a 10-15 basis point gap in returns between any of those funds if held for 10+ years in a rebalanced portfolio.

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