VCLT, BND or 0ther

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jdkoerner
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VCLT, BND or 0ther

Post by jdkoerner » Mon May 13, 2019 11:47 am

I'm 63, retired, living on disability. I need to rebalance a cash brokerage account. I need to buy $10,000 in one or more bond ETF. My current circumstances dictate that these are the absolute conditions under which I must operate at this time. As long as I generate under $16K of capital gains and dividends, I will pay no federal tax, only NYS, My understanding is that the risk and return on VCLT is greater than that for BND. So it would seem like VCLT is the way to go, and whenever I think I know what I'm doing, I don't. Thoughts? :confused

bizkitgto
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Re: VCLT, BND or 0ther

Post by bizkitgto » Mon May 13, 2019 12:36 pm

I have always liked BND, but I use it for defense in the event of a market drawdown that should allow me to rebalance.
Keep it simple: 20% BND, 50% VTI and 30% VXUS

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Wiggums
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Re: VCLT, BND or 0ther

Post by Wiggums » Mon May 13, 2019 12:36 pm

I use BND as well

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Re: VCLT, BND or 0ther

Post by MotoTrojan » Mon May 13, 2019 12:38 pm

jdkoerner wrote:
Mon May 13, 2019 11:47 am
I'm 63, retired, living on disability. I need to rebalance a cash brokerage account. I need to buy $10,000 in one or more bond ETF. My current circumstances dictate that these are the absolute conditions under which I must operate at this time. As long as I generate under $16K of capital gains and dividends, I will pay no federal tax, only NYS, My understanding is that the risk and return on VCLT is greater than that for BND. So it would seem like VCLT is the way to go, and whenever I think I know what I'm doing, I don't. Thoughts? :confused
What does your asset allocation call for? What is the purpose of this holding? What else do you have?

I'd probably use BND or Intermediate Treasuries. Long-term corporate bonds give you default risk (corporate, not government backed) and interest rate risk from the long-term (if interest rates go up, your NAV goes down a good bit). Long-term corporates have their uses but not really as a core bond fund.

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Re: VCLT, BND or 0ther

Post by Vanguard Fan 1367 » Mon May 13, 2019 1:14 pm

I have used VCLT and VCIT rather than BND. Those may or may not result in greater returns over the long haul. We shall see. Many Bogleheads prefer BND and they have great reasons, safety and the return of the principle.

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Re: VCLT, BND or 0ther

Post by midareff » Mon May 13, 2019 1:28 pm

What about tax-exempt dividends? Vanguard's Intermediate Term Tax-Exempt Muni Bond Fund? VWIUX

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Re: VCLT, BND or 0ther

Post by Vanguard Fan 1367 » Mon May 13, 2019 2:58 pm

midareff wrote:
Mon May 13, 2019 1:28 pm
What about tax-exempt dividends? Vanguard's Intermediate Term Tax-Exempt Muni Bond Fund? VWIUX
Some recommend keeing your bond allocation in IRAs. 401Ks and similar. But the Tax Exempt would be great if you don't have enough room in tax sheltered accounts for all the bonds you want.

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Re: VCLT, BND or 0ther

Post by midareff » Mon May 13, 2019 3:26 pm

Vanguard Fan 1367 wrote:
Mon May 13, 2019 2:58 pm
midareff wrote:
Mon May 13, 2019 1:28 pm
What about tax-exempt dividends? Vanguard's Intermediate Term Tax-Exempt Muni Bond Fund? VWIUX
Some recommend keeing your bond allocation in IRAs. 401Ks and similar. But the Tax Exempt would be great if you don't have enough room in tax sheltered accounts for all the bonds you want.
What presents the minimum taxable profile in the accumulation stage and what makes sense in the retired decumulation stage may have nothing to do with room in accounts.

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grabiner
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Re: VCLT, BND or 0ther

Post by grabiner » Mon May 13, 2019 6:56 pm

midareff wrote:
Mon May 13, 2019 1:28 pm
What about tax-exempt dividends? Vanguard's Intermediate Term Tax-Exempt Muni Bond Fund? VWIUX
He is in the 12% tax bracket, so munis do not make sense.

However, since he pays state tax, Treasury bonds might be a good deal, particularly TIPS.
Wiki David Grabiner

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midareff
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Re: VCLT, BND or 0ther

Post by midareff » Tue May 14, 2019 8:07 am

grabiner wrote:
Mon May 13, 2019 6:56 pm
midareff wrote:
Mon May 13, 2019 1:28 pm
What about tax-exempt dividends? Vanguard's Intermediate Term Tax-Exempt Muni Bond Fund? VWIUX
He is in the 12% tax bracket, so munis do not make sense.

However, since he pays state tax, Treasury bonds might be a good deal, particularly TIPS.
So, your thinking that Total Bond which has under performed the muni fund in every M* historical time period would be better? We have discussed this in prior threads and I have furnished lots of data that shows your statement on this inaccurate.

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Re: VCLT, BND or 0ther

Post by grabiner » Tue May 14, 2019 10:49 pm

midareff wrote:
Tue May 14, 2019 8:07 am
grabiner wrote:
Mon May 13, 2019 6:56 pm
midareff wrote:
Mon May 13, 2019 1:28 pm
What about tax-exempt dividends? Vanguard's Intermediate Term Tax-Exempt Muni Bond Fund? VWIUX
He is in the 12% tax bracket, so munis do not make sense.

However, since he pays state tax, Treasury bonds might be a good deal, particularly TIPS.
So, your thinking that Total Bond which has under performed the muni fund in every M* historical time period would be better? We have discussed this in prior threads and I have furnished lots of data that shows your statement on this inaccurate.
This is the usual argument about past performance not being indicative of future results, with one other point; the returns you are citing are not independent Intermediate-Term Tax-Exempt has outperformed Total Bond Market Index over the past 1, 3, 5, and 10 years (but Total Bond Market Index outperformed slightly over 15 years, and the Admiral shares of the two funds are even over one year if you use numbers ending today rather than month-end), but those are not independent periods. Over independent periods, Intermediate-Term Tax-Exempt outperformed Total Bond Market Index over eight of the last ten years.

I looked up the previous discussion, and I think you are referring to this thread in which there is a discussion of the difference between SEC and distribution yield. The muni fund has had a higher distribution yield than its SEC yield, which happens when bond prices have risen (and yields have fallen) after the fund bought its bonds.

But what matters for investors is future returns, and that is where the SEC yield is more relevant. The SEC yield is what an investor would receive if all the bonds in the fund were held to maturity (including the deduction of expenses). The actual return depends on what happens to bond yields. It doesn't depend much on distributions, except that bonds which have higher coupons have lower durations.

Currently, Total Bond Market Index Admiral has an SEC yield of 2.89% and a duration of six years, and Intermediate-Term Tax-Exempt Admiral has an SEC yield of 2.09% and a duration of five years. This says that Total Bond Market Index will have 0.8% higher pre-tax returns if rates do not change, or if rates change by comparable amounts, as long as defaults in the two funds are both extremely low.

(The unequal duration means that this is not quite correct. If the yields on both funds rise by 0,8% next year, the returns will be equal because Total Bond Market will lose 0.8% more of value. However, investors do not expect the yields to do that, as that would give both funds negative returns for one year, and investors do not buy bonds which they expect will have negative returns.)

Given the longer duration of Total Bond Market Index, the 27% tax rate that makes the two equal after tax is not quite a fair comparison; I recommend the muni fund to investors in a 24% bracket and consider them equally good in a 22% bracket, as if a taxable fund of comparable duration and risk had a 2.69% yield.

But the OP pays 6.33% tax on Vanguard Intermediate-Term Tax-Exempt, and 18.33% on Total Bond Market Index. At that rate, taxable bond rates would have to rise much more than muni rates for the muni fund to be better, and I have no reason to expect that.
Wiki David Grabiner

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midareff
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Re: VCLT, BND or 0ther

Post by midareff » Wed May 15, 2019 6:54 am

grabiner wrote:
Tue May 14, 2019 10:49 pm
midareff wrote:
Tue May 14, 2019 8:07 am
grabiner wrote:
Mon May 13, 2019 6:56 pm
midareff wrote:
Mon May 13, 2019 1:28 pm
What about tax-exempt dividends? Vanguard's Intermediate Term Tax-Exempt Muni Bond Fund? VWIUX
He is in the 12% tax bracket, so munis do not make sense.

However, since he pays state tax, Treasury bonds might be a good deal, particularly TIPS.
So, your thinking that Total Bond which has under performed the muni fund in every M* historical time period would be better? We have discussed this in prior threads and I have furnished lots of data that shows your statement on this inaccurate.
This is the usual argument about past performance not being indicative of future results, with one other point; the returns you are citing are not independent Intermediate-Term Tax-Exempt has outperformed Total Bond Market Index over the past 1, 3, 5, and 10 years (but Total Bond Market Index outperformed slightly over 15 years, and the Admiral shares of the two funds are even over one year if you use numbers ending today rather than month-end), but those are not independent periods. Over independent periods, Intermediate-Term Tax-Exempt outperformed Total Bond Market Index over eight of the last ten years. Agreed

I looked up the previous discussion, and I think you are referring to this thread in which there is a discussion of the difference between SEC and distribution yield. The muni fund has had a higher distribution yield than its SEC yield, which happens when bond prices have risen (and yields have fallen) after the fund bought its bonds. Or the bonds were purchased at a discount to face value, or other factors such as a possible change in credit worthiness changed the actual resale value vs. face value, or other factors. It's not just what you wrote, there are other scenarios.

But what matters for investors is future returns, and that is where the SEC yield is more relevant. The SEC yield is what an investor would receive if all the bonds in the fund were held to maturity (including the deduction of expenses). The actual return depends on what happens to bond yields. It doesn't depend much on distributions, except that bonds which have higher coupons have lower durations. That is not what the SEC Yield is and that may be how holding an individual bond works held to maturity, not how a bond fund works. To again quote Vanguard "A — BASED ON HOLDINGS' YIELD TO MATURITY FOR PRIOR 30 DAYS;DISTRIBUTION MAY DIFFER". Additionally, the statement "that bonds which have higher coupons have lower durations." is inaccurate since coupon and duration are independent, not interrelated in that manner.

Currently, Total Bond Market Index Admiral has an SEC yield of 2.89% and a duration of six years, and Intermediate-Term Tax-Exempt Admiral has an SEC yield of 2.09% and a duration of five years. This says that Total Bond Market Index will have 0.8% higher pre-tax returns if rates do not change, or if rates change by comparable amounts, as long as defaults in the two funds are both extremely low. It says nothing of the sort, again SEC Yield is as Vanguard defines it and has no relation to the purchase price of the bond and it's subsequent yield.

(The unequal duration means that this is not quite correct. If the yields on both funds rise by 0,8% next year, the returns will be equal because Total Bond Market will lose 0.8% more of value. You are speculating on the future direction of yields. However, investors do not expect the yields to do that, as that would give both funds negative returns for one year, and investors do not buy bonds which they expect will have negative returns.) Negative returns of what? SEC? Distribution? NAV? As an example High Yield has had a negative NAV change in quite a few years but still performs well on an overall basis based on it's total annual return as computed, distribution adding NAV change.

Given the longer duration of Total Bond Market Index, the 27% tax rate that makes the two equal after tax is not quite a fair comparison; I recommend the muni fund to investors in a 24% bracket and consider them equally good in a 22% bracket, as if a taxable fund of comparable duration and risk had a 2.69% yield. You are comparing apples and oranges as if they were the same and drawing conclusions from that which have been shown to be historically inaccurate.

But the OP pays 6.33% tax on Vanguard Intermediate-Term Tax-Exempt, and 18.33% on Total Bond Market Index. At that rate, taxable bond rates would have to rise much more than muni rates for the muni fund to be better, and I have no reason to expect that. Therefore he gets 12% more with the muni and we don't have to wait to see if what you expect will actually ever happen.
I'm going to go with Vanguard's definition of SEC Yield and understand that not only can it differ, but it does differ and has differed significantly since I started tracking it's distribution yield when I first bought it in 2011. You are going to assume the funds distribution yield will match it's SEC Yield and that hasn't happened for the last 8+ years so I have no expectation of that revision happening currently.

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Re: VCLT, BND or 0ther

Post by grabiner » Thu May 16, 2019 12:35 am

midareff wrote:
Wed May 15, 2019 6:54 am
(midareff's quotes in color, grabiner's in black)
I looked up the previous discussion, and I think you are referring to this thread in which there is a discussion of the difference between SEC and distribution yield. The muni fund has had a higher distribution yield than its SEC yield, which happens when bond prices have risen (and yields have fallen) after the fund bought its bonds. Or the bonds were purchased at a discount to face value, or other factors such as a possible change in credit worthiness changed the actual resale value vs. face value, or other factors. It's not just what you wrote, there are other scenarios.
I checked IRS Publication 550, and your discount situation is not correct. If a bond is purchased at a premium or discount, you may amortize the premium or discount with the interest income when reporting your taxes. For taxable bonds, you want to amortize the premium to reduce your taxes (as otherwise you would pay more tax on ordinary income and have a capital loss when you sold); for munis, you are required to amortize the premium so that you cannot get tax-exempt income and a capital loss. If a bond is purchased at a discount, you are not required to amortize the discount, but if you do not amortize, you still pay ordinary income tax on the market discount when you sell the bond (or it matures); you cannot take advantage over the capital gains. (I don't hold individual bonds; please correct me if I have misundertood the publicaiton rules.)

A mutual fund distributes the actual taxable (or tax-exempt) distribution, rather than the coupon. Thus I would expect a mutual fund to amortize the premiums and discounts on bonds, as this is likely to be to the advantage of the fundholders.

But if you continue to hold a bond, the taxable distribution does not change when the bond price changes. If the price on a bond increases above the amortization, the yield on that bond declines. This may be the result of the bond being upgraded, or of the bond remaining at the same quality but the rates on that type of bond falling. (The second is what happened to Vanguard's muni funds; I don't think most of the munis were upgraded, but muni rates have fallen recently.)

The discussion on future expected returns isn't really relevant to this thread, and it turns out to be interesting for other reasons (the future expected returns of a fund should be higher than the SEC yield), so I started a new thread: Expected return of a bond fund; please follow up there.
Wiki David Grabiner

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midareff
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Re: VCLT, BND or 0ther

Post by midareff » Thu May 16, 2019 7:15 am

grabiner wrote:
Thu May 16, 2019 12:35 am
midareff wrote:
Wed May 15, 2019 6:54 am
(midareff's quotes in color, grabiner's in black)
I looked up the previous discussion, and I think you are referring to this thread in which there is a discussion of the difference between SEC and distribution yield. The muni fund has had a higher distribution yield than its SEC yield, which happens when bond prices have risen (and yields have fallen) after the fund bought its bonds. Or the bonds were purchased at a discount to face value, or other factors such as a possible change in credit worthiness changed the actual resale value vs. face value, or other factors. It's not just what you wrote, there are other scenarios.
I checked IRS Publication 550, and your discount situation is not correct. If a bond is purchased at a premium or discount, you may amortize the premium or discount with the interest income when reporting your taxes. For taxable bonds, you want to amortize the premium to reduce your taxes (as otherwise you would pay more tax on ordinary income and have a capital loss when you sold); for munis, you are required to amortize the premium so that you cannot get tax-exempt income and a capital loss. If a bond is purchased at a discount, you are not required to amortize the discount, but if you do not amortize, you still pay ordinary income tax on the market discount when you sell the bond (or it matures); you cannot take advantage over the capital gains. (I don't hold individual bonds; please correct me if I have misundertood the publicaiton rules.)
Any internal gain or loss of the find is reflected in the bond funds year over year total performance as reported by Vanguard and reported by M*. It changes the actual reported past performance of these funds not at all, and changes the scenario I presented as having more variables then those you presented not at all as well. Additionally, having owned VWIUX for the last 8 years I can tell you it has not distributed a capital gain or loss in that period. What is more interesting is the recent article in which it was discussed Vanguards ability to wash such gains through ETF usage. Did you see or read it?

A mutual fund distributes the actual taxable (or tax-exempt) distribution, rather than the coupon. Thus I would expect a mutual fund to amortize the premiums and discounts on bonds, as this is likely to be to the advantage of the fundholders.
Agreed

But if you continue to hold a bond, the taxable (or non-taxable) distribution does not change when the bond price changes. Yes, but what does change is the percentage distribution yield which, as stated earlier and by Vanguard, may vary from the SEC yield. If the price on a bond increases above the amortization, the yield on that bond declines. This may be the result of the bond being upgraded, or of the bond remaining at the same quality but the rates on that type of bond falling. (The second is what happened to Vanguard's muni funds; I don't think most of the munis were upgraded, but muni rates have fallen recently.) Muni rates may have fallen but the distribution yield has remained relatively constant.

The discussion on future expected returns isn't really relevant to this thread, and it turns out to be interesting for other reasons (the future expected returns of a fund should be higher than the SEC yield), so I started a new thread: Expected return of a bond fund; please follow up there. and exactly why do you consider it irrelevant to this thread?... are we to assume the OP doesn't want a return on his money?

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