VOHIX vs VMMXX for fixed income in Ohio

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GrowthSeeker
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Joined: Tue May 15, 2018 10:14 pm

VOHIX vs VMMXX for fixed income in Ohio

Post by GrowthSeeker » Sun Jun 17, 2018 5:10 pm

I have a question about where to put money that is going from from cash into the bond / fixed income component of one's portfolio.
VOHIX (Vanguard Ohio Long-Term Tax-Exempt Fund)
expense ratio 0.15%
SEC yield 2.86%
vs
VMMXX (Vanguard Prime Money Market Fund)
expense ratio 0.16%
SEC yield 1.97%

Assume a Federal tax bracket of 22%
Assume Ohio residency with an Ohio tax rate of about 3%.
VOHIX would then have a pre-tax equivalent of [2.86%/(1-22%)]/(1-3%) = 3.78%

There have been several posts noting that in a rising interest rate environment, such as we seem to be in now, one should be more interested in short term bonds or money market, whereas VOHIX although a muni bond fund, is more long term (average maturity 17.9 years). I would expect VOHIX to drop in share price as interest rates rise.
Any thoughts on which is more likely to outperform in the short term; and in the long term?
Just because you're paranoid doesn't mean they're NOT out to get you.

aristotelian
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Re: VOHIX vs VMMXX for fixed income in Ohio

Post by aristotelian » Sun Jun 17, 2018 5:19 pm

VOHIX duration is 7 years not 17 years. It is labelled as long term, but apparently long term has different meanings for Treasury and muni. I treat it as an intermediate bond fund and have about 1 years expenses in it.

I also use VMMXX as my emergency fund. It is a money market fund, basically for holding cash. It would be expected to lag the rate of inflation for negative real return long term. Definitely not a good idea for a core holding.

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KlingKlang
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Re: VOHIX vs VMMXX for fixed income in Ohio

Post by KlingKlang » Sun Jun 17, 2018 6:04 pm

I live in Ohio and own both VOHIX and VMMXX, but they serve different purposes as pieces of my after tax bond and cash allocations respectively. By having the dividends from the bond fund and my tax-managed stock funds deposited into the money market fund I can easily rebalance by buying more shares of the stock or bond funds as necessary. Sticking to your asset allocation forces you to 'buy low, sell high' and relieves you of trying to guess what the markets will do in the future.

Vanguard used to have an Ohio Tax-Exempt Money Market Fund but they eliminated that several years ago.

GrowthSeeker
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Re: VOHIX vs VMMXX for fixed income in Ohio

Post by GrowthSeeker » Sun Jun 17, 2018 6:37 pm

OK, that’s a good point.
How about if we add in another choice:
Vanguard Ultra-Short-Term Bond Fund Investor Shares (VUBFX)
Expense 0.20%
SEC yield 2.32%
(vs VOHIX in a taxable account)
Just because you're paranoid doesn't mean they're NOT out to get you.

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KlingKlang
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Re: VOHIX vs VMMXX for fixed income in Ohio

Post by KlingKlang » Sun Jun 17, 2018 7:31 pm

GrowthSeeker wrote:
Sun Jun 17, 2018 6:37 pm

How about if we add in another choice:
Vanguard Ultra-Short-Term Bond Fund Investor Shares (VUBFX)
Expense 0.20%
SEC yield 2.32%
(vs VOHIX in a taxable account)
VUBFX will probably not decline as much as VOHIX in a bond bear market, at the cost of a lower yield and being subject to state taxation. Note that its return is lower than VMMXX YTD.

In my opinion the choice between bond funds and money market accounts depends on whether you are going to be upset if your principal declines.

An additional option you may wish to consider for after-tax savings is United States Series I Savings Bonds. They pay interest at a fixed rate plus the rate of inflation (currently 2.52% total). They allow you to shelter interest income for between 1 and 30 years. Their redemption value never decreases, although if inflation is negative it may not increase either. You can only purchase $10K/year at TreasuryDirect.gov plus $5K/year with your federal income tax refund. Minimum purchase is $25. The interest is state and local income tax free.

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