Vanguard Announces Plans To Launch Total Corporate Bond ETF

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MFInvestor
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Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by MFInvestor » Tue Aug 22, 2017 9:56 am

http://www.prnewswire.com/news-releases ... 07672.html

Press Release:

"VALLEY FORGE, Pa., Aug. 22, 2017 /PRNewswire/ -- Vanguard today filed a preliminary registration statement with the Securities and Exchange Commission for a new index portfolio, Vanguard Total Corporate Bond ETF. The ETF is expected to launch in the fourth quarter and will offer investors access to the entire U.S. investment-grade corporate bond market through a single fund.

"The new offering complements our existing lineup of total market funds and will provide investors with low-cost, broadly diversified exposure to the U.S. investment-grade corporate bond market," said John Hollyer, global head of Vanguard Fixed Income Group.
The fund will be structured as an ETF of ETFs, investing directly in three existing, low-cost ETFs: Vanguard Short-Term Corporate Bond ETF (VCSH), Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and Vanguard Long-Term Corporate Bond ETF (VCLT). "

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Doc » Tue Aug 22, 2017 10:16 am

So how does this work?

The authorized participant buys X shares of Vanguard Short-Term Corporate Bond ETF (VCSH), Y shares of Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and Z shares of Vanguard Long-Term Corporate Bond ETF (VCLT) and trades them for 100 shares of the new ETF? And this somehow arbitrages the price?

I must be missing something here.
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by JoMoney » Tue Aug 22, 2017 10:29 am

" The fund will be structured as an ETF of ETFs, investing directly in three existing, low-cost ETFs: Vanguard Short-Term Corporate Bond ETF (VCSH), Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and Vanguard Long-Term Corporate Bond ETF (VCLT). "
Weird.
I would think one of the advantages of having a 'Total Bond' fund, would be less need to turnover the portfolio - no need to sell a bond because it's moved outside the funds targeted maturity/duration. By structuring it as a fund of other funds that do target specific maturity ranges they lose that :?
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Fclevz » Tue Aug 22, 2017 10:46 am

I wonder if it's to compete against iShares CRED ETF?
Interestingly, iShares also has a 'total treasury' ETF (GOVT). I wonder if Vanguard will come out with one of those too?

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"more than 371 funds?"

Post by Taylor Larimore » Tue Aug 22, 2017 11:02 am

Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "more than 371 funds?"

Post by dkturner » Tue Aug 22, 2017 11:26 am

Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
When the Vanguard Group is approaching $5,000,000,000,000 in assets under management it has to adopt an all things to all men outlook if it wants to continue to grow.
Last edited by dkturner on Tue Aug 22, 2017 12:45 pm, edited 1 time in total.

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Re: "more than 371 funds?"

Post by Barry Barnitz » Tue Aug 22, 2017 11:34 am

Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
Hi Taylor:

The complete statement contains one answer to your question:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds to its more than 20 million investors worldwide.
Thus, the 371 funds include funds domiciled in national/regional markets that must conform to the jurisdictional authority of the governing nation state.

See | Low-cost investments Vanguard | Investing for non-U.S. investors.
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Re: "more than 371 funds?"

Post by jbolden1517 » Tue Aug 22, 2017 11:38 am

Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Can anyone explain why Vanguard offers so many funds?
I think on a lot of this generic index stuff they are becoming the default choice (beating out Blackrock and SSGA). They are quite happy with that status. They are definitely aiming for a big money low margin business. Right now they are taking in $1.5b per market day, so it's working for them. I suspect the real push for total corporate here is 401k, 403b plans that want/need a "corporate bond fund" but don't want to have to decide on a particular duration.

Moreover even before indexing got popular they were a rather diverse mutual fund house. They were never Fidelity diverse but they have always had a lot of funds. They have to play a balancing act here because ideologically they are opposed to lots of slice and dice and they are opposed to niche funds from an investment theory standpoint. But if their investors have to go out of house to buy something they can't get with Vanguard they stop seeing Vanguard as essentially the only fund company and learn there is a whole world of interesting options and develop a more sophisticated pallet. So they have to balance the menu. I think they are definitely aiming to be an investor's only mutual fund house for many investors.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by bigred77 » Tue Aug 22, 2017 11:44 am

I'm excited for the multitude of discussions (I'm being genuine, I plan to participate in these myself, it keeps me busy :mrgreen: ) where we all debate which is better: "100% Vanguard Total Corporate Bond vs. 100% Vanguard Intermediate-Term Corporate Bond"

We all know the end result will be a couple basis points difference either way in overall portfolio performance (noise!) and it's entirely impossible to predict which will do better. This was made for Bogleheads :mrgreen:

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Re: "more than 371 funds?"

Post by Munir » Tue Aug 22, 2017 12:57 pm

dkturner wrote:
Tue Aug 22, 2017 11:26 am
Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
When the Vanguard Group is approaching $5,000,000,000,000 in assets under management it has to adopt an all things to all men outlook if it wants to continue to grow.
I assume you meant "all things to all people" and not just men :happy .

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by spdoublebass » Tue Aug 22, 2017 1:00 pm

Fclevz wrote:
Tue Aug 22, 2017 10:46 am
Interestingly, iShares also has a 'total treasury' ETF (GOVT). I wonder if Vanguard will come out with one of those too?
+1
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by saltycaper » Tue Aug 22, 2017 1:05 pm

I suspect Mr. Bogle would like this fund, if it were not an ETF of ETFs.
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Re: "more than 371 funds?"

Post by BolderBoy » Tue Aug 22, 2017 1:06 pm

Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
Taylor - I don't think that mere mortals have exposure to that many funds. When I last looked at the VG website for personal investors I was only offered to look at 126 funds.

In reading through the proxy voting materials there were mentioned lots of funds I'd never heard of before - such as the Charlotte Funds.
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

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Re: "more than 371 funds?"

Post by gkaplan » Tue Aug 22, 2017 7:30 pm

Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
Does this figure include the different types of shares of each fund – Investor, Admiral, Institutional? If so, that 371 fund figure probably is less than 100.
Gordon

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Re: "more than 371 funds?"

Post by aristotelian » Tue Aug 22, 2017 7:37 pm

Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
It is starting to seem like overkill, but one of their comparative advantages over Schwab, for example, is selection in the low cost indexing space. Schwab can match the big funds in expense but so far does not always have what you are looking for. (I have both Schwab and VG accounts).

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by TD2626 » Tue Aug 22, 2017 8:14 pm

One has to wonder what investor would use this sort of fund. Mabye you could envision someone who buys individual treasuries directly, doesn't like the GNMAs in Total Bond, and wants a general corporate bond fund getting interested in this sort of thing. But it's hard to make a case for this being something most investors would use.

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Vanguard Reveals Plans for New, Low-Cost Bond ETF

Post by Always passive » Wed Aug 23, 2017 8:25 am

[Topic and reply merged into this existing thread - moderator prudent]

News from Vanguard.....

"Total market corporate bond ETF to be structured as a fund of funds

Vanguard’s new ETF will be comprised of three existing Vanguard ETFs – the Vanguard Short-Term Corporate Bond ETF, Vanguard Intermediate-Term Corporate Bond ETF and the Vanguard Long-Term Corporate Bond ETF. These three collectively have $39 billion in assets. Each of the underlying ETFs carries an expense ratio of 0.07% per year.

Such a fund-of-funds structure will allow the Vanguard’s new ETF to trade at tighter bid-ask spreads and operate with lower operating expenses than it would to invest directly in the bond index’s constituents, the company said in a news release."

https://blogs.wsj.com/moneybeat/2017/08 ... 2#cxrecs_s

Any comments?

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Re: Vanguard Reveals Plans for New, Low-Cost Bond ETF

Post by lack_ey » Wed Aug 23, 2017 9:44 am

Nice I guess but seeing as it doesn't offer any different asset coverage than was previously available, nothing too exciting.

MFInvestor
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by MFInvestor » Wed Aug 23, 2017 1:07 pm

Bloomberg weighs in on new ETF offering:

https://www.bloomberg.com/news/articles ... nguard-way

"Vanguard Jumps on ETF-of-ETFs Bandwagon, the Vanguard Way"

"Vanguard Group Inc. is entering the latest game in exchange-traded funds, but with a very Vanguard twist.

The $4.4 trillion asset manager is seeking approval for a Total Corporate Bond ETF, which would use the “ETF-of-ETFs” structure to buy other debt funds sold by the company, rather than individual bonds, according to regulatory filings. The new ETF, which would be the first from Vanguard to use this construction, would wrap the company’s short-term, intermediate term and longer-dated corporate bond funds into one product, the filings show.

ETFs that invest in other ETFs have been proliferating over the past few years. But while most of these funds combine different asset classes, or rotate between sectors, Vanguard’s new ETF will stay close to home -- buying its own bond funds.

“The use of its very, very liquid bond ETFs will help it tap into the corporate bond market very easily,” said Todd Rosenbluth, director of ETF and mutual funds at CFRA Research. “It’s a novel approach that will work well for not only investors, but also for Vanguard in its ability to launch a low-cost product that will trade with tight spreads and build its asset base relatively quickly.”"

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by hirlaw » Wed Aug 23, 2017 1:35 pm

The original and supreme Boglehead, John Bogle, has expressed concern that the Total Bond Market index is too heavy in Treasuries. Maybe this is a way to allow folks to compliment the Total Bond index by increasing corporate exposure in a "total bond" context.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by welderwannabe » Wed Aug 23, 2017 2:00 pm

TD2626 wrote:
Tue Aug 22, 2017 8:14 pm
One has to wonder what investor would use this sort of fund. Mabye you could envision someone who buys individual treasuries directly, doesn't like the GNMAs in Total Bond, and wants a general corporate bond fund getting interested in this sort of thing. But it's hard to make a case for this being something most investors would use.
I would consider it. I don't like the MBS in total bond, and I switched some of my treasury allocation over to CDs. I keep roughly 50-60% corporates, and 40-50% treasury/CDs in my tax advantaged. Right now I am making the corporates work with a mix of LQD and SLQD. I have stayed away from CRED because it looks to hold around 10% government paper, which is already well covered by my 50% treasury allocation. I appreciate a pure corporate bond option.

Not sure I would buy this vanguard offering since LQD/SLQD trade free at Fidelity where my tax advantaged is, but it is good to have the option.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Doc » Wed Aug 23, 2017 2:53 pm

welderwannabe wrote:
Wed Aug 23, 2017 2:00 pm
I would consider it. I don't like the MBS in total bond, and I switched some of my treasury allocation over to CDs. I keep roughly 50-60% corporates, and 40-50% treasury/CDs in my tax advantaged.
I do a similar thing as far as the MBS and Treasury/corporate split but stick to short and medium term with the more tax efficient parts in taxable and the less tax efficient parts in tax-advantaged. So the 1 for 3 ETF wouldn't do me any good. I can see the reason for a 1-30 yr corporate fund for some people I just question an ETF made up of only three securites.

I guess we'll find out.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by welderwannabe » Wed Aug 23, 2017 3:36 pm

Doc wrote:
Wed Aug 23, 2017 2:53 pm
I do a similar thing as far as the MBS and Treasury/corporate split but stick to short and medium term with the more tax efficient parts in taxable and the less tax efficient parts in tax-advantaged. So the 1 for 3 ETF wouldn't do me any good. I can see the reason for a 1-30 yr corporate fund for some people I just question an ETF made up of only three securites.

I guess we'll find out.
I prefer a fund over an ETF whenever given the choice, so I agree with you there.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by zenon » Wed Aug 23, 2017 3:43 pm

It's not really a total corporate bond market if it only covers the investment grade universe which depends on the rating agency clarification.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Barry Barnitz » Thu Aug 24, 2017 4:26 am

Hi:

Vanguard, as most of you hopefully realize, is now a global investment company. A cursory examination of retail funds and exchange-traded funds offered to global investors provides the following fund totals.

Australia: 25 funds
Canada: 33 funds
Hong Kong: 5 funds
Japan: 9 funds
Switzerland: 42 funds
United Kingdom: 65 funds
United States: 141 funds (this includes funds listed on Vanguard's personal investor site along with the suites of Russell and S&P ETF's listed on the advisors site).

This totals 317 funds out of the 371 world wide funds reported in the press release. My guess is that the remaining "uncounted" funds are likely to be stand-alone institutional funds.

Vanguard breaks down the 371 funds as:

U.S investors: 176 index and actively managed funds
Non-U.S. investors: 195 additional funds

regards,
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Re: "more than 371 funds?"

Post by dkturner » Thu Aug 24, 2017 11:30 am

Munir wrote:
Tue Aug 22, 2017 12:57 pm
dkturner wrote:
Tue Aug 22, 2017 11:26 am
Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
When the Vanguard Group is approaching $5,000,000,000,000 in assets under management it has to adopt an all things to all men outlook if it wants to continue to grow.
I assume you meant "all things to all people" and not just men :happy .
I was quoting St. Paul (1 Corinthians 9: 19-23)

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by jhfenton » Thu Aug 24, 2017 1:16 pm

It's an interesting structure, and I understand why they're doing it the way they are. The structure, though, makes it less attractive, as I prefer bond mutual funds.

But I doubt I would invest in it anyway, as I prefer to slice up my bond allocation. I currently own VSIGX (Intermediate Treasury/Government Index), VICSX (Intermediate Corporate Index), and VSCSX (Short-Term Corporate Index) (plus brokered CDs and some VOHIX (Ohio LT Tax Exempt) in taxable).

I don't see any particular advantage to combining the corporate bonds and adding in long-term.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by TropikThunder » Thu Aug 24, 2017 9:58 pm

JoMoney wrote:
Tue Aug 22, 2017 10:29 am
I would think one of the advantages of having a 'Total Bond' fund, would be less need to turnover the portfolio - no need to sell a bond because it's moved outside the funds targeted maturity/duration. By structuring it as a fund of other funds that do target specific maturity ranges they lose that :?
I've never really looked at the holdings of the soon-to-be underlying ETF's (Long, Interm, and Short Corporates) but is it conceivable that a 25-year bond could be bought by the Long Term ETF (VCLT) at issue, then sold at 10 years and re-purchased by the Intermediate Term ETF (VCIT), then sold again at 5 years and re-purchased by the Short Term ETF (VCSH), and then sold again at 1 year, generating capital gains each time? Maybe that happens anyway if you hold each ETF but as JoMoney said if a new "Total Corporate" took the TBM approach rather than ETF-of-ETF's it would have significantly lower capital gains.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by not4me » Fri Aug 25, 2017 9:05 am

I've read minimally on this outside this forum & it seems as if at least some see this as Vanguard offering a product expected to compete against ishares LQD etf & a Goldman Sachs etf GIGB. I don't think I understand yet which index the new Vanguard etf would track & how, if at all, it differs from other etfs. Hand in glove with the index, I'm interested in knowing the proportion of the existing etfs in the new one.

My general sense from earlier posts is that some aren't interested in corporate bonds & some would prefer other ways of owning this space. I wonder if the Vanguard Total Bond mutual fund wasn't well established & the BND etf was being introduced as an etf of etfs, if it would receive similar reaction.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by asset_chaos » Fri Aug 25, 2017 5:09 pm

JoMoney wrote:
Tue Aug 22, 2017 10:29 am
" The fund will be structured as an ETF of ETFs, investing directly in three existing, low-cost ETFs: Vanguard Short-Term Corporate Bond ETF (VCSH), Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and Vanguard Long-Term Corporate Bond ETF (VCLT). "
Weird.
I would think one of the advantages of having a 'Total Bond' fund, would be less need to turnover the portfolio - no need to sell a bond because it's moved outside the funds targeted maturity/duration. By structuring it as a fund of other funds that do target specific maturity ranges they lose that :?
I have read (where exactly escapes me now, perhaps statements of additional information) that Vanguard runs an internal market where it first "crosses" trades internally between its funds in order to minimize trading cost. E.g. Wellington wants to sell n shares of Apple and Total Stock wants to buy m shares of Apple. First they trade with each other as much as possible inside Vanguard before paying more to trade in the open markets. It would then not be surprising if bonds that migrated out of one etf style fund into another weren't simply traded internally for no cost.

Of course, I have no specific knowledge of Vanguard's internal workings or its plans on how to run this etf of etfs.
Regards, | | Guy

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Longtermgrowth » Fri Aug 25, 2017 10:29 pm

My initial thought when seeing the thread title was: Nice! More diversification with probably not too far off average duration if I was otherwise going with VCIT (Vanguard Intermediate-Term Corporate Bond ETF). However, after seeing that it is a fund of funds, or ETF of ETFs, I have the feeling that in a taxable account, it may not be near as efficient as VCIT; not to say that VCIT is terribly efficient in taxable in the first place...

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by VaR » Sat Aug 26, 2017 6:40 pm

Longtermgrowth wrote:
Fri Aug 25, 2017 10:29 pm
My initial thought when seeing the thread title was: Nice! More diversification with probably not too far off average duration if I was otherwise going with VCIT (Vanguard Intermediate-Term Corporate Bond ETF). However, after seeing that it is a fund of funds, or ETF of ETFs, I have the feeling that in a taxable account, it may not be near as efficient as VCIT; not to say that VCIT is terribly efficient in taxable in the first place...
Two things make it likely that this won't be a problem:
1. The ability of ETFs to funnel low cost-basis shares to in-kind redemptions.
2. Corporate bonds over the long-haul tend to have negative capital gains due to defaults and downgrades.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Doc » Sun Aug 27, 2017 7:11 am

VaR wrote:
Sat Aug 26, 2017 6:40 pm
Corporate bonds over the long-haul tend to have negative capital gains due to defaults and downgrades
If any bond is bought at issue and sold before maturity it will have a capital gain or loss depending on whether interest rates have gone down or up in the interim. I think the call provision is a factor but the timing of the call and the funds maturity range mandate complicates the analysis.

Do you have a data source?
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by VaR » Sun Aug 27, 2017 3:02 pm

Doc wrote:
Sun Aug 27, 2017 7:11 am
If any bond is bought at issue and sold before maturity it will have a capital gain or loss depending on whether interest rates have gone down or up in the interim. I think the call provision is a factor but the timing of the call and the funds maturity range mandate complicates the analysis.
This is true. The reason I think the effect is muted on corporate bond ETFs is that funds, outside of redemption, will hold bonds through to maturity (see below for exception) or downgrade below investment grade (for investment grade bond funds).

So as you state, the thing that could (not would) cause capital gains in a bond ETF is rates or spreads going down. And over the long haul, rates and spreads will average out to neither rising nor falling. And I'm saying that over the long haul, NAV of corporate bond funds are pulled down by defaults and downgrades.

The long-term effect that will pull up NAV for long-term and intermediate-term bond funds is the natural upward slope of the yield curve. This will push the NAV up by (yield difference)/(maturity difference) per year. So for example if an intermediate term corporate fund buys 10 year and sells 5 year bonds and the yield difference is 100 basis points, NAV should drift up by 20 basis points per year.

My back-of-the-envelope estimates for the other effects:
1. Yield loss due to defaults: 0-21 basis points per year. Note that this only includes defaults that occurred within the calendar year a bond was rated investment grade at the start of the year. I'm also assuming 50% recovery rate.
2. Yield loss due to downgrades below investment grade: 12-80 basis points per year.
3. Annual standard deviation expressed as yield: -80 to 80 basis points.
Do you have a data source?
No, not for the analysis itself, which is my own. Note that my statement isn't empirical based on bond fund prices over the past 35 years. The historical data shows small annual price appreciation due to the mostly steady decline in interest rates over the past 35 years.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Doc » Sun Aug 27, 2017 3:34 pm

@ VaR

I don't have time to go through your post in detail. I do understand the concepts.

As a generality, given the ideas you presented the index fund is at a disadvantage. A 5-10 index fund for example, has to buy that 20 with 10 years left to maturity even though it's obvious that it is going to be called soon. The active manager can just skip that one and buy a new 10 instead this eliminating the call at least for that one issue.

He also gets to sell that new ten with 6 years left or only 4 years left depending on the shape of the yield curve at the time.

I really don't see this working with an ETF of ETF's.
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by MnD » Sun Aug 27, 2017 8:02 pm

saltycaper wrote:
Tue Aug 22, 2017 1:05 pm
I suspect Mr. Bogle would like this fund, if it were not an ETF of ETFs.
50% total bond market, 50% corporate bond fund if I recall the interview.

VaR
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by VaR » Mon Aug 28, 2017 10:06 pm

Doc wrote:
Sun Aug 27, 2017 3:34 pm
As a generality, given the ideas you presented the index fund is at a disadvantage. A 5-10 index fund for example, has to buy that 20 with 10 years left to maturity even though it's obvious that it is going to be called soon. The active manager can just skip that one and buy a new 10 instead this eliminating the call at least for that one issue.

He also gets to sell that new ten with 6 years left or only 4 years left depending on the shape of the yield curve at the time.
I agree that an actively tax managed bond fund can use the tactics you mention to achieve tax optimization. I would pose a couple of questions, though:
1. What does this tax optimization do? I suspect that it avoids capital gains and instead turns it into interest income. This actually has negative consequences for taxable bonds.
2. How much does this tax optimization do? I suspect that it can avoid no more than 100 basis points of capital gains and likely much less.
I really don't see this working with an ETF of ETF's.
I have two observations depending on what the implication is:
1. I think that the concepts discussed enable the underlying ETFs to not have to throw off any gains, even though they may end up buying discount bonds and selling premium bonds.
2. The natural ETF tax advantage of being able to redeem out low basis shares can defer a great deal of capital gains. In some ways this might work better for an ETF of bond ETFs because the high turnover of bond ETFs puts pressure on the "redemption capacity" to keep up with offsetting realized gains in the underlying ETF portfolio.

But we will see how successful they are.

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Doc
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Doc » Tue Aug 29, 2017 9:00 am

VaR wrote:
Mon Aug 28, 2017 10:06 pm
1. What does this tax optimization do? I suspect that it avoids capital gains and instead turns it into interest income. This actually has negative consequences for taxable bonds.
It works the other way around. If you sell a bond before maturity it usually sells at a premium over par. Think of a ten year note with a 2% coupon with three years left to maturity. The going rate for a three may be say 1% yield. So the old note sells at a premium of approximately the 1% difference over the next three years. By selling you convert that future 3% into capital gains instead of ordinary income.

It's part of the "riding the yield curve" concept.

Of course costs matter and the active fund manager has to keep his costs down or it will eat up his advantage over the index fund.
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Tyler Aspect » Tue Aug 29, 2017 10:28 am

I view the ETF of ETF structure as a bootstrap mechanism. After the ETF gains significant asset, the fund manager can always ask for a re-org into a pure ETF if there is an advantage in doing so.
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VaR
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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by VaR » Wed Aug 30, 2017 1:54 am

Doc wrote:
Tue Aug 29, 2017 9:00 am
It works the other way around. If you sell a bond before maturity it usually sells at a premium over par. Think of a ten year note with a 2% coupon with three years left to maturity. The going rate for a three may be say 1% yield. So the old note sells at a premium of approximately the 1% difference over the next three years. By selling you convert that future 3% into capital gains instead of ordinary income.

It's part of the "riding the yield curve" concept.
I understand the cutely named "riding the yield curve" concept. It's unclear why you're quoting it as a *tax advantage* that actively managed funds have over ETFs, which was the original question a poster asked that I was trying to narrowly address.

I don't doubt that active bond fund managers have a number of strategies that they [think] they can use to gain an advantage over index bond funds. My intent was to try to shed some light on the following question:
Longtermgrowth wrote:I have the feeling that in a taxable account, it may not be near as efficient as VCIT
If you think you have a better answer, please contribute it! I'm no expert at corporate bond asset management strategies, my specialty was more in fixed income option and credit derivative analytics.

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Re: Vanguard Announces Plans To Launch Total Corporate Bond ETF

Post by Doc » Wed Aug 30, 2017 9:29 am

VaR wrote:
Wed Aug 30, 2017 1:54 am
I understand the cutely named "riding the yield curve" concept. It's unclear why you're quoting it as a *tax advantage* that actively managed funds have over ETFs, which was the original question a poster asked that I was trying to narrowly address.
Selling a bond before maturity often times converts the remaining income from that bond from ordinary income into capital gains. This gives the active manager an advantage over the index manager that has to hold the bond if it is in his index.

The ETF equity fund manager may be able to get the same effect through the creation unit process. I don't know enough about the creation unit process with bonds to know where the overall advantage lies.

I was thinking of index funds not ETFs when I made my original comment.
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Re: "more than 371 funds?"

Post by ThrustVectoring » Wed Aug 30, 2017 5:42 pm

Munir wrote:
Tue Aug 22, 2017 12:57 pm
dkturner wrote:
Tue Aug 22, 2017 11:26 am
Taylor Larimore wrote:
Tue Aug 22, 2017 11:02 am
Bogleheads:

According to the Announcement:
The firm, headquartered in Valley Forge, Pennsylvania, offers more than 371 funds
.
Can anyone explain why Vanguard offers so many funds?

Best wishes
Taylor
When the Vanguard Group is approaching $5,000,000,000,000 in assets under management it has to adopt an all things to all men outlook if it wants to continue to grow.
I assume you meant "all things to all people" and not just men :happy .
English is weird. "Men" can refer either to "members of Homo Sapiens" or "male members of Homo Sapiens", depending on context. The vast majority of people aren't sexist, so whenever it sounds like someone is deliberately excluding women they're probably using "man" or "men" to refer to humans as a class.

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