California Munis: long- vs. intermediate-term bond funds

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MTimer
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California Munis: long- vs. intermediate-term bond funds

Post by MTimer »

Hello, I'm new to this forum and new to investing. Lately I have been thinking of investing in CA municipal bond mutual funds under my personal brokerage account (not 401k), with (a) a horizon 2-3 years or longer and (b) high liquidity.

Given the interest risk in recent years, I was inclined to intermediate-term bond funds. However, the more recent dovish Fed stance change seemed to make long-term bonds more attractive now, given their potentially higher return, and now damped interest risk (not the mention the crazy bond rally in the past two weeks).

Any thoughts on the pros/cons of long- vs. intermediate-term in the current circumstance and possibility down the road will be very much appreciated.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by MikeG62 »

Personally with long rates having moved back toward the lower end of their historical range (over the last several months), I’d not commit a ton to LT bonds. I’d keep maturities a bit shorter as I don’t think you will be getting compensated for the term risk you’d be taking. By shorter I am not necessarily saying short-term, but a mix of bonds with an average duration no longer than intermediate term IMHO.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by Cyclesafe »

The average durations of "long term" VCLAX of about 7.0 and "intermediate term" VCADX of about 5.2 approximately reflect the difference in SEC yield, about 2.51% and 2.06%, respectively. Since muni's tend to be callable, yields will face an accelerating decline (and stay there) when interest rates go down. (Haven't thought about declining interest rates for a while.....).

Bottom line: IMHO at the present time in the short term it doesn't matter which Vanguard Cali fund one invests in. However, in the future VCLAX could take on much longer term debt at current low yields, sticking the investor with an albatross if/when rates go up.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by FoolStreet »

MTimer wrote: Mon Apr 01, 2019 11:54 pm Hello, I'm new to this forum and new to investing. Lately I have been thinking of investing in CA municipal bond mutual funds under my personal brokerage account (not 401k), with (a) a horizon 2-3 years or longer and (b) high liquidity.

Given the interest risk in recent years, I was inclined to intermediate-term bond funds. However, the more recent dovish Fed stance change seemed to make long-term bonds more attractive now, given their potentially higher return, and now damped interest risk (not the mention the crazy bond rally in the past two weeks).

Any thoughts on the pros/cons of long- vs. intermediate-term in the current circumstance and possibility down the road will be very much appreciated.
What is your overall desired asset allocation? And what part of bonds do you expect to be ca muni?
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Re: California Munis: long- vs. intermediate-term bond funds

Post by grabiner »

Cyclesafe wrote: Tue Apr 02, 2019 8:31 am The average durations of "long term" VCLAX of about 7.0 and "intermediate term" VCADX of about 5.2 approximately reflect the difference in SEC yield, about 2.51% and 2.06%, respectively. Since muni's tend to be callable, yields will face an accelerating decline (and stay there) when interest rates go down. (Haven't thought about declining interest rates for a while.....).
The call feature increases the risk of long-term munis. If rates rise, the durations might go to 10 and 6 years, so that the long-term fund loses significantly more than you would expect from its current duration.

But you are rewarded for that risk. The Treasury yield curve is almost flat. Treasuries are not callable, so investors do not need to be compensated for call risk. Long-term munis are usually callable, so investors trade them at prices which compensate for that risk.

As a separate issue, you may not want to have too much of your money in CA bond funds, because of the lack of diversification. I often recommend 50% Vanguard Limited-Term Tax-Exempt, and 50% Vanguard CA Long-Term Tax-Exempt, so that you have an overall intermediate-term duration, and half your bonds are in CA but more than half your income is exempt from CA tax.
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MTimer
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Re: California Munis: long- vs. intermediate-term bond funds

Post by MTimer »

Thank you all so very much for the helpful suggestions. I'm now convinced intermediate-term is the way to go, plus a mix of national and CA munis for diversification. Now comes fund picking. Unfortunately Vanguard funds are not transaction-fee-free (NTF) under my Fidelity brokerage, so I have been looking into alternatives and I'm currently leaned toward:

60%-CA muni: MECMX (BlackRock California Municipal Opportunities Fund Investor A Shares)
https://fundresearch.fidelity.com/mutua ... /09252Y101

40%-National muni: GSMIX (Goldman Sachs Dynamic Municipal Income Fund Class A)
https://fundresearch.fidelity.com/mutua ... /38141W828

The latter has somewhat lower credit quality, but both are on the top of the Morningstar 5-star list.

Any comments on these funds or suggestions for alternatives?

BTW, to FoolStreet's question: "What is your overall desired asset allocation?"
I'm thinking of 30% of my personal savings to be put into munis for the purpose of savings/capital preservation.

Thanks so much in advance.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by penumbra »

Terrible ideas for funds. Both have high front end loads, likely far in excess of what you’d pay in commissions for Vanguard funds. Suggest you keep looking.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by FoolStreet »

MTimer wrote: Sun Apr 07, 2019 1:05 am Thank you all so very much for the helpful suggestions. I'm now convinced intermediate-term is the way to go, plus a mix of national and CA munis for diversification. Now comes fund picking. Unfortunately Vanguard funds are not transaction-fee-free (NTF) under my Fidelity brokerage, so I have been looking into alternatives and I'm currently leaned toward:

60%-CA muni: MECMX (BlackRock California Municipal Opportunities Fund Investor A Shares)
https://fundresearch.fidelity.com/mutua ... /09252Y101

40%-National muni: GSMIX (Goldman Sachs Dynamic Municipal Income Fund Class A)
https://fundresearch.fidelity.com/mutua ... /38141W828

The latter has somewhat lower credit quality, but both are on the top of the Morningstar 5-star list.

Any comments on these funds or suggestions for alternatives?

BTW, to FoolStreet's question: "What is your overall desired asset allocation?"
I'm thinking of 30% of my personal savings to be put into munis for the purpose of savings/capital preservation.

Thanks so much in advance.
MTimer, you mentioned you are new to investing, so I hope you don’t mind me asking you to step back and consider your overall plan before getting to the muni question. Asset allocation typically refers to the percent of equities you hold versus bonds. So, when you responded the way you did, it made me pause to checkpoint.

Please review this link describing the 3=fund portfolio.

https://www.bogleheads.org/wiki/Three-fund_portfolio

This is the central tenet of our philosophy and is the underpinning for all our recommendations.

Next, we can optimize a little bit by putting certain assets in taxable accounts vs tax-advantaged.

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

After reading all this, you may decide to change your approach to munis! Does this change your approach???

And if not, here is a list of fidelity funds


hhttps://fundresearch.fidelity.com/mutual-funds/composition/316061407

And here is a ca muni fund.

https://fundresearch.fidelity.com/mutua ... /316061407


The reality is that the bond index funds we described in this post are best found directly from vanguard.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by introvertengineer »

iShare CA Muni Bond ETF (CMF) is available at Fidelity with no transaction fee and ER 0.25%.
https://screener.fidelity.com/ftgw/etf/ ... e=o-NavBar
https://www.blackrock.com/us/individual ... i-bond-etf
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MTimer
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Re: California Munis: long- vs. intermediate-term bond funds

Post by MTimer »

penumbra wrote: Sun Apr 07, 2019 1:30 am Terrible ideas for funds. Both have high front end loads, likely far in excess of what you’d pay in commissions for Vanguard funds. Suggest you keep looking.
Thanks, penumbra, Yes, I notice the load, but on the Fidelity page:
"This fund is now available NTF (No Transaction Fee) and offered load-waived through Fidelity".

Many thanks to FoolStreet and introvertengineer for the invaluable links, I'll follow that to do some reading and keep looking.
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MTimer
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Re: California Munis: long- vs. intermediate-term bond funds

Post by MTimer »

FoolStreet wrote: Sun Apr 07, 2019 2:19 am ... And if not, here is a list of fidelity funds
hhttps://fundresearch.fidelity.com/mutual-funds/composition/316061407
... The reality is that the bond index funds we described in this post are best found directly from vanguard.
Hi, FoolStreet, I was wondering if you mistyped the link above for "a list of fidelity funds", which actually points to a single fund (FSPXX - Fidelity California AMT Tax-Free Money Market Fund), not "bond index funds ... directly from vanguard" as you described? If so, could you kindly provide the correct link? Many thanks.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by grabiner »

MTimer wrote: Sun Apr 07, 2019 1:05 am Thank you all so very much for the helpful suggestions. I'm now convinced intermediate-term is the way to go, plus a mix of national and CA munis for diversification. Now comes fund picking. Unfortunately Vanguard funds are not transaction-fee-free (NTF) under my Fidelity brokerage, so I have been looking into alternatives and I'm currently leaned toward:

60%-CA muni: MECMX (BlackRock California Municipal Opportunities Fund Investor A Shares)
https://fundresearch.fidelity.com/mutua ... /09252Y101

40%-National muni: GSMIX (Goldman Sachs Dynamic Municipal Income Fund Class A)
https://fundresearch.fidelity.com/mutua ... /38141W828

The latter has somewhat lower credit quality, but both are on the top of the Morningstar 5-star list.

Any comments on these funds or suggestions for alternatives?
When comparing funds, you need to look at the total cost, not just one part of it. These funds are load-waived at Fidelity, but that is just the up-front cost; you also pay 0.80% and 0.76% annually. If you use a transaction-fee fund, you will pay the dollar fee, but likely only once a year when you rebalance or add new money. Likewise, if you use an ETF which is not commission-free, you pay the commission when you buy and sell, but that is again a small one-time cost.

If you are making an investment over $50K, you might be better off with the 0.09% expenses of Vanguard's CA muni fund on Admiral shares than with the 0.25% on the ETF CMF, even paying the transaction fee once a year. (Alternatively, you could open a Vanguard account and hold it there.) For a national muni fund, use iShares' MUB or Vanguard's VTEB, at 0.07% and 0.08% expenses.
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MTimer
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Re: California Munis: long- vs. intermediate-term bond funds

Post by MTimer »

grabiner wrote: Sun Apr 07, 2019 6:27 pm If you are making an investment over $50K, you might be better off with the 0.09% expenses of Vanguard's CA muni fund on Admiral shares than with the 0.25% on the ETF CMF, even paying the transaction fee once a year. (Alternatively, you could open a Vanguard account and hold it there.) For a national muni fund, use iShares' MUB or Vanguard's VTEB, at 0.07% and 0.08% expenses.
Many thanks to David for your comments and suggestions. In fact, I have not opened a Fidelity brokerage account yet; in principle, I could instead go with Vanguard directly. The reason I'm leaning toward Fidelity is that I have a 403(b) from my former employer currently held there and for simplicity I prefer to stay with Fidelity for my personal (taxable) brokerage as well, but I don't have to if there's a good reason. (I decided not roll-over Fidelity into my current employer's 403(b) @TIAA which has far fewer fund choices.)

I'm thinking of ~$60k into munis under my personal brokerage. But I'm a bit puzzled by David's ER argument when comparing funds performance/return. I understand the 0.80% (MECMX) and 0.76% (GSMIX) ERs are on the higher end; however they both have outperformed the market and the corresponding Vanguard funds by about 1% over the past 10 years (I'm looking at VCAIX and VWITX, which are available on Fidelity.com for comparison) - see the link below. Would this justify their high ERs?

https://www.fidelity.com/fund-screener/ ... ITX&tab=pf

After all, the net return (after deducting ER) is what matters, right? (And the published returns are already net of ER.) Or did I miss anything? I don't meant to bring up the debate of passive/index vs. active funds, although I myself has a passive philosophy on the investor end.

Thoughts, comments, and/or suggestions will be very much appreciated.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by grabiner »

MTimer wrote: Thu Apr 11, 2019 1:49 am I'm thinking of ~$60k into munis under my personal brokerage. But I'm a bit puzzled by David's ER argument when comparing funds performance/return. I understand the 0.80% (MECMX) and 0.76% (GSMIX) ERs are on the higher end; however they both have outperformed the market and the corresponding Vanguard funds by about 1% over the past 10 years (I'm looking at VCAIX and VWITX, which are available on Fidelity.com for comparison) - see the link below. Would this justify their high ERs?
There is always a trade-off between risk and return, and it is most noticeable with bond funds. MECMX (BlackRock California Muni Opportunities) holds bonds which investors consider riskier than VCAIX (Vanguard CA Intermediate-Term Tax-Exempt). The BlackRock fund holds bonds yielding 2.96% (2.16% SEC yield plus its 0.80% expenses), while the Vanguard fund holds bonds yielding 2.10% (1.93% yield plus 0.17% expenses on the Investor share class; for $60K, you could hold Admiral shares for 0.09% expenses).

And you can see this risk by comparing the charts. In September-October 2008, when you most needed your bonds for risk reduction, the BlackRock fund lost 13% top to bottom, while the Vanguard fund lost 8%. In one week in June 2013, when muni yields rose, the BlackRock fund lost 6%, while the Vanguard fund lost 3%.

I can't make the same comparison for GSMIX (Goldman Sachs Dynamic Muni Fund) because it doesn't have a portfolio or SEC yield on Morningstar, but it appears to show the same effect, consistent with a riskier fund.

If you want to take that type of risk, you might as well get the full reward by using Vanguard's High-Yield Tax-Exempt (which, despite its name, is a medium-quality fund rather than a junk fund), This fund has about the same risk as the Goldman Sachs fund, with return charts tracking almost perfectly, taking equal losses in down markets. But in the long run, the lower expenses of the Vanguard fund have put it ahead.
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Re: California Munis: long- vs. intermediate-term bond funds

Post by FoolStreet »

MTimer wrote: Thu Apr 11, 2019 1:49 am
grabiner wrote: Sun Apr 07, 2019 6:27 pm If you are making an investment over $50K, you might be better off with the 0.09% expenses of Vanguard's CA muni fund on Admiral shares than with the 0.25% on the ETF CMF, even paying the transaction fee once a year. (Alternatively, you could open a Vanguard account and hold it there.) For a national muni fund, use iShares' MUB or Vanguard's VTEB, at 0.07% and 0.08% expenses.
Many thanks to David for your comments and suggestions. In fact, I have not opened a Fidelity brokerage account yet; in principle, I could instead go with Vanguard directly. The reason I'm leaning toward Fidelity is that I have a 403(b) from my former employer currently held there and for simplicity I prefer to stay with Fidelity for my personal (taxable) brokerage as well, but I don't have to if there's a good reason. (I decided not roll-over Fidelity into my current employer's 403(b) @TIAA which has far fewer fund choices.)

I'm thinking of ~$60k into munis under my personal brokerage. But I'm a bit puzzled by David's ER argument when comparing funds performance/return. I understand the 0.80% (MECMX) and 0.76% (GSMIX) ERs are on the higher end; however they both have outperformed the market and the corresponding Vanguard funds by about 1% over the past 10 years (I'm looking at VCAIX and VWITX, which are available on Fidelity.com for comparison) - see the link below. Would this justify their high ERs?

https://www.fidelity.com/fund-screener/ ... ITX&tab=pf

After all, the net return (after deducting ER) is what matters, right? (And the published returns are already net of ER.) Or did I miss anything? I don't meant to bring up the debate of passive/index vs. active funds, although I myself has a passive philosophy on the investor end.

Thoughts, comments, and/or suggestions will be very much appreciated.
Past performance is not an indicator of future returns.

For bonds, you want to look at go-forward performance, not historical. We use the 30day yield, which calculates the current bond portfolio and what it will yield in the next 30days. Sometimes it’s called 30 day SEC yield.

https://fundresearch.fidelity.com/mutua ... /09252Y101
This has a 30d Yield of 2.16 with an ER of 0.8, for net 1.36 go-forward.

https://fundresearch.fidelity.com/mutua ... /38141W828
30d yield of 2.47 with ER of 0.8, for net 1.67 go- forward.



https://fundresearch.fidelity.com/mutua ... /922021308
30d of 1.98 with ER of .17 for net 1.81 (WIN)

https://fundresearch.fidelity.com/mutua ... /922907209
2.10 with ER of .17 for net 1.93 (WINJ


Vanguard looks even better when you use Admiral shares with a lower ER, you get higher net yield.

Does this make any sense?

If you think it is confusing to have 30d yield hidden in a sub=menu and not auto calculated with ER, it is. There is a lot of ER to be earned by hiding these kinds of details. But that’s why we come to bogleheads!
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MTimer
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Re: California Munis: long- vs. intermediate-term bond funds

Post by MTimer »

FoolStreet wrote: Sat Apr 13, 2019 8:20 am For bonds, you want to look at go-forward performance, not historical. We use the 30day yield, which calculates the current bond portfolio and what it will yield in the next 30days. Sometimes it’s called 30 day SEC yield.
....
https://fundresearch.fidelity.com/mutua ... /922907209
2.10 with ER of .17 for net 1.93 (WINJ
...
Vanguard looks even better when you use Admiral shares with a lower ER, you get higher net yield.

If you think it is confusing to have 30d yield hidden in a sub-menu and not auto calculated with ER, it is. There is a lot of ER to be earned by hiding these kinds of details. But that’s why we come to bogleheads!
Thanks so much, FoolStreet and David! Now it's crystaly clear. No wonder I was confused all along and wasted a lot time researching these numbers that were designed to trick/confuse (new) investors like myself. Glad I came to the right place at bogleheads!

Looks like it's better to open a brokerage account directly at Vanguard (instead of Fidelity) and hold Vanguard bond funds there. Does Vanguard also offer options for trading non-Vanguard funds, at no or small fees?

(I understand in general Vanguard funds could be the one-stop pot for all mutual fund needs, but it would be nice to keep other options open.)

Many thanks.
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MTimer
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Re: California Munis: long- vs. intermediate-term bond funds

Post by MTimer »

Hi, FoolStreet et al.,

I'm sorry but I am confused again. Just dug out this old thread:
viewtopic.php?t=143664
"... the SEC yield is calculated after the expense ratio."

and http://financial-dictionary.thefreedict ... /SEC+yield:
"The SEC yield is calculated by taking the interest each share in the fund earns for a 30 day period and subtracting all expenses and sales charges the fund's managers assess."

If so, your calculation below would have subtracted ER twice, when you use the past 30-day SEC yield to project the go-forward performance.
FoolStreet wrote: Sat Apr 13, 2019 8:20 am https://fundresearch.fidelity.com/mutua ... /09252Y101
This has a 30d Yield of 2.16 with an ER of 0.8, for net 1.36 go-forward.
Is that right? Or did I misunderstand? Could you explain a bit more? Many thanks.
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