Muni Bond Funds for Taxable Account

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jameswg
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Joined: Sat Sep 19, 2020 9:07 am

Muni Bond Funds for Taxable Account

Post by jameswg »

Hello, I recently read The Bogleheads Guide to Investing and highly recommend to anyone who has not read it. I'm working on an IPS and would like some input on selecting a bond fund for my taxable acct. A little background. 41 yrs old, married, 2 kids middle school ages, both wife and I work and are blessed with very stable high earning jobs. Have approx 600K in tax-advantage retirement accts, 120K 529, 50K cash EF, and 450K taxable brokerage. We continue to max 401K contributions and put 3-5K per child into 529 each year.

For the retirement accts, AA is 80/20 and invested in VTI 65%, VXUS 15%, BND 15%, BNDX 5% where possible, company 401Ks(about 80K total) are 100% SP500 index fund available at those providers.

For $450K taxable, my risk tolerance and quite frankly lack of specific goal for this money is such that AA is 60/40, with 50% VTI, 10% VXUS but I'm struggling with what to do with the 40% bonds. These Muni Bond ETFs look attractive: VTEB and MUB but with some recent chatter on state bankruptcy blah blah are these funds higher risk than say BND, BNDX?

Thanks in advance for the replies!
theorist
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Joined: Sat Sep 28, 2019 11:39 am

Re: Muni Bond Funds for Taxable Account

Post by theorist »

jameswg wrote: Sat Sep 19, 2020 11:09 am Hello, I recently read The Bogleheads Guide to Investing and highly recommend to anyone who has not read it. I'm working on an IPS and would like some input on selecting a bond fund for my taxable acct. A little background. 41 yrs old, married, 2 kids middle school ages, both wife and I work and are blessed with very stable high earning jobs. Have approx 600K in tax-advantage retirement accts, 120K 529, 50K cash EF, and 450K taxable brokerage. We continue to max 401K contributions and put 3-5K per child into 529 each year.

For the retirement accts, AA is 80/20 and invested in VTI 65%, VXUS 15%, BND 15%, BNDX 5% where possible, company 401Ks(about 80K total) are 100% SP500 index fund available at those providers.

For $450K taxable, my risk tolerance and quite frankly lack of specific goal for this money is such that AA is 60/40, with 50% VTI, 10% VXUS but I'm struggling with what to do with the 40% bonds. These Muni Bond ETFs look attractive: VTEB and MUB but with some recent chatter on state bankruptcy blah blah are these funds higher risk than say BND, BNDX?

Thanks in advance for the replies!
A glance at the portfolio holdings of VTEB tells me that it holds high quality bonds (mostly AA with some AAA and A), and is of average risk for a high quality muni bond fund. It briefly fell a few percent during the rapid drawdown starting in March, if that would panic you, keep it in mind.

A suggestion: since you mention high earnings, you may want to look into state specific muni bond funds, if you live in a state with high state income tax. I live in CA and use Vanguard California Intermediate-Term Tax-Exempt for some of my muni bonds in a taxable account.
Topic Author
jameswg
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Joined: Sat Sep 19, 2020 9:07 am

Re: Muni Bond Funds for Taxable Account

Post by jameswg »

Thank you, State is Wisconsin, about 7.5% state tax. I’ll see if any state specific funds exist but I’d worry they are too small and feel more comfortable with a big liquidity fund like VTEB or MUB with 8-10 Billion or assets.
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Artsdoctor
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Re: Muni Bond Funds for Taxable Account

Post by Artsdoctor »

Interest rates are extremely low right now and they may remain low for a long time. However, you might eventually want to take advantage of NAV declines in the future if/when rates go up. There are some peculiarities regarding tax-loss harvesting shares of tax-exempt funds/ETFs that you'll want to familiarize yourself with:

https://www.bogleheads.org/wiki/Tax_loss_harvesting

Personally, I like keeping things as simple as possible so I only invest in tax-exempt funds which accumulate dividends on a daily basis, and not a monthly basis. It's just easier to not have to deal with the "6-month rule" which I find burdensome. If you have access to Vanguard mutual funds and not just ETFs, you might consider the tax-exempt intermediate-term fund (VWIUX).
retiredjg
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Re: Muni Bond Funds for Taxable Account

Post by retiredjg »

I'd suggest that you hold most or all your bonds in the tax-deferred accounts.

There is a place for tax-exempt bond funds, but they are not just an automatic exchange/plug-in for funds composed of taxable bonds. They (the munis) are somewhat less diversified and tend to be riskier.

They are appropriate for people who choose to or must hold bonds in a taxable account, but that would not be my first choice if I had space in the tax-deferred accounts.
qjoe
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Re: Muni Bond Funds for Taxable Account

Post by qjoe »

retiredjg wrote: Sat Sep 19, 2020 5:07 pm I'd suggest that you hold most or all your bonds in the tax-deferred accounts.

There is a place for tax-exempt bond funds, but they are not just an automatic exchange/plug-in for funds composed of taxable bonds. They (the munis) are somewhat less diversified and tend to be riskier.

They are appropriate for people who choose to or must hold bonds in a taxable account, but that would not be my first choice if I had space in the tax-deferred accounts.
I've seen this suggested often but my issue is I don't have a good bond option in my 401k.
retiredjg
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Re: Muni Bond Funds for Taxable Account

Post by retiredjg »

qjoe, every fund in your portfolio does not have to be just perfect. Sometimes you just need to use something that is not optimal. And frequently, we find that people's choices are not nearly as bad as they thought.

If you want help with that, you should start a thread about your bond choices.
Topic Author
jameswg
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Re: Muni Bond Funds for Taxable Account

Post by jameswg »

Artsdoctor wrote: Sat Sep 19, 2020 5:04 pm Interest rates are extremely low right now and they may remain low for a long time. However, you might eventually want to take advantage of NAV declines in the future if/when rates go up. There are some peculiarities regarding tax-loss harvesting shares of tax-exempt funds/ETFs that you'll want to familiarize yourself with:

https://www.bogleheads.org/wiki/Tax_loss_harvesting

Personally, I like keeping things as simple as possible so I only invest in tax-exempt funds which accumulate dividends on a daily basis, and not a monthly basis. It's just easier to not have to deal with the "6-month rule" which I find burdensome. If you have access to Vanguard mutual funds and not just ETFs, you might consider the tax-exempt intermediate-term fund (VWIUX).
@Artsdoctor thank you such much for the info. VWIUX appears to be an excellent fit for me. Also, thanks for pointing out the interesting tax loss harvesting differences between ETFs and the mutual funds and why in this case the mutual VWIUX is better than an ETF.

I dont quite follow you on the "you might eventually want to take advantage of NAV declines in the future if/when rates go up". Can you provide more detail on how to monitor this and take advantage of it?
hudson
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Re: Muni Bond Funds for Taxable Account

Post by hudson »

Jameswg,
I agree that Vanguard Intermediate Muni, VWIUX beats VTEB and MUB if you ever want to tax loss harvest.
Baird's intermediate muni has a higher expense ratio; I have no idea if it's daily accrual or not....but the holdings are higher quality than VWIUX....AAA/AA/prefunded.
For now, I like VWIUX better because it pays out more.
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Stinky
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Re: Muni Bond Funds for Taxable Account

Post by Stinky »

qjoe wrote: Sat Sep 19, 2020 5:26 pm
retiredjg wrote: Sat Sep 19, 2020 5:07 pm I'd suggest that you hold most or all your bonds in the tax-deferred accounts.

There is a place for tax-exempt bond funds, but they are not just an automatic exchange/plug-in for funds composed of taxable bonds. They (the munis) are somewhat less diversified and tend to be riskier.

They are appropriate for people who choose to or must hold bonds in a taxable account, but that would not be my first choice if I had space in the tax-deferred accounts.
I've seen this suggested often but my issue is I don't have a good bond option in my 401k.
Do you have a stable value option in your 401(k)? If so, many folks would see that as a good bond alternative.
It's a GREAT day to be alive - Travis Tritt
Robert20
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Re: Muni Bond Funds for Taxable Account

Post by Robert20 »

so is VTEB good to hold extra money instead of banks?
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Artsdoctor
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Re: Muni Bond Funds for Taxable Account

Post by Artsdoctor »

jameswg wrote: Sun Sep 20, 2020 6:59 am
Artsdoctor wrote: Sat Sep 19, 2020 5:04 pm Interest rates are extremely low right now and they may remain low for a long time. However, you might eventually want to take advantage of NAV declines in the future if/when rates go up. There are some peculiarities regarding tax-loss harvesting shares of tax-exempt funds/ETFs that you'll want to familiarize yourself with:

https://www.bogleheads.org/wiki/Tax_loss_harvesting

Personally, I like keeping things as simple as possible so I only invest in tax-exempt funds which accumulate dividends on a daily basis, and not a monthly basis. It's just easier to not have to deal with the "6-month rule" which I find burdensome. If you have access to Vanguard mutual funds and not just ETFs, you might consider the tax-exempt intermediate-term fund (VWIUX).
@Artsdoctor thank you such much for the info. VWIUX appears to be an excellent fit for me. Also, thanks for pointing out the interesting tax loss harvesting differences between ETFs and the mutual funds and why in this case the mutual VWIUX is better than an ETF.

I dont quite follow you on the "you might eventually want to take advantage of NAV declines in the future if/when rates go up". Can you provide more detail on how to monitor this and take advantage of it?
There's no possible way to know how long interest rates will remain this low. However, rates are SO low right now that they will most likely increase at some point in the future and when they do, the NAV of the fund will decrease (as rights go up, the NAV will fall). Without getting into a discussion of duration and attempted calculations, the point is that eventually, you may choose to switch out shares of the fund which have fallen in value for something that is "similar but not identical." Spend some time reading up on tax-loss harvesting and you'll see what I mean. But in the meantime, consider starting with VWIUX because it's a fine fund, it's huge, the cost is extremely low, and you can use it to compare all other tax-exempt funds to.
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txaggie
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Re: Muni Bond Funds for Taxable Account

Post by txaggie »

theorist wrote: Sat Sep 19, 2020 11:41 am
jameswg wrote: Sat Sep 19, 2020 11:09 am Hello, I recently read The Bogleheads Guide to Investing and highly recommend to anyone who has not read it. I'm working on an IPS and would like some input on selecting a bond fund for my taxable acct. A little background. 41 yrs old, married, 2 kids middle school ages, both wife and I work and are blessed with very stable high earning jobs. Have approx 600K in tax-advantage retirement accts, 120K 529, 50K cash EF, and 450K taxable brokerage. We continue to max 401K contributions and put 3-5K per child into 529 each year.

For the retirement accts, AA is 80/20 and invested in VTI 65%, VXUS 15%, BND 15%, BNDX 5% where possible, company 401Ks(about 80K total) are 100% SP500 index fund available at those providers.

For $450K taxable, my risk tolerance and quite frankly lack of specific goal for this money is such that AA is 60/40, with 50% VTI, 10% VXUS but I'm struggling with what to do with the 40% bonds. These Muni Bond ETFs look attractive: VTEB and MUB but with some recent chatter on state bankruptcy blah blah are these funds higher risk than say BND, BNDX?

Thanks in advance for the replies!
A glance at the portfolio holdings of VTEB tells me that it holds high quality bonds (mostly AA with some AAA and A), and is of average risk for a high quality muni bond fund. It briefly fell a few percent during the rapid drawdown starting in March, if that would panic you, keep it in mind.

A suggestion: since you mention high earnings, you may want to look into state specific muni bond funds, if you live in a state with high state income tax. I live in CA and use Vanguard California Intermediate-Term Tax-Exempt for some of my muni bonds in a taxable account.
VTEB fell by more than a few percent in March. It fell 20.59% from its high on March 9th to its low on March 19th.
qjoe
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Re: Muni Bond Funds for Taxable Account

Post by qjoe »

Stinky wrote: Sun Sep 20, 2020 8:50 am
qjoe wrote: Sat Sep 19, 2020 5:26 pm
retiredjg wrote: Sat Sep 19, 2020 5:07 pm I'd suggest that you hold most or all your bonds in the tax-deferred accounts.

There is a place for tax-exempt bond funds, but they are not just an automatic exchange/plug-in for funds composed of taxable bonds. They (the munis) are somewhat less diversified and tend to be riskier.

They are appropriate for people who choose to or must hold bonds in a taxable account, but that would not be my first choice if I had space in the tax-deferred accounts.
I've seen this suggested often but my issue is I don't have a good bond option in my 401k.
Do you have a stable value option in your 401(k)? If so, many folks would see that as a good bond alternative.
retiredjg wrote: Sat Sep 19, 2020 5:45 pm qjoe, every fund in your portfolio does not have to be just perfect. Sometimes you just need to use something that is not optimal. And frequently, we find that people's choices are not nearly as bad as they thought.

If you want help with that, you should start a thread about your bond choices.
Thanks for the replies. I decided to recheck what bond options are in my 401k. Currently I am 100% VFIAX in my 401k and my bond allocation is VWITX in my taxable.

Bond choices in my 401k are
NHILX
OIBAX

And the majority of the rest of the options are Black Rock lifepath index. I would probably use LIKAX. I was also looking to add some international so maybe this could work.

Maybe time to reevaluate.
jameswg wrote: Sat Sep 19, 2020 11:09 am Hello, I recently read The Bogleheads Guide to Investing and highly recommend to anyone who has not read it. I'm working on an IPS and would like some input on selecting a bond fund for my taxable acct. A little background. 41 yrs old, married, 2 kids middle school ages, both wife and I work and are blessed with very stable high earning jobs. Have approx 600K in tax-advantage retirement accts, 120K 529, 50K cash EF, and 450K taxable brokerage. We continue to max 401K contributions and put 3-5K per child into 529 each year.

For the retirement accts, AA is 80/20 and invested in VTI 65%, VXUS 15%, BND 15%, BNDX 5% where possible, company 401Ks(about 80K total) are 100% SP500 index fund available at those providers.

For $450K taxable, my risk tolerance and quite frankly lack of specific goal for this money is such that AA is 60/40, with 50% VTI, 10% VXUS but I'm struggling with what to do with the 40% bonds. These Muni Bond ETFs look attractive: VTEB and MUB but with some recent chatter on state bankruptcy blah blah are these funds higher risk than say BND, BNDX?

Thanks in advance for the replies!
And sorry to hijack your thread but this is a great question I have thought about often. :sharebeer
UpperNwGuy
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Re: Muni Bond Funds for Taxable Account

Post by UpperNwGuy »

txaggie wrote: Sun Sep 20, 2020 9:43 am VTEB fell by more than a few percent in March. It fell 20.59% from its high on March 9th to its low on March 19th.
And what happened after March 19th?
hudson
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Re: Muni Bond Funds for Taxable Account

Post by hudson »

Robert20 wrote: Sun Sep 20, 2020 8:53 am so is VTEB good to hold extra money instead of banks?
Robert20,
It's not as safe as a federally guaranteed bank or credit union.
It's not as safe as a treasury fund.
It may or may not be safer than an investment grade corporate fund. I vote that it's safer...but that's just my opinion.
It depends how safe you want your investments to be.

Bill Bernstein would say... viewtopic.php?p=5160087#p5160087
Robert20
Posts: 195
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Re: Muni Bond Funds for Taxable Account

Post by Robert20 »

hudson wrote: Sun Sep 20, 2020 10:28 am
Robert20 wrote: Sun Sep 20, 2020 8:53 am so is VTEB good to hold extra money instead of banks?
Robert20,
It's not as safe as a federally guaranteed bank or credit union.
It's not as safe as a treasury fund.
It may or may not be safer than an investment grade corporate fund. I vote that it's safer...but that's just my opinion.
It depends how safe you want your investments to be.

Bill Bernstein would say... viewtopic.php?p=5160087#p5160087
which treasury fund/ETF is worth investing?
sycamore
Posts: 1225
Joined: Tue May 08, 2018 12:06 pm

Re: Muni Bond Funds for Taxable Account

Post by sycamore »

Robert20 wrote: Sun Sep 20, 2020 10:56 am ...
which treasury fund/ETF is worth investing?
A very low-cost one. Vanguard has quite a few... short-term, intermediate-term, long-term, and active versus indexed. Pick one that best matches your time frame and whether prefer active management or lowest possible cost (go the index route).
hudson
Posts: 3257
Joined: Fri Apr 06, 2007 9:15 am

Re: Muni Bond Funds for Taxable Account

Post by hudson »

Robert20 wrote: Sun Sep 20, 2020 10:56 am
hudson wrote: Sun Sep 20, 2020 10:28 am
Robert20 wrote: Sun Sep 20, 2020 8:53 am so is VTEB good to hold extra money instead of banks?
Robert20,
It's not as safe as a federally guaranteed bank or credit union.
It's not as safe as a treasury fund.
It may or may not be safer than an investment grade corporate fund. I vote that it's safer...but that's just my opinion.
It depends how safe you want your investments to be.

Bill Bernstein would say... viewtopic.php?p=5160087#p5160087
which treasury fund/ETF is worth investing?
Robert20,
Have you read any Boglehead books?
maybe these 3? viewtopic.php?p=5372762#p5372762
Topic Author
jameswg
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Joined: Sat Sep 19, 2020 9:07 am

Re: Muni Bond Funds for Taxable Account

Post by jameswg »

Looks like the Vanguard Short-Term Tax-Exempt Fund VMSTX/VMSUX are extremely stable with 40 years of history. The long term VWLTX also looks pretty good. With interest rates very low and looking like they will be for a few years, which of these bond funds short, med, long make most sense. I remember reading that it takes X years for every 1% increase in rates for a bond fund to recover its principal value where X is the average duration of the fund.

So with this in mind does it make sense to ride the long term fund for a few years and then transition to med/short as rates rise? This kinda feels like market timing though so maybe just ride the intermediate and forget about it.

Thanks!
sycamore
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Re: Muni Bond Funds for Taxable Account

Post by sycamore »

jameswg wrote: Mon Sep 21, 2020 7:58 am Looks like the Vanguard Short-Term Tax-Exempt Fund VMSTX/VMSUX are extremely stable with 40 years of history. The long term VWLTX also looks pretty good. With interest rates very low and looking like they will be for a few years, which of these bond funds short, med, long make most sense. I remember reading that it takes X years for every 1% increase in rates for a bond fund to recover its principal value where X is the average duration of the fund.

So with this in mind does it make sense to ride the long term fund for a few years and then transition to med/short as rates rise? This kinda feels like market timing though so maybe just ride the intermediate and forget about it.

Thanks!
That would be market timing. How will you know when rates are about to rise? The Fed may make some kind of "signal" about the Federal Funds Rate or some other mechanism they control but that's no guarantee the market will react in a particular way. Even if the Fed doesn't change anything, maybe the economy gets worse/states' financial situations get worse so the market perceives munis as riskier and thus it demands a higher yield thus causing the muni prices to drop. Lots of different scenarios could play out.

It's reasonable to roughly align your bond fund duration with your expected spending horizon. If you need the money in a couple years, long term funds would not make sense. But for spending 20 years in the future, a long term makes sense. Some people appreciate that logic but they perceive the volatility (and potential losses) of long term as "too risky," leaving intermediate term as the "not too hot not too cold" choice.
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