Help me understand these two funds.

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Help me understand these two funds.

Post by coffeeblack » Mon Jan 13, 2020 9:29 pm

VFITX (total intermediate bond fund) has a 5.53% return average since inception and a 6.29% return for one year.

VWITX (intermediate Mini federal tax exempt) has a 5.35% return since inception and 6.78 return for one year. There is no federal tax and the returns seem close.

So why would one not get VWITX over VFITX as part of their bond portfolio?

Which one is safer?

What would your effective tax rate have to be to consider VWITX over the other?

Any other information that would be helpful.

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Joined: Mon Nov 04, 2019 7:55 pm

Re: Help me understand these two funds.

Post by annu » Mon Jan 13, 2020 9:49 pm

The ostensible reason to invest in tax-exempt municipal bonds is if your tax bracket is high enough that the Tax Equivalent Yield or TEY (the yield you have to earn on a taxable bond to get the same yield after taxes as you get from the munis) is better than what you’d get from taxable bonds.
So with someone in 24% willneorm like below( check for latest sec yield numbers, below is what I have saved)
You can calculate TEY pretty easily: it’s just <muni yield> / (1 - <marginal tax rate>).

Per Vanguard, VTEB has a 30 day SEC yield of 1.65% so your TEY is 0.0165 / (1 - 0.24) = 0.0217 or 2.17%

BND’s 30 day SEC yield (again per Vanguard) is 2.26%, which is clearly better.

So no, you shouldn’t invest in munis as there’s no advantage to it at your tax bracket.

Generally you need to be in a high tax bracket for investing in municipal bond funds to make sense vs taxable bond funds. And even then, investing in munis vs a total bond fund has the downside of lowering your diversification.

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Re: Help me understand these two funds.

Post by Geologist » Mon Jan 13, 2020 10:01 pm

First, VFITX is NOT the Total Intermediate Bond fund but the Intermediate-Term Treasury Fund.

Second, the two funds don’t have the same inception date (the dates are about 14 years apart) so that their returns since inception should not be compared. The closeness is merely coincidental.

One year return tells you very little.

The Treasury fund is safer and is exempt from state taxes.

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