Bond Strategy in a low interest rate environment: BND vs. BIV

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xerxes101
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Joined: Sat Oct 14, 2017 11:25 am

Bond Strategy in a low interest rate environment: BND vs. BIV

Post by xerxes101 »

I need to do a major rebalance of the bond portion of my portfolio, and I have a strategy question for the smart people on this forum.

I am a fan of the 3-fund portfolio so normally BND (Vanguard total bond market ETF) is my go-to ETF, but doesn't it make more sense to go with BIV (Vanguard intermediate term bond ETF) in this low interest rate environment? Why or why not? What are pros and cons do you think?

Let me tell you about the data points that I have been looking at: Effective duration between the two ETFs don't seem to be that different BND: 6.45 years vs. BIV: 6.48 years, but BIV has a 3 year average return of 4.05% vs 3.39% for BND (data courtesy of Morningstar) . When I talked to a Vanguard representative, he mentioned another factor that comes to play which I had never thought about. The appreciation / yield of these bonds are also impacted by Treasury purchases. In other words Treasury could impact the yield of these bonds by creating extra demand....OK maybe I am overthinking this :D
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anon_investor
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Re: Bond Strategy in a low interest rate environment: BND vs. BIV

Post by anon_investor »

xerxes101 wrote: Thu Aug 06, 2020 1:13 pm I need to do a major rebalance of the bond portion of my portfolio, and I have a strategy question for the smart people on this forum.

I am a fan of the 3-fund portfolio so normally BND (Vanguard total bond market ETF) is my go-to ETF, but doesn't it make more sense to go with BIV (Vanguard intermediate term bond ETF) in this low interest rate environment? Why or why not? What are pros and cons do you think?

Let me tell you about the data points that I have been looking at: Effective duration between the two ETFs don't seem to be that different BND: 6.45 years vs. BIV: 6.48 years, but BIV has a 3 year average return of 4.05% vs 3.39% for BND (data courtesy of Morningstar) . When I talked to a Vanguard representative, he mentioned another factor that comes to play which I had never thought about. The appreciation / yield of these bonds are also impacted by Treasury purchases. In other words Treasury could impact the yield of these bonds by creating extra demand....OK maybe I am overthinking this :D
You are overthinking this. BND and BIV will have a very similar return long term. This is like arguing about Total Stock Market and S&P500. BND and BIV are considered by many as tax loss harvest partners because of their very similar returns.
friar1610
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Re: Bond Strategy in a low interest rate environment: BND vs. BIV

Post by friar1610 »

I'm sure smarter people than I will weigh in, but I have debated that choice with myself over the years. The bottom line is that BIV has a greater percentage of corporate bonds (about 50%) vs. BND which has about 1/3. So BIV is a tad riskier, accounting for the marginally higher historic yield. BND also has government mortgage-backed securities which I believe BIV doesn't have. Some Bogleheads seem not to like those.

I've often seen posts by Taylor Larimore in which he makes the point that any medium-term, diversified bond fund is about as good as any other over the long run. Either of these funds would certainly qualify by that criterion.

I've personally decided that in this interest-rate environment my needs for yield are not so great that I'm going to do anything exotic (which the switch you're talking about certainly isn't) so I'll just suck it up. Of course, others may feel different or have different needs..
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BigJohn
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Re: Bond Strategy in a low interest rate environment: BND vs. BIV

Post by BigJohn »

I debated this exact choice with myself years ago when I setup my portfolio after retirement. Ultimately I went with IT Bond Index for two reasons. I liked the more constant ratio of treasuries to corporates (BND moves over time with the market) and I didn't like the mortgage backed component of BND. But I honestly think its a coin flip and over the long haul there will be no meaningful difference.
dbr
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Re: Bond Strategy in a low interest rate environment: BND vs. BIV

Post by dbr »

Why or why not -- no reason at all either way. Don't waste your time worrying about it. If you need more return and can fit the risk into a thought out scheme of need, ability, and willingness to take risk, then allocate more to stocks. Otherwise take your lumps because life is not always a bowl of cherries but rather just pits.
Redlion
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Re: Bond Strategy in a low interest rate environment: BND vs. BIV

Post by Redlion »

There is no need to time the Bond market, Back in March quite a few people on this site were selling there Equities as a result of the Pandemic.
Topic Author
xerxes101
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Joined: Sat Oct 14, 2017 11:25 am

Re: Bond Strategy in a low interest rate environment: BND vs. BIV

Post by xerxes101 »

Redlion wrote: Thu Aug 06, 2020 3:53 pm There is no need to time the Bond market, Back in March quite a few people on this site were selling there Equities as a result of the Pandemic.
My intention was not really to time the bond market. Rather, it is time for me to rebalance the portfolio, and was revisiting the merits between the choices, namely BND and BIV.
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