Grabiner, community , help with OR muni fund choice vs vwiux

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annu
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Grabiner, community , help with OR muni fund choice vs vwiux

Post by annu » Tue Jan 14, 2020 1:55 am

I am in 35% bracket, in Oregon. I have vwiux but just found out about https://www.morningstar.com/funds/xnas/ortyx/quote
, it has sec yield of 1.8
It has a higher expense ratio of 0.550 compared to vwiux which is 0.09 https://investor.vanguard.com/mutual-fu ... view/vwiux which has sec yield of 1.54

I will like to invest in my taxable account, and since will get state tax benifit also considering OR state muni.

I see a management fee mentioned of .4, not sure but think it included in gross expense ratio of .550

I am new to muni, so looking for some help in taxable.

toblerone
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by toblerone » Tue Jan 14, 2020 2:13 am

annu wrote:
Tue Jan 14, 2020 1:55 am
I am in 35% bracket, in Oregon. I have vwiux but just found out about https://www.morningstar.com/funds/xnas/ortyx/quote
, it has sec yield of 1.8
It has a higher expense ratio of 0.550 compared to vwiux which is 0.09 https://investor.vanguard.com/mutual-fu ... view/vwiux which has sec yield of 1.54

I will like to invest in my taxable account, and since will get state tax benifit also considering OR state muni.

I see a management fee mentioned of .4, not sure but think it included in gross expense ratio of .550

I am new to muni, so looking for some help in taxable.
The management fee is included in the expense ratio. Since the expenses of VWIUX are so low, it is likely to beat any national muni with the same risk profile.
What matters to you is the risk difference and total return, after taxes. 1.8% vs 1.54%... what is your state tax rate?

Admiral
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by Admiral » Tue Jan 14, 2020 7:23 am

I would not hold a bond fund with a .55% expense ratio on general principle alone. The returns are low enough without giving money to the fund manager. Calculate out how much that ER will cost you in gains over 10-20 years. It's bad.

ofckrupke
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by ofckrupke » Tue Jan 14, 2020 10:17 am

The thing to realize is that for the OR fund to yield 1.8%, the underlying bond portfolio needs to have a collective yield of 1.8+0.55=2.35%. For the Vanguard fund it's 1.54+0.09 = 1.63%. The difference directly represents the market's opinion of the risk difference between the portfolios. (This can't be separated quantitatively into differences in term and credit risks, but inference can be drawn from duration and fraction of portfolio at each credit grade.)
A closer risk comparison (based on market judgement of underlying portfolio risks) ought to be had with Vanguard High-Yield Tax-Exempt VWALX (0.09%); with SEC yield at 2.28% the underlying portfolio yield is about 2.37%. Again the distribution of risk between term and credit might differ between this fund and the OR fund; but if the OP finds acceptable the differences in duration and graded credit makeup, expected return after OR taxation on VWALX is 2.075%, more than a quarter percent higher than the OR fund.

added: the above is the conventional wisdom. But it is strikingly inconsistent with Morningstar's information wrt the duration and graded credit composition (OR fund is both shorter duration and higher, maybe much higher, credit composition than VWALX - at least, according to Morningstar; from their view of the portfolio composition, the closest comparison really is to VWIUX). This bears further investigation before dismissal in favor of either Vanguard fund...

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grabiner
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by grabiner » Tue Jan 14, 2020 10:20 pm

ofckrupke wrote:
Tue Jan 14, 2020 10:17 am
The thing to realize is that for the OR fund to yield 1.8%, the underlying bond portfolio needs to have a collective yield of 1.8+0.55=2.35%. For the Vanguard fund it's 1.54+0.09 = 1.63%. The difference directly represents the market's opinion of the risk difference between the portfolios. (This can't be separated quantitatively into differences in term and credit risks, but inference can be drawn from duration and fraction of portfolio at each credit grade.)
A closer risk comparison (based on market judgement of underlying portfolio risks) ought to be had with Vanguard High-Yield Tax-Exempt VWALX (0.09%); with SEC yield at 2.28% the underlying portfolio yield is about 2.37%. Again the distribution of risk between term and credit might differ between this fund and the OR fund; but if the OP finds acceptable the differences in duration and graded credit makeup, expected return after OR taxation on VWALX is 2.075%, more than a quarter percent higher than the OR fund.

added: the above is the conventional wisdom. But it is strikingly inconsistent with Morningstar's information wrt the duration and graded credit composition (OR fund is both shorter duration and higher, maybe much higher, credit composition than VWALX - at least, according to Morningstar; from their view of the portfolio composition, the closest comparison really is to VWIUX). This bears further investigation before dismissal in favor of either Vanguard fund...
Normally, in a situation like this, I would trust the market more than either Morningstar or the bond rating agencies. Here, I am suspicious of the yield number; is Morningstar reporting a distribution yield rather than an SEC yield, or computing things differently for callable bonds? Charting the Aquila fund against Vanguard Intermediate-Term Tax-Exempt, I see that they show almost exactly the same declines in down markets (including 2008, when medium-quality bonds lost more than low-quality bonds), and the Vanguard fund has a slow but extremely steady outperformance; this is what I would expect for two funds holding bonds of similar quality with different expenses.
Wiki David Grabiner

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annu
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by annu » Tue Jan 14, 2020 11:05 pm

grabiner wrote:
Tue Jan 14, 2020 10:20 pm
ofckrupke wrote:
Tue Jan 14, 2020 10:17 am
The thing to realize is that for the OR fund to yield 1.8%, the underlying bond portfolio needs to have a collective yield of 1.8+0.55=2.35%. For the Vanguard fund it's 1.54+0.09 = 1.63%. The difference directly represents the market's opinion of the risk difference between the portfolios. (This can't be separated quantitatively into differences in term and credit risks, but inference can be drawn from duration and fraction of portfolio at each credit grade.)
A closer risk comparison (based on market judgement of underlying portfolio risks) ought to be had with Vanguard High-Yield Tax-Exempt VWALX (0.09%); with SEC yield at 2.28% the underlying portfolio yield is about 2.37%. Again the distribution of risk between term and credit might differ between this fund and the OR fund; but if the OP finds acceptable the differences in duration and graded credit makeup, expected return after OR taxation on VWALX is 2.075%, more than a quarter percent higher than the OR fund.

added: the above is the conventional wisdom. But it is strikingly inconsistent with Morningstar's information wrt the duration and graded credit composition (OR fund is both shorter duration and higher, maybe much higher, credit composition than VWALX - at least, according to Morningstar; from their view of the portfolio composition, the closest comparison really is to VWIUX). This bears further investigation before dismissal in favor of either Vanguard fund...
Normally, in a situation like this, I would trust the market more than either Morningstar or the bond rating agencies. Here, I am suspicious of the yield number; is Morningstar reporting a distribution yield rather than an SEC yield, or computing things differently for callable bonds? Charting the Aquila fund against Vanguard Intermediate-Term Tax-Exempt, I see that they show almost exactly the same declines in down markets (including 2008, when medium-quality bonds lost more than low-quality bonds), and the Vanguard fund has a slow but extremely steady outperformance; this is what I would expect for two funds holding bonds of similar quality with different expenses.
I do see that fidelity has oregon bonds that I can buy directly, i see bonds that are fully backed, insured and investment grade as in bank qualified. What I see is coupon and rates, why is buying bonds directly not something I am able to find on boglehead, why pay someone a fee to manage them, if I just can invest into my state directly and with high level of safety/quality?

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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by grabiner » Tue Jan 14, 2020 11:12 pm

annu wrote:
Tue Jan 14, 2020 11:05 pm
I do see that fidelity has oregon bonds that I can buy directly, i see bonds that are fully backed, insured and investment grade as in bank qualified. What I see is coupon and rates, why is buying bonds directly not something I am able to find on boglehead, why pay someone a fee to manage them, if I just can invest into my state directly and with high level of safety/quality?
Buying state general-obligation bonds has relatively little diversification risk; if Oregon defaults on its general-obligation bonds, municipalities all over Oregon will have similar problems. Insured munis are almost as good, although you do have to deal with the credit risk of the insurer; the insurer will only default if a lot of bonds default.

The problem here is transaction costs, particularly if you need to sell bonds before maturity, because the muni market is less liquid. You can buy $10K of a muni mutual fund, and later sell the fund for $10K if bond prices haven't changed. If you buy $10K of individual munis, you might get only $9800 when you sell them even though you would have to pay $10K to buy more.
Wiki David Grabiner

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annu
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by annu » Wed Jan 15, 2020 3:13 am

Thanks a lot. This really helps. I think I will stick to vwiux. One last question.
Is below correct?

You can calculate TEY pretty easily: it’s just <muni yield> / (1 - <marginal tax rate>).

Per Vanguard, VWIUX has a 30 day SEC yield of 1.53% so your TEY is 0.0153/ (1 - 0.35)= 2.35%

Since I am in Oregon, I dont get any other benifit. So if I have bond fund in taxable, with yield better then that I should go for it, even when it is not muni?

I am not sure if amt or niit will come into picture here and if they do, niit of 3.8 for e.g do you do below then?
Tey is 00.0153/ (1-0.35-.038)=2.5

If that is true, I could get better returns with a CD offering more than 2.5...I am not worried about selling selling right away or within 5 to 7 years, a normal period for many of the cds offering high rates as well.

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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by dratkinson » Wed Jan 15, 2020 6:38 am

Been there, done that. I rejected an Aquila single-state muni fund because of what I read in the prospectus. Don't remember why: load, leverage, large AMT exposure,....

Due diligence requires that you read the prospectus, and understand what you read. (See below*.)

The management fee has already been subtracted from SEC yield.

Don't believe any load is subtracted from SEC yield. (Don't recall seeing "load" mentioned in SEC yield calculation.)



Before going the individual muni bond route, should read:
--Swedroe's book, The Only Guide to a Winning Bond Strategy You'll Ever Need.
--And find his forum/internet posts describing how his firm selects individual muni bonds for its clients. * Pay special attention to the characteristics of individual bonds culled by Swedroe's firm; you'll want to cull funds possessing similar characteristics.

Insured bonds. In 2008, I owned a Vanguard insured muni fund. Vanguard merged it into another muni fund. This was during the time when many insurance companies were in trouble; I assumed the two events were related. So insurance might not mean much during a financial crisis if the insurer is also in trouble.



Disclosure. After reading Swedroe's book, I decided I didn't want the hassle of managing individual bonds. Let a fund manager do that.

All I wanted to do was: watch muni funds pay dividends, rebalance into them, report them on my taxes, and maybe TLH them. Period.

The urge to reach for additional yield wanted to be scratched.

While not recommended, I already owned VWLTX/VWLUX (LT national muni fund).

But I wanted to find an acceptable single-state muni fund to reach for more risk/reward. I posted my due diligence search for it here: viewtopic.php?t=197966

I found a small one with an ER of .65%---not unreasonable for a small fund. The TEY first-look, and simulated tax returns produced by Excel1040.com as a second-look, suggested it would be acceptable. It also passed all of my other due diligence steps. So far, so good.

Bonds are reported to lose 5-15% during a market correction. I’ve learned I can withstand a temporary 15% paper loss. But just to be sure, I over-fund the munis in my extended EF tier to 120% (=1/(1-.15)) of anticipated need. And stopped worrying.

I did TLH both VWLUX and my single-state muni in 2018. Enjoyed my tax deduction. Have rebalanced only into the single-state muni since to target a 50/50 allocation to national/single-state munis.

When comparing bond funds, I use TBM as the standard. If I can’t get a little more risk/reward than TBM, then why bother? Just use TBM.

So far, all HY muni funds have been a bridge too far when compared to VWLUX and my single-state muni funds---too little extra return (<1% additional after-tax income as reported by Excel1040 simulated tax returns), and too much extra risk.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

ofckrupke
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by ofckrupke » Wed Jan 15, 2020 10:52 am

annu wrote:
Wed Jan 15, 2020 3:13 am
Thanks a lot. This really helps. I think I will stick to vwiux. One last question.
Is below correct?

You can calculate TEY pretty easily: it’s just <muni yield> / (1 - <marginal tax rate>).
Personally I've always found it easier to just apply the relevant rates of taxation to each investment vehicle's pre-tax return and compare the post-tax numbers. Resorting to TEY has always seemed more like salesperson inflationism.

So VWIUX would be 1.53% * (1-0.09) = 1.39% (unless you are in the 10% OR bracket)
ORTYX would be 1.76% (as of 1/14/20, from the Aquilafunds web site)
VBTLX would be 2.22% * (1-0.35-0.09-0.038)= 1.16% (for a 35% bracket Oregonian above the AGI threshold for NIIT - SALT capped, of course)

The 3.8% NIIT taxability or exemption of an item of income matches that of the regular federal tax. So tax exempt muni bond interest, and interest dividends from tax-exempt bonds in mutual funds, are exempt from NIIT. A marginal dollar of capital gain or loss from sale of a muni bond or muni bond fund, or from a CG distribution by such a fund, is subject to NIIT to the extent that, floating atop other income, it falls above the pertinent AGI threshold.

EddyB
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Re: Grabiner, community , help with OR muni fund choice vs vwiux

Post by EddyB » Wed Jan 15, 2020 11:12 am

dratkinson wrote:
Wed Jan 15, 2020 6:38 am
Been there, done that. I rejected an Aquila single-state muni fund because of what I read in the prospectus. Don't remember why: load, leverage, large AMT exposure,....

Due diligence requires that you read the prospectus, and understand what you read. (See below*.)

The management fee has already been subtracted from SEC yield.

Don't believe any load is subtracted from SEC yield. (Don't recall seeing "load" mentioned in SEC yield calculation.)



Before going the individual muni bond route, should read:
--Swedroe's book, The Only Guide to a Winning Bond Strategy You'll Ever Need.
--And find his forum/internet posts describing how his firm selects individual muni bonds for its clients. * Pay special attention to the characteristics of individual bonds culled by Swedroe's firm; you'll want to cull funds possessing similar characteristics.

Insured bonds. In 2008, I owned a Vanguard insured muni fund. Vanguard merged it into another muni fund. This was during the time when many insurance companies were in trouble; I assumed the two events were related. So insurance might not mean much during a financial crisis if the insurer is also in trouble.



Disclosure. After reading Swedroe's book, I decided I didn't want the hassle of managing individual bonds. Let a fund manager do that.

All I wanted to do was: watch muni funds pay dividends, rebalance into them, report them on my taxes, and maybe TLH them. Period.

The urge to reach for additional yield wanted to be scratched.

While not recommended, I already owned VWLTX/VWLUX (LT national muni fund).

But I wanted to find an acceptable single-state muni fund to reach for more risk/reward. I posted my due diligence search for it here: viewtopic.php?t=197966

I found a small one with an ER of .65%---not unreasonable for a small fund. The TEY first-look, and simulated tax returns produced by Excel1040.com as a second-look, suggested it would be acceptable. It also passed all of my other due diligence steps. So far, so good.

Bonds are reported to lose 5-15% during a market correction. I’ve learned I can withstand a temporary 15% paper loss. But just to be sure, I over-fund the munis in my extended EF tier to 120% (=1/(1-.15)) of anticipated need. And stopped worrying.

I did TLH both VWLUX and my single-state muni in 2018. Enjoyed my tax deduction. Have rebalanced only into the single-state muni since to target a 50/50 allocation to national/single-state munis.

When comparing bond funds, I use TBM as the standard. If I can’t get a little more risk/reward than TBM, then why bother? Just use TBM.

So far, all HY muni funds have been a bridge too far when compared to VWLUX and my single-state muni funds---too little extra return (<1% additional after-tax income as reported by Excel1040 simulated tax returns), and too much extra risk.
Also consider whether a treasury fund, taking into account the 10% tax avoided for an Oregon filer and the credit advantage of treasuries vs munis, makes that an attractive option for some uses. I have tried to leave the great majority of my bond fund holdings in my 401(k) (even as they have come to dominate that account) because I haven’t considered the muni fund offerings to be “worth it,” but I keep just a small allocation in treasury funds in a taxable account, as “sure thing” money.

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