Bond Fund Comparison Help (VBTLX VS MWTIX)

[HAWK23]

Hello everyone,

I recently transferred my Roth IRA from Edward Jones to Vanguard. I've liquidated virtually all of the EDJ funds and have bought up Vanguard Total US, Vanguard Total International, and Vanguard Total Bond. There is, however, 1 fund I have yet to liquidate because I need some help analyzing it and seeing if perhaps it's worth keeping. I need some help identifying positives and negatives and the differences between the following 2 Bond funds. I'm looking for help analyzing the funds beyond the difference in expense ratio:


Metropolitan West Total Return Bd I
Ticker Symbol: MWTIX
Expense Ratio: .44
Morningstar Rating: Gold Fund
Morningstar Star Rating: Four-Stars


Vanguard Total Bond Market Index Admiral Shares
Ticker Symbol: VBTLX
Expense Ratio: .05
Morningstar Rating: Silver Fund
Morningstar Star Rating: Three-Stars



My questions:

#1: My most important question is what do you guys see to be the difference in composition between the two funds? I clearly know the biggest difference, on the surface, seems to be the difference in expense ratio (ER). However, I'm asking does one hold something the other doesn't or vice versa? Are they a similar fund or are they different fundamentally in some way? Is it worth having both funds? Do they each do something different for my portfolio?

#2: I've read on these forums to basically ignore the star ratings on Morningstar because they are somewhat arbitrary. However, I do have some concern in liquidating a "gold fund" in favor of a "silver fund". Can someone explain why a fund would be rated gold over silver? What do I need to know about how or why funds, in general, are rated and what might be accounting for the difference between these two particular funds?

Thank you all so much in advance!

[oldcomputerguy]

I don't see a striking difference, not anything that jumps out and says "bad fund!!".

The Metropolitan fund does have an allocation to longer-term bonds (20-30 years) that is higher than Vanguard's fund (34% for the Metropolitan fund versus 12% for Vanguard's), which may tend to make Metropolitan's fund somewhat more sensitive to prevailing interest rate changes. On the other hand, the Metropolitan fund has a slightly shorter average duration (5.6 years versus 6.1 years), but I'm not at all certain that such a small difference is significant.

Looking at the two, I can't see a significant enough difference to warrant the difference in ER.

[peppers]

Here is what Morningstar has to say.

http://www.morningstar.com/funds/xnas/mwtix/quote.html

http://www.morningstar.com/funds/xnas/vbtlx/quote.html

[ruralavalon]

Both are excellent funds.

Vanguard Total Bond Market Index Fund Admiral Shares(VBTLX) ER 0.05%, average effective duration = 6.14 years, average credit quality = AA, government bonds 46%, corporate bonds 27%, securitized 24%.

Metropolitan West Total Return Institutional (MWTIX) ER 0.44%, average effective duration = 5.68 years, average credit quality = BBB, government bonds 35%, corporate bonds, 22%, securitized 37%.

The main differences are that Metropolitan West Total Return Institutional is an actively managed fund, has a higher expense ratio, has a lower credit quality, and historically has outperformed Vanguard Total Bond Market Index Fund Admiral Shares.

[oldcomputerguy]

The main differences are that Metropolitan West Total Return Institutional is an actively managed fund, has a higher expense ratio, has a lower credit quality, and historically has outperformed Vanguard Total Bond Market Index Fund Admiral Shares.

I guess the question one has to ask is whether the Metropolitan fund has outperformed the Vanguard fund by enough to make up the expense difference.

[ruralavalon]

The main differences are that Metropolitan West Total Return Institutional is an actively managed fund, has a higher expense ratio, has a lower credit quality, and historically has outperformed Vanguard Total Bond Market Index Fund Admiral Shares.

I guess the question one has to ask is whether the Metropolitan fund has outperformed the Vanguard fund by enough to make up the expense difference.

It has outperformed even considering the expense ratio difference.

Over 21 years $10k invested in MWTIX became $35,138 and $10k invested in VBTLX became $26,998.

[HAWK23]

Thank you - great stuff so far guys. Looks like perhaps both funds could have a place in my portfolio. Bonds are my weakest point as far as knowledge and understanding.

What is "average credit quality"? AA vs BBB what does that mean?

[ruralavalon]

Thank you - great stuff so far guys. Looks like perhaps both funds could have a place in my portfolio. Bonds are my weakest point as far as knowledge and understanding.

What is "average credit quality"? AA vs BBB what does that mean?

AAA would be the best credit quality and safest, BBB is still investment grade but riskier, lower than BBB is high yield bonds (junk bonds) and high risk.

[oldcomputerguy]

Thank you - great stuff so far guys. Looks like perhaps both funds could have a place in my portfolio. Bonds are my weakest point as far as knowledge and understanding.

What is "average credit quality"? AA vs BBB what does that mean?

https://en.wikipedia.org/wiki/Bond_credit_rating

One of the classifying characteristics of bonds is "credit quality". Basically it means "how likely is it that the bond issuer will default and not repay the debt?" The quality of a bond's credit-worthiness is denoted using a three-or-four-character designation from a defined scale. Highest-credit-quality bonds are rated AAA by Standard and Poor and Fitch, Aaa by Moody. There is a cut-off level, above which bonds are considered "investment-grade" (i.e. the chance of default is slight). This level is at BBB- on the S&P and Fitch scales, Baa3 on Moody's. Anything lower than these ratings is considered "junk" (euphemistically referred to as "high-yield" due to their higher return and higher risk).

Some people like to invest in "junk" bonds to juice their total returns, but doing so incurs taking more risk.

[HAWK23]

Thank you - great stuff so far guys. Looks like perhaps both funds could have a place in my portfolio. Bonds are my weakest point as far as knowledge and understanding.

What is "average credit quality"? AA vs BBB what does that mean?

AAA would be the best credit quality and safest, BBB is still investment grade but riskier, lower than BBB is high yield bonds (junk bonds) and high risk.

Excellent thank you so much for your thoughts. This place has been great getting quality feedback!

It sounds like it could be a fair/smart move to contribute to both moving forward as each have their own positives.
I know this is probably a personal question with no true great answer, but if I split my future contributions to both funds 50/50 would that be an adequate way to cover bond allocation in my portfolio as a 32 year old somewhat beginner?

[Sandtrap]

Here's a comparison on Morningstar
VBTLX vs MWTIX

[ruralavalon]

Thank you - great stuff so far guys. Looks like perhaps both funds could have a place in my portfolio. Bonds are my weakest point as far as knowledge and understanding.

What is "average credit quality"? AA vs BBB what does that mean?

AAA would be the best credit quality and safest, BBB is still investment grade but riskier, lower than BBB is high yield bonds (junk bonds) and high risk.

Excellent thank you so much for your thoughts. This place has been great getting feedback!

It sounds like it could be a fair/smart move to contribute to both moving forward as each have their own positives.
I know this is probably a personal question with no true great answer, but if I split my future contributions to both funds 50/50 would that be an adequate way to cover bond allocation in my portfolio as a 32 year old somewhat beginner?

Either fund by itself would be a more than adequate way to cover your bond allocation. Sometimes it's a matter of having to use both, depending on the accounts used and size.

In general I personally prefer a good index fund over a good actively managed fund.

What type of account is each fund offered in (like an IRA, 401k, 403b, 457b taxable account)?

[peppers]

Just thinking out loud here.

Is the Met West fund in a tax advantaged account? The higher turnover of MWTIX vs VBTLX "may" create some income tax unpleasantness.

[HAWK23]

Rural:

I have MWTIX and BND (ETF version of VBTLX) both in my Roth IRA. I also have a small amount being contributed to VBTLX monthly in my 403b (I can change this amount at anytime if I want).


OldComputerGuy: Thank you very much for the wiki excerpt above. Great help!

Peppers: I have no bonds in my taxable accounts! Learned that here too!

[grabiner]

Just thinking out loud here.

Is the Met West fund in a tax advantaged account? The higher turnover of MWTIX vs VBTLX "may" create some income tax unpleasantness.

This is not an issue with bond funds. Bond funds get almost all their income from dividends, so actively managed bond funds do not generate higher tax bills. (And even bond index funds have to turn over their bonds, because bonds mature, get called, or become too short of the index.)

[peppers]

Just thinking out loud here.

Is the Met West fund in a tax advantaged account? The higher turnover of MWTIX vs VBTLX "may" create some income tax unpleasantness.

This is not an issue with bond funds. Bond funds get almost all their income from dividends, so actively managed bond funds do not generate higher tax bills. (And even bond index funds have to turn over their bonds, because bonds mature, get called, or become too short of the index.)

Hello David

Yes, I understand where you are coming from. But, bond funds occasionally pay out capital gains.

Vanguard Intermediate Term Treasury Fund (VFITX) distributed LT and ST capital gains in 2016.
Even the venerable Vanguard Total Bond Index Fund (VBTLX) distributed a LT gain in 2018.

Apologies to the OP for digressing.

[pkcrafter]

I think the difference in performance is mostly due to risk exposure. An AA fund vs BBB.

This shows up as better returns in good times for the BBB fund, but lower returns in market falls. For instance, VBTLX gained 5% in 2008, whereas MWTIX lost 1.2. Not terrible, but that is the difference. Also, VBTLX, as of now, has a bit longer duration than MWTIX.

Paul

[Taylor Larimore]

HAWK23:

Bonds are primarily for safety--not higher returns. It is more efficient to increase your stock allocation for higher returns.

There is no free-lunch in bonds (except muni-bonds for high-income taxpayers). Higher yields nearly always reflect higher risk.

Best wishes.
Taylor

[HAWK23]

HAWK23:

Bonds are primarily for safety--not higher returns. It is more efficient to increase your stock allocation for higher returns.

There is no free-lunch in bonds (except muni-bonds for high-income taxpayers). Higher yields nearly always reflect higher risk.

Best wishes.
Taylor

My intention is not to get a free-lunch but to determine whether MWTIX was a fund I should liquidate or if it could add some value. I think I've decided I will keep VBTLX as my main bond fund but keep the MWTIX fund as a smaller percentage. Maybe something along the lines of 75% VBTLX and 25% MWTIX to make up my bond allocation.