Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

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Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by jhfenton » Tue Aug 08, 2017 11:54 am

Today, Vanguard announced plans to change the benchmarks for 3 Vanguard Government Bond Index Funds, which will then be renamed Vanguard Treasury Index Funds.

Prospectus updates were filed with the U.S. Securities and Exchange Commission, proposing the changes to all share classes of the following funds:

Vanguard Short-Term Government Bond Index Fund
Vanguard Intermediate-Term Government Bond Index Fund
Vanguard Long-Term Government Bond Index Fund

Each fund will track a pure Treasury benchmark and no longer hold government agency-issued securities. This includes debt issuance from Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, known as Freddie Mac and Fannie Mae, respectively.
https://personal.vanguard.com/us/insigh ... nds-082017

I own VSIGX, the intermediate fund. It will not change how I use the fund. I doubt I would even notice the difference, if they hadn't announced it (and weren't changing the names). It appears to affect just under 5% of the holdings.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Tue Aug 08, 2017 11:59 am

This is excellent news, thanks for posting. I use the Intermediate-Term Government bond as my sole bond holding (I used to use the IT Corporate bond Index fund too, but dropped for tax cost reasons). I just looked at the Agency bond weighting in the fund recently and was pleased it was so low, especially since pure treasury funds from iShares are significantly more expensive.

One thing that concerned me:
The funds' advisor, Vanguard Fixed Income Group, expects to manage each fund's transition in such a way that trading costs will be moderate
How can we evaluate how significant the trading costs will be? Are they going to splice the benchmarks? That's what they have done for some of the more significant index changes (like the recent Emerging Markets change). Anyway, it's less than 5% of the fund so it shouldn't be too significant. If it helps with spreads, it will benefit us all in the long-term.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Tue Aug 08, 2017 1:28 pm

So now we have a 1-3, a 1-5, a 3-10, a 5-10 and a long Treasury fund from Vanguard. Decisions, decisions, decisions.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by lazyday » Tue Aug 08, 2017 1:54 pm

If I have this right, after the change there'll be

INDEX

ST Treasury
IT Treasury
LT Treasury
Extended Duration Treasury

ST TIPS

ACTIVE

Treasury Money Market
ST Treasury
IT Treasury
LT Treasury

TIPS (dollar-weighted average maturity is expected to be in a range of 7 to 20 years)
Last edited by lazyday on Tue Aug 08, 2017 2:23 pm, edited 1 time in total.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Tue Aug 08, 2017 2:16 pm

lazyday wrote:If I have this right, after the change there'll be ...
Treasury Money Market is not closed. It is just not available as a settlement account. $50k minimum.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by CyberBob » Tue Aug 08, 2017 2:17 pm

triceratop wrote:...pure treasury funds from iShares...
That's probably the reason for the change. Vanguard's current treasury funds aren't indexed and don't have ETF shares. After this benchmark change, Vanguard will have pure treasury ETF's to compete with that big iShares volume.
Last edited by CyberBob on Tue Aug 08, 2017 2:18 pm, edited 1 time in total.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Tue Aug 08, 2017 2:17 pm

lazyday wrote:If I have this right, after the change there'll be

INDEX

ST Treasury
IT Treasury
LT Treasury
Extended Duration Treasury

ST TIPS

ACTIVE

Treasury Money Market (closed)
ST Treasury
IT Treasury
LT Treasury

TIPS (dollar-weighted average maturity is expected to be in a range of 7 to 20 years)
Prior to this change there were no Vanguard Treasury ETFs, though, so it is an improvement for those not at Vanguard. Again, not that 5% agencies was ever a significant problem.

edit: CyberBob above posted at the same time and makes a good point, possibly increasing liquidity due to higher volume.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by lazyday » Tue Aug 08, 2017 2:23 pm

Doc wrote:Treasury Money Market is not closed. It is just not available as a settlement account. $50k minimum.
Fixed, thanks

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by welderwannabe » Tue Aug 08, 2017 2:55 pm

Maybe they will add an investor class to VSIGX as part of this change. Be nice so people could hold it in their Vangaurd Solo401k.

Edit: Just read Vanguard's press release. No mention of investor classes. Seems strange they don't offer one.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Tue Aug 08, 2017 3:10 pm

welderwannabe wrote:Maybe they will add an investor class to VSIGX as part of this change. Be nice so people could hold it in their Vangaurd Solo401k.

Edit: Just read Vanguard's press release. No mention of investor classes. Seems strange they don't offer one.
The active Treasury funds are available as Investor class. Short 1-5 yr, intermediate 5-10 yr but they have been running a little lower duration than their benchmark in the past.

(Glad to see that I am not the only one that tends to spell it "Vangaurd". But I burned my right hand learning to braze pipe so I have a good excuse. :) )
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by welderwannabe » Tue Aug 08, 2017 3:19 pm

Doc wrote:The active Treasury funds are available as Investor class. Short 1-5 yr, intermediate 5-10 yr but they have been running a little lower duration than their benchmark in the past.

(Glad to see that I am not the only one that tends to spell it "Vangaurd". But I burned my right hand learning to braze pipe so I have a good excuse. :) )
The .20ER seemed a tick steep to me and I just find it funny that they don't have a lower class fund and push investors to their active management fund in their 401k product.

It really doesn't matter to me anymore as I moved my Solo401k to Fidelity a couple of weeks back. They do have a treasury fund with a $2500 minimum and a .16ER. I know I shouldn't get my undies in a twist over 4 basis points, but the yields on bonds are so low that it does matter.

Vanguard did the same thing with Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares (VICSX) too...no investor class. I hope this isn't a pattern that will become more common.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by aristotelian » Tue Aug 08, 2017 8:22 pm

What is the difference between the new funds and the old Treasury Funds (VFISX, VFITX, VUSTX). I thought including GNMAs was one of the factors that made VSIGX different. How will the new Treasury Index Funds differ from the old Treasury Funds?
Last edited by aristotelian on Tue Aug 08, 2017 8:33 pm, edited 1 time in total.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by mongstradamus » Tue Aug 08, 2017 8:25 pm

aristotelian wrote:What is the difference between the new funds and the old Treasury Index funds (VFISX, VFITX, VUSTX). I thought including GNMAs was one of the factors that made VSIGX different. How will the new Treasury Funds differ from the old Treasury Index Funds?
Vfitx is active fund I believe which is main difference

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by jhfenton » Tue Aug 08, 2017 8:36 pm

aristotelian wrote:What is the difference between the new funds and the old Treasury Funds (VFISX, VFITX, VUSTX). I thought including GNMAs was one of the factors that made VSIGX different. How will the new Treasury Index Funds differ from the old Treasury Funds?
The old treasury funds are active funds. The new treasury index funds are index funds with ETF share classes.

That's pretty much it. There's no particular reason for the old funds to exist except that they already do. They existed first.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Theoretical » Tue Aug 08, 2017 9:11 pm

I wish they'd do a cheap version of iShares GOVT (.15), which is a total market treasury fund.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Tue Aug 08, 2017 9:14 pm

Theoretical wrote:I wish they'd do a cheap version of iShares GOVT (.15), which is a total market treasury fund.
Why do you want your duration to be determined in that manner?
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Wind_Reaver » Tue Aug 08, 2017 10:21 pm

aristotelian wrote:What is the difference between the new funds and the old Treasury Funds (VFISX, VFITX, VUSTX). I thought including GNMAs was one of the factors that made VSIGX different. How will the new Treasury Index Funds differ from the old Treasury Funds?
The active Treasury funds allow for up to 20% "other" securities. GNMA securities are held at management discretion, sometimes leveraged. The index is Treasury only.

If only Vanguard would sort the Federal Money Market Fund and resolve the identity crisis. It's slowly morphing to a Treasury fund.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by stlutz » Tue Aug 08, 2017 11:08 pm

I think the main benefit to investors is that it will make it easier for the funds to attract assets. A "government" bond fund doesn't usually come up in a search of Treasury bond funds, and we even have a had a lot of confusion on this board around the fact that these funds were almost entirely Treasuries.

More assets will ultimately lead to lower expenses.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Wed Aug 09, 2017 7:10 am

jhfenton wrote:The old treasury funds are active funds. The new treasury index funds are index funds with ETF share classes.

That's pretty much it. There's no particular reason for the old funds to exist except that they already do. They existed first.
The big difference to me is the different maturity range as I noted up thread.

After a management change a few years ago the non-treasury portion was reduced but with no change in prospectus. (Info bases on Morningstar analyst report.)

I have been using the admiral class of the active funds and see no reason to change. And I would not buy the new index funds until several months after the transition is effected. Cap gains distributions possibly?
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Wed Aug 09, 2017 1:55 pm

Doc wrote:
jhfenton wrote:The old treasury funds are active funds. The new treasury index funds are index funds with ETF share classes.

That's pretty much it. There's no particular reason for the old funds to exist except that they already do. They existed first.
The big difference to me is the different maturity range as I noted up thread.

After a management change a few years ago the non-treasury portion was reduced but with no change in prospectus. (Info bases on Morningstar analyst report.)

I have been using the admiral class of the active funds and see no reason to change. And I would not buy the new index funds until several months after the transition is effected. Cap gains distributions possibly?
They claim in the above link that that is not expected to occur. Of course, they paid out LT and ST capital gains last year, so I take that to mean "no additional distributions".

Actually in my current tax bracket, 0%, I prefer to receive LTCG distributions, because it will reduce the tax cost of the subsequent interest payments.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by grok87 » Wed Aug 09, 2017 7:52 pm

I think the end game here is they merge the active treasury funds into the new index treasury funds
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by mongstradamus » Wed Aug 09, 2017 8:40 pm

grok87 wrote:I think the end game here is they merge the active treasury funds into the new index treasury funds
They may keep them seperate like they do with their investment grade and corp bond fund? They still have vfsux and vficx on the active side vs vcsh and vcit which are passive fund. Only time will tell i suppose.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by grok87 » Wed Aug 09, 2017 10:00 pm

mongstradamus wrote:
grok87 wrote:I think the end game here is they merge the active treasury funds into the new index treasury funds
They may keep them seperate like they do with their investment grade and corp bond fund? They still have vfsux and vficx on the active side vs vcsh and vcit which are passive fund. Only time will tell i suppose.
Good point, but the investment grade funds are only about half corporates.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Thu Aug 10, 2017 8:09 am

grok87 wrote:Good point, but the investment grade funds are only about half corporates
VFIDX Intermediate IG

Guv 14.5%
Corp 69.6%
Securitized 13.9%

Source Morningstar.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by grok87 » Thu Aug 10, 2017 8:43 am

Doc wrote:
grok87 wrote:Good point, but the investment grade funds are only about half corporates
VFIDX Intermediate IG

Guv 14.5%
Corp 69.6%
Securitized 13.9%

Source Morningstar.
thanks. i was looking at the short term one...
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Thu Aug 10, 2017 10:35 am

grok87 wrote:
Doc wrote:
grok87 wrote:Good point, but the investment grade funds are only about half corporates
VFIDX Intermediate IG

Guv 14.5%
Corp 69.6%
Securitized 13.9%

Source Morningstar.
thanks. i was looking at the short term one...
The short fund is only 22% guv (17% Treasuries)

Part of the difference is in the securitized. Are non agency MBS guv or corporate in a credit rating sense?

For the short corporate we are looking at 99% corporate.

Back to the Treasury fund question:

Vanguard Intermediate-Term Treasury Fund Admiral Shares VFIUX
Morningstar archive wrote:By mandate, the fund is required to hold at least 80% of its assets in U.S. Treasuries. Wright-Casparius has the flexibility to invest the remaining 20% in other non-Treasury government securities like agency mortgage-backed securities and Treasury Inflation-Protected Securities. But over the past couple of years, as the team has believed opportunities in agency MBS have thinned out, that exposure has stayed between zero and 10%.
Morningstar analyst report from 1/16/15 (They stopped covering this fund since then.)

Since the manager change in January 2015 the active Treasury funds have looked a lot like the Government Index Funds except for the duration. Even before that the return were almost identical: ~7 bps per year in total return over the last 8 years. Right now the duration for the intermediate term funds are the same for the active and index funds.

The active fund can "ride the yield curve" as it chooses while the index fund cannot. I guess time will tell if we have 4 Treasury funds or or only 2, five years from now. (My guess is 4.)
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by grok87 » Thu Aug 10, 2017 5:47 pm

Doc wrote:
grok87 wrote:
Doc wrote:
grok87 wrote:Good point, but the investment grade funds are only about half corporates
VFIDX Intermediate IG

Guv 14.5%
Corp 69.6%
Securitized 13.9%

Source Morningstar.
thanks. i was looking at the short term one...
The short fund is only 22% guv (17% Treasuries)

Part of the difference is in the securitized. Are non agency MBS guv or corporate in a credit rating sense?
non-agency MBS would not be government
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Thu Aug 10, 2017 5:56 pm

grok87 wrote:non-agency MBS would not be government
I didn't pose the question well. Actually I messed it up completely.

Let me try again.

Are non-agency MBS corporates?

The reason I get confused is that agency MBS is government but not agency MBS is securitized which is a different category from corporate. Or is the agency debt in government not MBS but just agency loans?

I also don't really care since I have been avoiding MBS of any stripe even before Lehman.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by lack_ey » Thu Aug 10, 2017 5:57 pm

I think I'd rather just hold Treasuries myself if that's the exposure I wanted, but okay. There's definitely a market for this stuff.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by grok87 » Thu Aug 10, 2017 6:57 pm

Doc wrote:
grok87 wrote:non-agency MBS would not be government
I didn't pose the question well. Actually I messed it up completely.

Let me try again.

Are non-agency MBS corporates?

The reason I get confused is that agency MBS is government but not agency MBS is securitized which is a different category from corporate. Or is the agency debt in government not MBS but just agency loans?

I also don't really care since I have been avoiding MBS of any stripe even before Lehman.
no they are not corporates. they would be pools of mortgages that are without any sort of backing- be it federal (GNMA) or government-sponsored-enterprise (GSE = Fannie/Freddie)
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Fri Aug 11, 2017 6:31 am

grok87 wrote:no they are not corporates. they would be pools of mortgages that are without any sort of backing- be it federal (GNMA) or government-sponsored-enterprise (GSE = Fannie/Freddie)
My understanding or maybe misunderstanding.

GNMAs are motgage pools guaranteed by US.

GSE mortgage pools do not have a US guarantee.

Because GSEs are in receivership their actual notes have an implied US guarantee.

There are residential mortgage pools that may have some guarantee from a private entity.

CMBS are commercial MBS not corporate MBS. I thought this means commercial property.

It makes no sense to me that GSA mortgage pools go in "Government" and commercial and residential non GSAs go in a category with things like consumer debt that are guaranteed by the promises of people like Doc & Grok.

Then there is the whole question of breaking the mortgage pools into components and selling them to Lehmann.

I really like the idea of Vg changing the Guv fund to pure Treasuries. I just won't t invest in it until the transition is completed and well settled.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by grok87 » Fri Aug 11, 2017 7:45 am

Doc wrote:
grok87 wrote:no they are not corporates. they would be pools of mortgages that are without any sort of backing- be it federal (GNMA) or government-sponsored-enterprise (GSE = Fannie/Freddie)
My understanding or maybe misunderstanding.

GNMAs are motgage pools guaranteed by US.

GSE mortgage pools do not have a US guarantee.

Because GSEs are in receivership their actual notes have an implied US guarantee.

There are residential mortgage pools that may have some guarantee from a private entity.

CMBS are commercial MBS not corporate MBS. I thought this means commercial property.

It makes no sense to me that GSA mortgage pools go in "Government" and commercial and residential non GSAs go in a category with things like consumer debt that are guaranteed by the promises of people like Doc & Grok.

Then there is the whole question of breaking the mortgage pools into components and selling them to Lehmann.

I really like the idea of Vg changing the Guv fund to pure Treasuries. I just won't t invest in it until the transition is completed and well settled.
Not sure about any sort of guarantee on the non-agency stuff- also they are being re-named pls= private label securities.

https://www.housingwire.com/articles/40 ... a-comeback

Typical Wall Street ploy-whenever something bad happens just rename it and try again.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by JoMoney » Fri Aug 11, 2017 7:46 am

It's hard for an index investor to "stay the course" tracking an index when the mutual fund company won't stop monkeying with what index their fund is going to track.
At least with this change, it's towards better quality/safety, and if some people want the higher risk stuff they can mix it in to their preference.
... unlike when they've changed other index funds to add small-caps, Emerging markets, Chinese stocks, foreign bonds, etc...
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Fri Aug 11, 2017 7:58 am

grok87 wrote:Not sure about any sort of guarantee on the non-agency stuff- also they are being re-named pls= private label securities
Way back when we had a mortgage, we were required to pay a mortgage insurance fee as well as the interest. May be a thing that is long gone.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Fri Aug 11, 2017 7:59 am

@JoMoney

Yeh.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Fri Aug 11, 2017 12:20 pm

lack_ey wrote:I think I'd rather just hold Treasuries myself if that's the exposure I wanted, but okay. There's definitely a market for this stuff.
That's interesting. You would do that even if you wanted to maintain a similar duration bond portfolio, for a small portion of your portfolio (I imagine you would use some kind of ladder)? I hold about 10% in VGIT. I'm not really familiar with what the spreads are on treasuries for implementing something like this. If it is truly cheaper I would consider it.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Fri Aug 11, 2017 5:04 pm

triceratop wrote:
lack_ey wrote:I think I'd rather just hold Treasuries myself if that's the exposure I wanted, but okay. There's definitely a market for this stuff.
That's interesting. You would do that even if you wanted to maintain a similar duration bond portfolio, for a small portion of your portfolio (I imagine you would use some kind of ladder)? I hold about 10% in VGIT. I'm not really familiar with what the spreads are on treasuries for implementing something like this. If it is truly cheaper I would consider it.
It's cheaper if you can buy 25 bond lots. You get the ability to "ride the yield curve" which an index fund cannot do. And you can sometimes convert ordinary income into LTCG. It's also a PITA.

Our bond portfolio is 50% Treasuries of which half are actual notes. But half of that other half are ETFs waiting to go into actual notes when the yield curve becomes more normal and when Washington starts to show that it can govern. It may be awhile. :(
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by stlutz » Fri Aug 11, 2017 6:42 pm

You get the ability to "ride the yield curve" which an index fund cannot do. And you can sometimes convert ordinary income into LTCG.
A fund "rides the yield curve". The intermediate term version of the fund in question buys 10, 7 and 5 year notes and sells them when they reach 3 years of maturity. If they make a profit at sale, then there is a long-term capital gain. That may be distributed at a time you don't want which is one bit of control you get with individual notes. Even better is an ETF that doesn't end up distributing gains because of the creation/redemption mechanism (e.g. SCHR or IEI). In that case the capital gains just result in a share price increase and you don't have to realize the gains until your sell the ETF, which could be decades in the future.

There is not fundamental difference between owning a fund and a collection of bonds (since the fund just owns a collection of bonds).

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by lack_ey » Fri Aug 11, 2017 6:58 pm

triceratop wrote:
lack_ey wrote:I think I'd rather just hold Treasuries myself if that's the exposure I wanted, but okay. There's definitely a market for this stuff.
That's interesting. You would do that even if you wanted to maintain a similar duration bond portfolio, for a small portion of your portfolio (I imagine you would use some kind of ladder)? I hold about 10% in VGIT. I'm not really familiar with what the spreads are on treasuries for implementing something like this. If it is truly cheaper I would consider it.
First of all, I have to say that I don't have enough money in Treasury bonds for this to be worth my time, so I don't do it personally.

You can get Treasury bonds at auction, so if you just did a ladder and bought new issues on maturity, there wouldn't be spreads to deal with. Alternatively you could just target some range and hold a few issues, like buy a 7-year Treasury every year and sell anything that gets down to 3 years (so you might hold 7/6/5/4 and then in a year that's 6/5/4/3 whereupon you sell the 3 and get a new 7).

That said, some off-the-run issues may have slightly better yields, better than the average of what a fund might hold. There are typically small differences in yields between Treasuries based on investor preference for liquidity and then some small gap that can't quite be closed by the pair traders.

Typical spreads in the secondary market are around 0.03 (quoted referenced to par of 100). So around 3 bp. Spread out a couple of transactions over a few years of holding and this is pretty small. Keep in mind that VGIT has a spread around 7 bp, though you might not be trading that as much as individual bonds in a ladder you could be managing.

Downside is obviously your time/effort (though this is low) and then the kinda-chunky transaction sizes, generally in the range of $1,000 per bond, sometimes requiring larger lots than whole numbers. Then having to think about what to do with the interest payments and investing those. Of course you can just stick the remainder in other funds or keep as cash, so not a big deal.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Hector » Fri Aug 11, 2017 7:05 pm

This is great news. I hold Vanguard Short-Term Treasury fund and am disappointed that fund does not invest 100% in treasury the way fidelity treasury funds do.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Fri Aug 11, 2017 7:23 pm

stlutz wrote:
You get the ability to "ride the yield curve" which an index fund cannot do. And you can sometimes convert ordinary income into LTCG.
A fund "rides the yield curve". The intermediate term version of the fund in question buys 10, 7 and 5 year notes and sells them when they reach 3 years of maturity. If they make a profit at sale, then there is a long-term capital gain. That may be distributed at a time you don't want which is one bit of control you get with individual notes. Even better is an ETF that doesn't end up distributing gains because of the creation/redemption mechanism (e.g. SCHR or IEI). In that case the capital gains just result in a share price increase and you don't have to realize the gains until your sell the ETF, which could be decades in the future.

There is not fundamental difference between owning a fund and a collection of bonds (since the fund just owns a collection of bonds).
A 3-7 index fund has to buy new fives. A "3 - 7" riding the curve portfolio only buys 7's.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Fri Aug 11, 2017 7:51 pm

lack_ey wrote:
triceratop wrote:
lack_ey wrote:I think I'd rather just hold Treasuries myself if that's the exposure I wanted, but okay. There's definitely a market for this stuff.
That's interesting. You would do that even if you wanted to maintain a similar duration bond portfolio, for a small portion of your portfolio (I imagine you would use some kind of ladder)? I hold about 10% in VGIT. I'm not really familiar with what the spreads are on treasuries for implementing something like this. If it is truly cheaper I would consider it.
First of all, I have to say that I don't have enough money in Treasury bonds for this to be worth my time, so I don't do it personally.

You can get Treasury bonds at auction, so if you just did a ladder and bought new issues on maturity, there wouldn't be spreads to deal with. Alternatively you could just target some range and hold a few issues, like buy a 7-year Treasury every year and sell anything that gets down to 3 years (so you might hold 7/6/5/4 and then in a year that's 6/5/4/3 whereupon you sell the 3 and get a new 7).

That said, some off-the-run issues may have slightly better yields, better than the average of what a fund might hold. There are typically small differences in yields between Treasuries based on investor preference for liquidity and then some small gap that can't quite be closed by the pair traders.

Typical spreads in the secondary market are around 0.03 (quoted referenced to par of 100). So around 3 bp. Spread out a couple of transactions over a few years of holding and this is pretty small. Keep in mind that VGIT has a spread around 7 bp, though you might not be trading that as much as individual bonds in a ladder you could be managing.

Downside is obviously your time/effort (though this is low) and then the kinda-chunky transaction sizes, generally in the range of $1,000 per bond, sometimes requiring larger lots than whole numbers. Then having to think about what to do with the interest payments and investing those. Of course you can just stick the remainder in other funds or keep as cash, so not a big deal.
Thanks for the note about buying treasuries at auction, which would apparently guarantee me the high yield. Fortunately when buying at auction you can buy in multiples of $100 so if planning to hold to maturity not as big a "lumpy" problem as it might be on the secondary market.

At this point I would be saving about $5/yr in expenses by forgoing the fund and buying treasuries at auction. It likely isn't worth it at the moment but in the medium term I can see the benefit. The biggest draw is converting income into LTCG which wasn't something I had thought too much about before.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by mongstradamus » Fri Aug 11, 2017 8:15 pm

I wanted to ask a sort of silly question by how much of a difference between is there between 97% treasuries and 100% treasuries is, isn't vfitx and vsigx around 97-98 % treasuries already ?

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Fri Aug 11, 2017 8:31 pm

mongstradamus wrote:I wanted to ask a sort of silly question by how much of a difference between is there between 97% treasuries and 100% treasuries is, isn't vfitx and vsigx around 97-98 % treasuries already ?
There is not much difference, especially if Vanguard is right in claiming that the portion of the fund invested in agencies will continue to decline.

What has been pointed out is that this marks Vamguard's first 100% treasury ETF. Some people own no mutual funds. These will become nearly the cheapest treasury ETFs on the market if I'm not mistaken. Schwab currently has a slight edge on cost. This may allow them to scoop up more assets (more liquidity due to holding solely treasuries) and push costs lower.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by raven15 » Fri Aug 11, 2017 11:08 pm

triceratop wrote:This is excellent news, thanks for posting. I use the Intermediate-Term Government bond as my sole bond holding (I used to use the IT Corporate bond Index fund too, but dropped for tax cost reasons). I just looked at the Agency bond weighting in the fund recently and was pleased it was so low, especially since pure treasury funds from iShares are significantly more expensive.
Have you considered VWAHX as a substitute for VCIT? Last year you mentioned the 50/50 VGIT/VCIT split. I decided I liked the concept, but ended up with VWAHX instead. It has a higher yield in all tax brackets, and similar credit risk based on 2008.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by triceratop » Sat Aug 12, 2017 1:43 am

raven15 wrote:
triceratop wrote:This is excellent news, thanks for posting. I use the Intermediate-Term Government bond as my sole bond holding (I used to use the IT Corporate bond Index fund too, but dropped for tax cost reasons). I just looked at the Agency bond weighting in the fund recently and was pleased it was so low, especially since pure treasury funds from iShares are significantly more expensive.
Have you considered VWAHX as a substitute for VCIT? Last year you mentioned the 50/50 VGIT/VCIT split. I decided I liked the concept, but ended up with VWAHX instead. It has a higher yield in all tax brackets, and similar credit risk based on 2008.

https://www.portfoliovisualizer.com/bac ... tion5_2=50
I like the 50/50 split idea still but I will only revisit it when I have sufficient tax-advantaged space. Right now I have a laughable $6k total in a Roth IRA and that is it. I'll keep that in high-growth stocks rather than optimize for holding corporates.

Hard for me to like high-yield for the same reasons, especially since I'm in a very low bracket making the risk/reward even more speculative. I would expect the tax-equivalent risk/reward to be positive only for the higher brackets as the same dynamics for taxable bonds apply but I get less benefit than others who determine the prices (if that at all makes sense). I would only do high yield fallen angels in taxable, and probably not even.

Just my two cents.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by weltschmerz » Sat Aug 12, 2017 1:26 pm

This is great news. I have invested in the Intermediate Treasury Fund (VFIUX) before, but it has a high minimum for Admiral ($50k) and a 0.1% expense ratio. The new indexed version (VSIGX) has only a $10k minimum for Admiral, and a 0.07% expense ratio. What's not to like? Plus, Tax Loss Harvesting between VFIUX and VSIGX becomes possible, since they are completely different funds (active vs index).

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Sat Aug 12, 2017 2:37 pm

The Dan wrote:
Sat Aug 12, 2017 1:26 pm
What's not to like?
The index they use and the inability to get any benefit from "curve riding" because they have to buy sevens as well as tens and have to sell when the index says not when the market says.
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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by weltschmerz » Sat Aug 12, 2017 2:49 pm

Doc wrote:
Sat Aug 12, 2017 2:37 pm
The Dan wrote:
Sat Aug 12, 2017 1:26 pm
What's not to like?
The index they use and the inability to get any benefit from "curve riding" because they have to buy sevens as well as tens and have to sell when the index says not when the market says.
OK, but has that mattered? Comparing the 5-year returns of the indexed version (VSIGX) to the active version (VFIUX):
Image
I assume the guy running the active version has latitude to tweak the average duration, take advantage of yield curve riding and so forth, yet there's really no discernible difference between the 2 total returns.

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Re: Vanguard Government Bond Index Funds changing names and indices (dropping agency bonds)

Post by Doc » Sat Aug 12, 2017 6:15 pm

The Dan wrote:
Sat Aug 12, 2017 2:49 pm
OK, but has that mattered? Comparing the 5-year returns of the indexed version (VSIGX) to the active version (VFIUX)
Your chart appears to be for 5 days not 5 years.

That said what happened in the last 5 years matters little. The bond market has been atypical since Lehman.
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