Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

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miasma
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Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by miasma »

I'm considering moving most of my current savings that I have in cash (HYSA) to Taxable. I'm trying to determine which Municipal Bond Fund to select given my risk tolerance. Given that my investments are with Fidelity in fidelity funds, I'm primarily looking at Fidelity funds.

Some Background:
1. My Emergency Fund (~6 mo expenses) will remain in HYSA, this is just the remaining I have in cash that I've treated as a safety/FI portion of my portfolio.
2. I expect to use some of this cash (10-20% of it?) in the next 2 years (new car, other home improvement expenses), but otherwise likely won't use it for at least 5-10 (if not held until retirement)
3. Right now I hold bonds in 401k (US Total Bond - FXNAX), none in Roth or Taxable. 95% Equities / 5% Bonds total portfolio, 90%/10% just 401k. It's generally aggressive, but I've been comfortable with that given the cash in HYSA (Cash is about 10% of total portfolio if I added it into the portfolio)
4. I'm in a high tax bracket, living in MA with a 5% state tax rate, which is why i'm considering munis in taxable
5. Previously, HYSA and at one point a 1 year CD held pretty competitive rates, but with savings rate drops to 0.65, it feels like having this much in cash is just a waste.
6. I'm doing everything else right: maximizing 401k, backdoor roth, emergency fund, no debt 'cept low mortgage, low expense index funds in taxable

General questions:
1. Should I be looking at short-term, intermediate-term, or long-term funds?
2. Are state munis worth selecting over national for tax-free on state level?
3. How can I really judge volatility of the fund and what risk I'm willing to except?
4. Are munis just not the way to go here and I should really be considering another alternative?

Here are the funds I'm looking at:
Fidelity® Tax-Free Bond Fund (FTABX), National Long, ER: 0.25%, Avg Dur, 6yr, 30day Yield +1.54%, 3YR +4.17%
Fidelity® Intermediate Municipal Income Fund (FLTMX), National Inter, ER: 0.35%, Avg Dur 4.5yr, 30day Yield +0.91%, 3YR +3.52%
Fidelity® Limited Term Municipal Income Fund (FSTFX), National Short, ER: 0.37%, Avg Dur 2.7yr, 30day Yield +0.55%, 3 YR +2.41%
Fidelity® Massachusetts Municipal Income Fund (FDMMX), State Muni, ER: 0.45% Avg, 5.64yr, 30day Yield +1.00%, 3YR +3.49%

Given the above, I was thinking the intermediate national (FLTMX), but would FTABX still be quite low-risk for better gains?
sycamore
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by sycamore »

miasma wrote: Sat Sep 26, 2020 4:47 pm ...
General questions:
1. Should I be looking at short-term, intermediate-term, or long-term funds?
2. Are state munis worth selecting over national for tax-free on state level?
3. How can I really judge volatility of the fund and what risk I'm willing to except?
4. Are munis just not the way to go here and I should really be considering another alternative?

Here are the funds I'm looking at:
Fidelity® Tax-Free Bond Fund (FTABX), National Long, ER: 0.25%, Avg Dur, 6yr, 30day Yield +1.54%, 3YR +4.17%
Fidelity® Intermediate Municipal Income Fund (FLTMX), National Inter, ER: 0.35%, Avg Dur 4.5yr, 30day Yield +0.91%, 3YR +3.52%
Fidelity® Limited Term Municipal Income Fund (FSTFX), National Short, ER: 0.37%, Avg Dur 2.7yr, 30day Yield +0.55%, 3 YR +2.41%
Fidelity® Massachusetts Municipal Income Fund (FDMMX), State Muni, ER: 0.45% Avg, 5.64yr, 30day Yield +1.00%, 3YR +3.49%

Given the above, I was thinking the intermediate national (FLTMX), but would FTABX still be quite low-risk for better gains?
1. Pick a duration based on when you need the money for spending. Based on your goals, sounds like you might need some short, some intermediate, some long. Though many people are put off by long term due to its volatility, even though it might be the best choice given the time frame; they settle on intermediate as a compromise.

2. Calculate how much 5% is of the amount you have invested times the SEC yield. That’s how much the state muni is worth. Whether that is worth the risk is up to you. A common rule of thumb is no more than 50% in state munis.

3. You’ll know what risk you’re willing to accept when the sh** hits the fan :) Seriously though if you’re OK with 90/10 AA you’re obviously okay with high risk investments so don’t worry about it.

4. Munis are a reasonable option. Another option is Series EE Treasury Bonds. They pay a very low interest rate unless you hold at least 20 years, at which point they double in value (basically a 3.5% yield). But only use those if you can commit to holding for the long term. Worth some time looking into those.

Also, you posted the 3YR performance of the funds. I would just ignore them for the purposes of picking a fund; instead pick based on duration and state vs national and expense ratio. Take a look at the ETFs SUB and MUB and VTEB - they hold munis too (SUB is short term, the others intermediate) and have a lower expense ratio than the Fidelity funds.

Also co
CFM300
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by CFM300 »

miasma wrote: Sat Sep 26, 2020 4:47 pm General questions:
1. Should I be looking at short-term, intermediate-term, or long-term funds?
2. Are state munis worth selecting over national for tax-free on state level?
3. How can I really judge volatility of the fund and what risk I'm willing to except?
4. Are munis just not the way to go here and I should really be considering another alternative?
Go to Morningstar or Portfolio Visualizer and see how the funds you're considering performed during the March meltdown. The first one you list dropped nearly 8%.
UpperNwGuy
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by UpperNwGuy »

CFM300 wrote: Sat Sep 26, 2020 7:09 pm
miasma wrote: Sat Sep 26, 2020 4:47 pm General questions:
1. Should I be looking at short-term, intermediate-term, or long-term funds?
2. Are state munis worth selecting over national for tax-free on state level?
3. How can I really judge volatility of the fund and what risk I'm willing to except?
4. Are munis just not the way to go here and I should really be considering another alternative?
Go to Morningstar or Portfolio Visualizer and see how the funds you're considering performed during the March meltdown. The first one you list dropped nearly 8%.
But also look at how each fund performed during the recovery from the March meltdown, and look at how they have performed year to date.
am
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by am »

All the muni funds are yielding so low now that it’s not worth bearing the fluctuations. Stick with cash. At least you will keep your principal. We are not out of this mess yet and munis may still take a hit.
Topic Author
miasma
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by miasma »

Thanks, great advice here thus far. Looking at portfolio visualizer for comparing the funds was quite useful. Specifically looking at max drawdown (and historical drawdown periods) to test my risk tolerance as well as taking a look at different slices of returns look like such as good years and bad years.

It looks like returnwise it doesn't make that much sense to choose the state muni to avoid the state taxes.
Tattarrattat
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by Tattarrattat »

FMBIX, fid muni bond index
National intermediate
ER 0.07
Topic Author
miasma
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by miasma »

Tattarrattat wrote: Sat Sep 26, 2020 8:57 pm FMBIX, fid muni bond index
National intermediate
ER 0.07
Thanks for this one, I noticed it when researching before but it looks like it was introduced only a year ago. The ER is nice, but it seems to have a much larger turnover rate and larger swings than FLTMX. Any reason besides the ER to go for this one?
dbr
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by dbr »

If you have a 401k that can hold as much in bonds as you need overall, then you should not be holding munis at all. For long term investing intermediate term bonds in a 401k are a good long term holding you can just leave alone.

If you have more in cash in a savings account than you need as an emergency fund then it is likely the excess should be invested in stocks in your taxable account. If for some reason you would have to sell those stocks when they are down you can recover the status quo by selling bonds in your 401k and buying stocks in the 401k. Alternatively just stay where you are. While it is reasonable to set the amount of cash in an emergency fund as a number of dollars, that cash is also still fixed income that is a proportion of your assets and is already part of your "Taxable."

The point is to look at all investments as a whole.

It is also true that with near zero interest rates there are not a lot of tax driven incentives to jigger around what is invested in where.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by retiredjg »

miasma wrote: Sun Sep 27, 2020 12:04 am
Tattarrattat wrote: Sat Sep 26, 2020 8:57 pm FMBIX, fid muni bond index
National intermediate
ER 0.07
Thanks for this one, I noticed it when researching before but it looks like it was introduced only a year ago. The ER is nice, but it seems to have a much larger turnover rate and larger swings than FLTMX. Any reason besides the ER to go for this one?
Here's a guess. Fidelity has lagged Vanguard on having low cost bond funds for years. I think they are trying to fix that by introducing some lower cost bond index funds, something they have been woefully short on.

That could account for the fact this bond fund was introduced only a year ago. The higher turnover could be a result of being new. Bond funds tend to have turnover anyway (bonds in the fund mature and are replaced by other bonds) and I'm not sure that turnover is important in a tax-exempt investment anyway.

The bonds are high quality and the duration on the shorter side. If the fund suited my needs, I'd have no problem using this one.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by dbr »

retiredjg wrote: Sun Sep 27, 2020 8:44 am
miasma wrote: Sun Sep 27, 2020 12:04 am
Tattarrattat wrote: Sat Sep 26, 2020 8:57 pm FMBIX, fid muni bond index
National intermediate
ER 0.07
Thanks for this one, I noticed it when researching before but it looks like it was introduced only a year ago. The ER is nice, but it seems to have a much larger turnover rate and larger swings than FLTMX. Any reason besides the ER to go for this one?
Here's a guess. Fidelity has lagged Vanguard on having low cost bond funds for years. I think they are trying to fix that by introducing some lower cost bond index funds, something they have been woefully short on.

I wonder. One of my holdings is FUAMX for intermediate Treasuries, and at one time only Fidelity had a state muni fund for where I lived at the time, but granted it was too expensive. I'm trying to recall how recently FUAMX replaced an earlier version, maybe a couple of years ago. That muni fund is still to expensive.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by grabiner »

retiredjg wrote: Sun Sep 27, 2020 8:44 am
miasma wrote: Sun Sep 27, 2020 12:04 am
Tattarrattat wrote: Sat Sep 26, 2020 8:57 pm FMBIX, fid muni bond index
National intermediate
ER 0.07
Thanks for this one, I noticed it when researching before but it looks like it was introduced only a year ago. The ER is nice, but it seems to have a much larger turnover rate and larger swings than FLTMX. Any reason besides the ER to go for this one?
Here's a guess. Fidelity has lagged Vanguard on having low cost bond funds for years. I think they are trying to fix that by introducing some lower cost bond index funds, something they have been woefully short on.
The Vanguard funds analogous to the Fidelity funds mentioned in the initial post have 0.17% expenses, 0.09% on Admiral shares. My normal recommendation for your situation is Vanguard Limited-Term Tax-Exempt, with an 0.72% SEC yield on Admiral shares, 2.4 years duration. If you can tolerate a longer duration, a 50/50 split between Vanguard MA Long-Term Tax-Exempt and Limited-Term Tax-Exempt would give you an intermediate duration overall, with more than half your muni interest exempt from MA tax.

If you want to stay with Fidelity, you can use ETFs. iShares' SUB has 0.07% expenses and a duration of 2.1 years. It reports an SEC yield of only 0.32%, which may imply higher-quality bonds.
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miasma
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by miasma »

retiredjg wrote: Sun Sep 27, 2020 8:44 am
miasma wrote: Sun Sep 27, 2020 12:04 am
Tattarrattat wrote: Sat Sep 26, 2020 8:57 pm FMBIX, fid muni bond index
National intermediate
ER 0.07
Thanks for this one, I noticed it when researching before but it looks like it was introduced only a year ago. The ER is nice, but it seems to have a much larger turnover rate and larger swings than FLTMX. Any reason besides the ER to go for this one?
Here's a guess. Fidelity has lagged Vanguard on having low cost bond funds for years. I think they are trying to fix that by introducing some lower cost bond index funds, something they have been woefully short on.
...
The bonds are high quality and the duration on the shorter side. If the fund suited my needs, I'd have no problem using this one.
So basically FMBIX is a preferred replacement for FLTMX? Anyway to research or in descriptions why that is? Seems odd to keep open multiple funds basically tracking the same thing.
retiredjg
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by retiredjg »

One is an index fund and rated as a high quality bond fund and is very low cost. The other is not an index fund and is a medium quality bond fund and is higher cost (but not high cost).

I'd choose the first one. Or do something like what grabiner said.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by sycamore »

miasma wrote: Sun Sep 27, 2020 9:26 am ...
So basically FMBIX is a preferred replacement for FLTMX? Anyway to research or in descriptions why that is? Seems odd to keep open multiple funds basically tracking the same thing.
One is an actively managed fund, another is a passively managed fund that follows an index. Vanguard also offers both kinds.
They have different kinds of clients - some prefer active, some prefer passive.

Here's FLTMX's investment approach:
- Fidelity® Intermediate Municipal Income Fund is a diversified national municipal bond strategy investing primarily in intermediate-maturity general obligation and revenue-backed securities.
- Our investment approach focuses on fundamental credit analysis, yield-curve positioning and an analysis of the structural characteristics of each security.
- The fund's interest rate sensitivity is targeted closely to that of its benchmark to prevent interest rate speculation from overwhelming research-based strategies that we deem to have a higher likelihood of success.
- We emphasize a total-return approach that seeks to generate a high level of tax-exempt income, consistent with the preservation of capital.
By contrast the strategy for FMBIX is to follow an index:
Normally investing at least 80% of assets in municipal securities whose interest is exempt from federal income tax (but may be subject to the federal alternative minimum tax). Normally investing at least 80% of assets in securities included in the Bloomberg Barclays Municipal Bond Index, a market value-weighted index of investment-grade municipal bonds with maturities of one year or more. Using statistical sampling techniques based on duration, maturity, interest rate sensitivity, security structure, and credit quality to attempt to replicate the returns of the Bloomberg Barclays Municipal Bond Index using a smaller number of securities.
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miasma
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by miasma »

sycamore wrote: Sun Sep 27, 2020 10:01 am
miasma wrote: Sun Sep 27, 2020 9:26 am ...
So basically FMBIX is a preferred replacement for FLTMX? Anyway to research or in descriptions why that is? Seems odd to keep open multiple funds basically tracking the same thing.
One is an actively managed fund, another is a passively managed fund that follows an index. Vanguard also offers both kinds.
They have different kinds of clients - some prefer active, some prefer passive.
Thanks! This was immensely helpful -- it wasn't clear at first glance that these the ones I chose were actively managed vs. FMBIX was index. Given the Bogleheads philosophy, I should definitely be valuing the low-cost index over the actively managed one -- especially if they're both aiming for the same type of asset. Surprised that Fidelity hasn't offered more index equivalents for limited/short or long-term yet.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by gjlynch17 »

grabiner wrote: Sun Sep 27, 2020 9:11 am
If you want to stay with Fidelity, you can use ETFs. iShares' SUB has 0.07% expenses and a duration of 2.1 years. It reports an SEC yield of only 0.32%, which may imply higher-quality bonds.
Another suggestion if you want to stay with Fidelity is JP Morgan Ultra-Short Municipal Income ETF (JMST). JMST is an actively managed fund with a 0.18% ER. JMST has a shorter duration than SUB (0.73 years) but is of reasonable credit quality and did well during the gyrations in March (lost 0.26% vs. 0.95% for SUB with a quicker rebound). JMST will fluctuate in value and there is a risk of fixed income ETFs having a material discount between price and NAV (although JMST was one of the few fixed income ETFs that did not have a big gap in March). JMST could be a good fit as part of your fixed income portfolio between they HYSA and longer-term bond funds.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by grabiner »

sycamore wrote: Sun Sep 27, 2020 10:01 am
miasma wrote: Sun Sep 27, 2020 9:26 am ...
So basically FMBIX is a preferred replacement for FLTMX? Anyway to research or in descriptions why that is? Seems odd to keep open multiple funds basically tracking the same thing.
One is an actively managed fund, another is a passively managed fund that follows an index. Vanguard also offers both kinds.
They have different kinds of clients - some prefer active, some prefer passive.
However, for conservatively-managed muni funds such as those from Fidelity and Vanguard, it doesn't make much difference, because there isn't as much variation among high-quality muni bonds as among stocks. An active muni fund should track an appropriate index (of the same duration and quality) less expenses, and at Vanguard, the active funds are no more expensive than the index.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by bck63 »

miasma wrote: Sat Sep 26, 2020 4:47 pm Here are the funds I'm looking at:
Fidelity® Tax-Free Bond Fund (FTABX), National Long, ER: 0.25%, Avg Dur, 6yr, 30day Yield +1.54%, 3YR +4.17%
Fidelity® Intermediate Municipal Income Fund (FLTMX), National Inter, ER: 0.35%, Avg Dur 4.5yr, 30day Yield +0.91%, 3YR +3.52%
Fidelity® Limited Term Municipal Income Fund (FSTFX), National Short, ER: 0.37%, Avg Dur 2.7yr, 30day Yield +0.55%, 3 YR +2.41%
Fidelity® Massachusetts Municipal Income Fund (FDMMX), State Muni, ER: 0.45% Avg, 5.64yr, 30day Yield +1.00%, 3YR +3.49%
You could also consider Fidelity's Municipal Bond Index Fund (FMBIX). Expense ratio is 0.07%. Duration is 5.88 years. This is what I use in my Fidelity taxable account.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by Tattarrattat »

Fidelity has built up a substantial repertoire of index funds that correlate with various Vanguard funds and usually come in a tiny bit cheaper, typically .01% or so. The goal is to commoditize what Vanguard does and remove their competitive advantage, ie, beat them at their own game. Indeed as commodities, these Fidelity funds as well as the similarly positioned Schwab and ishares products are pretty much comparable to their Vanguard models. Pick whichever you prefer, they're more alike than different. These days, for many given mainstream investment niches, frequently there are four comparable and totally satisfactory options.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by Investors Mind Money »

You may want to look into Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) with 4.7 years duration and 0.17% expense ratio. More than 90% of investment in this fund is high quality credit-rating municipal bonds from A to AAA. I would avoid lower credit-rating and long duration tax exempt bonds or bond funds.

During the 2007-2008 financial crisis Vanguard Intermediate Tax-Exempt Fund (VWITX) dropped 8% while S&P 500 lost more than 50% of its value from its peak on October 9, 2007 to bottom on March 9, 2009. During the recent March 2020 sell-off, VWITX dropped 11% while S&P 500 lost more than 30%.

We split our cash between Tax Exempt Bond Funds and US Treasuries to reduce risk.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by UpperNwGuy »

Investors Mind Money wrote: Sun Sep 27, 2020 4:07 pm We split our cash between Tax Exempt Bond Funds and US Treasuries to reduce risk.
I do something similar, but I add in a smaller proportion of corporate bonds to boost yield.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by hudson »

grabiner wrote: Sun Sep 27, 2020 9:11 am
retiredjg wrote: Sun Sep 27, 2020 8:44 am
miasma wrote: Sun Sep 27, 2020 12:04 am
Tattarrattat wrote: Sat Sep 26, 2020 8:57 pm FMBIX, fid muni bond index
National intermediate
ER 0.07
Thanks for this one, I noticed it when researching before but it looks like it was introduced only a year ago. The ER is nice, but it seems to have a much larger turnover rate and larger swings than FLTMX. Any reason besides the ER to go for this one?
Here's a guess. Fidelity has lagged Vanguard on having low cost bond funds for years. I think they are trying to fix that by introducing some lower cost bond index funds, something they have been woefully short on.
The Vanguard funds analogous to the Fidelity funds mentioned in the initial post have 0.17% expenses, 0.09% on Admiral shares. My normal recommendation for your situation is Vanguard Limited-Term Tax-Exempt, with an 0.72% SEC yield on Admiral shares, 2.4 years duration. If you can tolerate a longer duration, a 50/50 split between Vanguard MA Long-Term Tax-Exempt and Limited-Term Tax-Exempt would give you an intermediate duration overall, with more than half your muni interest exempt from MA tax.

If you want to stay with Fidelity, you can use ETFs. iShares' SUB has 0.07% expenses and a duration of 2.1 years. It reports an SEC yield of only 0.32%, which may imply higher-quality bonds.
I like the recommendation above.
As far as muni funds, I like VWIUX as it has daily accrual and works well if you ever tax loss harvest.
If I was going for a safer fund, I like BMBIX...the expense ration isn't that great but it's all AAA/AA or better.
When I look at a fund I look expense ratio and the percentage of AAA/AA/A bonds.
With VWIUX and BMBIX, I never pay attention to turnover.
ETF's that I've owned or own that I think are OK: MUB and VTEB.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by ivgrivchuck »

I wouldn't recommend moving from Cash to Muni. The excess yield is very small, and you take some credit risk and significant one-sided duration risk.

On cash side: HYSAs, CDs, I-bonds, EE-bonds are worth taking a look.

If you insist on hunting excess yield: VTEB, MUB are solid choices.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by dratkinson »

My 2-cents.

--After learning that the major component of bond fund total return comes from dividends, I now prefer more (longer duration) to less. Within reason. You'll need to decide "within reason" for yourself.

--The current lower yield and past inverted yield environments have seemed to affect shorter durations (<=5yrs) more than longer---higher dividends in longer duration.

--Risk and reward are related, you can't have one without the other. But in my short experience, longer duration:
--rewards are typically stable,
--and risks (NAV fluctuations) are infrequent and can be TLHed.


Disclosure. Since I don't need to sell, I prefer a 50/50 allocation to Vanguard's LT national muni and Segall Bryant & Hamill's IT single-state muni. I have 3yrs of living expenses in Vanguard's IT national muni as the last tier of my formal EFs---better return than local CDs.

The benefit of a muni over cash is that it's dividends don't add to taxable income or tax bracket.

But muni dividends do add to MAGIs. But since MAGIs are based on actual dollars, not taxable-equivalent dollars, a muni's lower yield should affect MAGIs less than the higher yield of a taxable investment.

So far, so good.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by kxl19 »

bck63 wrote: Sun Sep 27, 2020 3:36 pm You could also consider Fidelity's Municipal Bond Index Fund (FMBIX). Expense ratio is 0.07%. Duration is 5.88 years. This is what I use in my Fidelity taxable account.
I used to have this fund, but was surprised the total assets under management was unusually low compared to the Vanguard / iShare products. Seems like FMBIX didn't get much traction
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by palanzo »

dratkinson wrote: Mon Sep 28, 2020 8:55 pm The benefit of a muni over cash is that it's dividends don't add to taxable income or tax bracket.
Unfortunately not so. California, for example, taxes out of state muni dividends as income.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by dratkinson »

palanzo wrote: Mon Sep 28, 2020 9:31 pm
dratkinson wrote: Mon Sep 28, 2020 8:55 pm The benefit of a muni over cash is that it's dividends don't add to taxable income or tax bracket.
Unfortunately not so. California, for example, taxes out of state muni dividends as income.
l was only thinking about fed taxes, but you're right.

That's where grabiner's idea comes into play. Use a LT single-state muni, paired 50/50 with Vanguard's limited term national muni. This gives you an IT combination, with most of your dividends state-tax exempt.


Disclosure. Since Vanguard didn't have one, I had to find my single-state muni elsewhere.

Due diligence becomes more important when you must look for munis among less well known fund families.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by bck63 »

kxl19 wrote: Mon Sep 28, 2020 9:08 pm
bck63 wrote: Sun Sep 27, 2020 3:36 pm You could also consider Fidelity's Municipal Bond Index Fund (FMBIX). Expense ratio is 0.07%. Duration is 5.88 years. This is what I use in my Fidelity taxable account.
I used to have this fund, but was surprised the total assets under management was unusually low compared to the Vanguard / iShare products. Seems like FMBIX didn't get much traction
Yes you're right. It is going up every month though, but is still only around $71 million. I look every month at the AUM and hope it continues to grow. Fidelity doesn't really advertise their index funds very much, unfortunately.
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grabiner
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by grabiner »

dratkinson wrote: Mon Sep 28, 2020 11:11 pm Disclosure. Since Vanguard didn't have one, I had to find my single-state muni elsewhere.

Due diligence becomes more important when you must look for munis among less well known fund families.
This is usually not worth doing. If Vanguard doesn't have a fund for your state, the expense difference between Vanguard's national fund and a non-Vanguard in-state fund is usually more than the state tax on the Vanguard fund. Thus, if you choose a Vanguard fund (or combination of funds) with the same pre-expense yield to the out-of-state fund, you will have comparable risk, a better after-tax yield, and better diversification.

(If yields rise, the issue might change. If munis ever yield 5%, and you pay the top 8.95% MD state and county tax rate, a MD tax-exempt fund will save you 0.45% in taxes over a national fund, and that is more than the difference between T. Rowe Price and Vanguard expenses.)
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by dratkinson »

grabiner wrote: Tue Sep 29, 2020 7:43 pm
dratkinson wrote: Mon Sep 28, 2020 11:11 pm Disclosure. Since Vanguard didn't have one, I had to find my single-state muni elsewhere.

Due diligence becomes more important when you must look for munis among less well known fund families.
This is usually not worth doing. If Vanguard doesn't have a fund for your state, the expense difference between Vanguard's national fund and a non-Vanguard in-state fund is usually more than the state tax on the Vanguard fund. Thus, if you choose a Vanguard fund (or combination of funds) with the same pre-expense yield to the out-of-state fund, you will have comparable risk, a better after-tax yield, and better diversification.

(If yields rise, the issue might change. If munis ever yield 5%, and you pay the top 8.95% MD state and county tax rate, a MD tax-exempt fund will save you 0.45% in taxes over a national fund, and that is more than the difference between T. Rowe Price and Vanguard expenses.)
Agreed. But if the itch to be doing something is really bad....

As part of your due diligence, you'll want to create simulated tax returns to help ensure the risk is worth taking. (Assume worst case while reading prospectus: reinstated waived fees will reduce SEC yield, max limit of AMT bonds will be purchased,....)


Due diligence. You'll want to search forum for Swedroe's due diligence steps. He's posted the requirements individual muni bonds must meet before his firm will purchase them for its clients. Can apply the same technique to your selection of funds.
--Cull unacceptable fund candidates by reading the prospectus.
--Create simulated tax returns for any not culled. Go forward with any single-state fund that produces more after-tax income than both TBM (total bond market index fund), and your preferred Vanguard national muni fund.
--Then think seriously about the risk of owning a less well known fund that makes it this far. (Example: is your state on any list of "death spiral" states---more takers than makers, is fund run by the like of Bernie Madoff---search state attorney general for fund/manager problems,....)
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

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dratkinson wrote: Tue Sep 29, 2020 9:15 pm Due diligence. You'll want to search forum for Swedroe's due diligence steps. He's posted the requirements individual muni bonds must meet before his firm will purchase them for its clients. Can apply the same technique to your selection of funds.
--Cull unacceptable fund candidates by reading the prospectus.
--Create simulated tax returns for any not culled. Go forward with any single-state fund that produces more after-tax income than both TBM (total bond market index fund), and your preferred Vanguard national muni fund.
--Then think seriously about the risk of owning a less well known fund that makes it this far. (Example: is your state on any list of "death spiral" states---more takers than makers, is fund run by the like of Bernie Madoff---search state attorney general for fund/manager problems,....)
The simulated tax return should compare funds of comparable risk. If your state's fund holding bonds rated A and BBB has a much higher after-tax yield than the government-heavy Total Bond Market or the mostly AAA and AA-rated Vanguard funds, this isn't a clear advantage. You may get a closer to fair comparison from Vanguard Intermediate-Term Corporate Bond Index, or Vanguard High-Yield Tax-Exempt, even if those wouldn't be your preferred Vanguard bond funds.

The comparison I prefer to make is to assume that Vanguard offered a fund with the same yield. If you have an in-state fund with 2.60% yield and 0.40% expenses, then a Vanguard muni fund of comparable risk would have 0.09% expenses on its Admiral shares and thus a 2.91% yield. In this example, you would need a state tax rate of 11% for the Vanguard fund to have a lower after-tax return.

(Vanguard doesn't offer a fund this risky; the current yield on Vanguard High-Yield Tax-Exempt Admiral is 2.27%. But assuming a fair trade-off between return and risk, you could probably get a comparable risk level with a higher return by holding slightly less of the Vanguard muni fund and more stock than you are considering with the single-state fund, or even less of Vanguard's higher-quality muni funds and even more stock.)
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Re: Municipal Bonds in Taxable as Alt to Cash, how to choose which fund?

Post by Carol88888 »

If you want this as a substitute for cash, then I think you would want to go very short in duration.

You can buy an ETF SUB that fills the bill.
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