Does bond length matter for investing in bond funds?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
JustinR
Posts: 406
Joined: Tue Apr 27, 2010 11:43 pm

Does bond length matter for investing in bond funds?

Post by JustinR » Tue Oct 17, 2017 2:30 am

HSAs are not recognized in CA. So in my HSA, I invest in government bonds that have minimal state taxes.

I've been investing in VGIT (Vanguard Intermediate-Term Government Bond ETF). TDAmeritrade is going to start charging commissions for VG ETFs, so I'm looking for a substitute.


I'm currently comparing these two:
  • ITE (SPDR Bloomberg Barclays Intermediate Term Treasury ETF)
  • SPTL (SPDR Portfolio Long Term Treasury ETF)
The Intermediate Term fund has depressingly low returns. It's almost like I'm investing in nothing or leaving it in a savings bank. While the Long Term fund has higher returns and has a smaller expense ratio. But people often recommend against investing in long-term bonds?

Bonds in general are a confusing subject for me. But if I'm not investing in bonds directly, and investing in a bond fund, does it matter the length? The yields are better in the long-term fund so why shouldn't I invest in that?




Other options:
  • SPTS (SPDR Portfolio Short Term Treasury ETF)
  • GOVT (iShares U.S. Treasury Bond ETF)
  • USFR (WisdomTree Bloomberg Floating Rate Treasury Fund)
  • IPE (SPDR Bloomberg Barclays TIPS ETF)
  • TIPX (SPDR Bloomberg Barclays 1-10 Year TIPS ETF)
  • STIP (iShares 0-5 Year TIPS Bond ETF)

Johm221122
Posts: 5039
Joined: Fri May 13, 2011 6:27 pm

Re: Does bond length matter for investing in bond funds?

Post by Johm221122 » Tue Oct 17, 2017 4:44 am

JustinR
The yields are better in the long-term fund so why shouldn't I invest in that?
The risk is greater,if/when rates rise long term bonds funds NAV will fall more than shorter bonds,but your fund will pay higher interest
Have you looked at Wiki
https://www.bogleheads.org/wiki/Individ ... _bond_fund

dbr
Posts: 23722
Joined: Sun Mar 04, 2007 9:50 am

Re: Does bond length matter for investing in bond funds?

Post by dbr » Tue Oct 17, 2017 8:32 am

JustinR wrote:
Tue Oct 17, 2017 2:30 am

I'm currently comparing these two:
  • ITE (SPDR Bloomberg Barclays Intermediate Term Treasury ETF)
  • SPTL (SPDR Portfolio Long Term Treasury ETF)
The Intermediate Term fund has depressingly low returns. It's almost like I'm investing in nothing or leaving it in a savings bank. While the Long Term fund has higher returns and has a smaller expense ratio. But people often recommend against investing in long-term bonds?

As the other poster stated longer bonds fluctuate more with changes in interest rate, specifically losing a lot of value if rates go up until enough time has passed to regain value from higher yield. Depressingly low returns affect all bonds at this time because you and everyone else is unlucky at the moment. Harden the Heck Up and realize that the bowl is sometimes full of pits not cherries.

Bonds in general are a confusing subject for me. But if I'm not investing in bonds directly, and investing in a bond fund, does it matter the length? The yields are better in the long-term fund so why shouldn't I invest in that?

A bond fund is just a collection of bonds and offers no magic sauce to avoid reality. It is a legitimate decision whether or not to take more risk for more return if that is what you want to do. A fairly general conclusion might be that intermediate bonds are a favorable trade-off of risk and return. There is also a school of thought that risk should be taken in equities rather than bonds and those people hold short bonds and cash like investments along with stocks. It is probably a bad idea to increase risk to get more return when return is hard to come by.



Other options:
  • SPTS (SPDR Portfolio Short Term Treasury ETF)
  • GOVT (iShares U.S. Treasury Bond ETF)
  • USFR (WisdomTree Bloomberg Floating Rate Treasury Fund)
  • IPE (SPDR Bloomberg Barclays TIPS ETF)
  • TIPX (SPDR Bloomberg Barclays 1-10 Year TIPS ETF)
  • STIP (iShares 0-5 Year TIPS Bond ETF)

rkhusky
Posts: 4401
Joined: Thu Aug 18, 2011 8:09 pm

Re: Does bond length matter for investing in bond funds?

Post by rkhusky » Tue Oct 17, 2017 8:53 am

The length of the bond should be related to when you will need the money. If you don't need to withdraw money for 30 years from a fund with an average duration of 10 years, you should be okay. You are taking a risk however, if you plan to withdraw money in 10 years from a fund with an average duration of 30 years.

dbr
Posts: 23722
Joined: Sun Mar 04, 2007 9:50 am

Re: Does bond length matter for investing in bond funds?

Post by dbr » Tue Oct 17, 2017 9:00 am

rkhusky wrote:
Tue Oct 17, 2017 8:53 am
The length of the bond should be related to when you will need the money. If you don't need to withdraw money for 30 years from a fund with an average duration of 10 years, you should be okay. You are taking a risk however, if you plan to withdraw money in 10 years from a fund with an average duration of 30 years.
People accumulating for and then living out retirement don't have a specific time when the money is "needed." There are very few situations where someone has a clearly identified time when a significant amount of money is needed. I would advocate not looking at bonds in isolation and instead consider the risk and return of the portfolio as a whole. Less in stocks and more in bonds reduces both risk and return of the portfolio. Choosing less in stocks and more in bonds may increase the risk of portfolio failure in retirement if there are not enough stocks. Exactly what bonds are elected is a second order effect that someone anxious about overall efficiency might address. For most investors simply choosing the right stock/bond allocation is enough of a handle.

There are people who choose to fund retirement income by building a ladder of bonds that come due just in order to be withdrawn for income year in and year out. I am not sure there is really an advantage to doing that.

mega317
Posts: 1110
Joined: Tue Apr 19, 2016 10:55 am

Re: Does bond length matter for investing in bond funds?

Post by mega317 » Tue Oct 17, 2017 9:01 am

If you're happy with VGIT, in my opinion you should be satisfied with ITE. They are virtually the same. Another option, especially if you're not using the HSA for current expenses, is to use a tax-efficient stock fund and hold your bonds in a tax-deferred retirement account.

aristotelian
Posts: 3033
Joined: Wed Jan 11, 2017 8:05 pm

Re: Does bond length matter for investing in bond funds?

Post by aristotelian » Tue Oct 17, 2017 9:39 am

Look at the chart for long term bond funds. They are very risky, just as risky as stocks. Personally, I prefer to keep things simple and put what I am comfortable putting at risk in stocks, and then putting what I want to have stable in intermediate term bonds.

dbr
Posts: 23722
Joined: Sun Mar 04, 2007 9:50 am

Re: Does bond length matter for investing in bond funds?

Post by dbr » Tue Oct 17, 2017 11:27 am

aristotelian wrote:
Tue Oct 17, 2017 9:39 am
Look at the chart for long term bond funds. They are very risky, just as risky as stocks. Personally, I prefer to keep things simple and put what I am comfortable putting at risk in stocks, and then putting what I want to have stable in intermediate term bonds.
That is an exaggeration. Long bonds are certainly not without risk but the risk is not as much as that of stocks. An example of risk estimates for asset classes can be found here: https://portfoliosolutions.com/latest-l ... ecast-2016 High yield corporates really do start to range into stock territory. Long term Treasuries, for example, really do not.

alex_686
Posts: 2548
Joined: Mon Feb 09, 2015 2:39 pm

Re: Does bond length matter for investing in bond funds?

Post by alex_686 » Tue Oct 17, 2017 11:33 am

JustinR wrote:
Tue Oct 17, 2017 2:30 am
While the Long Term fund has higher returns and has a smaller expense ratio. But people often recommend against investing in long-term bonds?
The last 10 years have been exceptionally good for long term bonds. The longer the maturity the higher the duration, the higher the duration. With rates falling these long duration bonds have had the wind at their back. Rates can't keep falling forever.

I prefer intermediate bonds. Lower return but also lower risk. It fits my risk profile better.

aristotelian
Posts: 3033
Joined: Wed Jan 11, 2017 8:05 pm

Re: Does bond length matter for investing in bond funds?

Post by aristotelian » Tue Oct 17, 2017 11:40 am

dbr wrote:
Tue Oct 17, 2017 11:27 am
aristotelian wrote:
Tue Oct 17, 2017 9:39 am
Look at the chart for long term bond funds. They are very risky, just as risky as stocks. Personally, I prefer to keep things simple and put what I am comfortable putting at risk in stocks, and then putting what I want to have stable in intermediate term bonds.
That is an exaggeration. Long bonds are certainly not without risk but the risk is not as much as that of stocks. An example of risk estimates for asset classes can be found here: https://portfoliosolutions.com/latest-l ... ecast-2016 High yield corporates really do start to range into stock territory. Long term Treasuries, for example, really do not.
Really? I see two years in the last 15 of double digit drawdowns:
https://personal.vanguard.com/us/funds/ ... 083#tab=1a

Maybe a slight exaggeration, but not the kind of stability most seek from their bond allocation.

lack_ey
Posts: 5713
Joined: Wed Nov 19, 2014 11:55 pm

Re: Does bond length matter for investing in bond funds?

Post by lack_ey » Tue Oct 17, 2017 11:42 am

dbr wrote:
Tue Oct 17, 2017 11:27 am
That is an exaggeration. Long bonds are certainly not without risk but the risk is not as much as that of stocks. An example of risk estimates for asset classes can be found here: https://portfoliosolutions.com/latest-l ... ecast-2016 High yield corporates really do start to range into stock territory. Long term Treasuries, for example, really do not.
Those numbers look weird to me for the high yield corporates. Actually, that may be because for some reason they're trying to estimate 10-year BB-B corporates even though the majority of junk bonds are shorter maturity. Less than 2% and 3% of iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK) has a maturity over 10 years. They usually don't issue long-term bonds as nobody really wants it. A good amount of the time, long-term junk is a fallen angel, issued as investment grade.

Calculated over the last 10 years, which I think we can fairly characterize as relatively placid for long-term bonds and with quite a scare in credit, broad junk bond funds were slightly less volatile than long-term government bonds:
https://www.portfoliovisualizer.com/ass ... ingDays=60

I do agree that unless you go to the very longest term, maybe STRIPS, you probably don't get higher... risk (well, volatility) than stocks in long-term government bonds. Or maybe if you're talking about long-term bonds more generally, including corporate bonds.

GuineaPig
Posts: 39
Joined: Tue Jun 20, 2017 10:50 am

Re: Does bond length matter for investing in bond funds?

Post by GuineaPig » Tue Oct 17, 2017 3:15 pm

Thank you for posting this thread, though I know it has been discussed many times. I also live in California and share the overall "meh" feeling about investing my HSA in an investment that bears 1.7% interest (that's the current SEC Yield for ITE, the intermediate Treasury ETF).

And yet, a couple of things:
1) That is still better than most any regular savings account. And deposits are deducted from your AGI for federal taxes.
2) It will be fully tax-free most years, with no fussing over paperwork for CA until I sell the investment, at which point there will be capital gains/losses for the state.
3) I will simply readjust other accounts to make up for this account. In other words, this will be my safest investment account and bonds that I hold elsewhere can be switched to equities.

For me, it's worth it to avoid having to examine dividends and whatnot every year just for the state taxes (or risk a state tax audit).

Now, that still taxes us back to, "Why not long-term bonds?" Long-term bonds have done well for a long time due to falling interest rates. There's nowhere left for interest rates to fall really, unless we go into a deflationary period (possible!). If interest rates go up, those long-term bonds are not going to look so hot.

GOVT -- the iShares full Treasury ETF -- is about 85% bonds that are 10 years or less, with about 15% at 20+ years. Its SEC yield has been 1.8% over the last 30 days, not much better than ITE. The long-term fund has had a 2.67% SEC yield. Meh.

Johm221122
Posts: 5039
Joined: Fri May 13, 2011 6:27 pm

Re: Does bond length matter for investing in bond funds?

Post by Johm221122 » Tue Oct 17, 2017 6:34 pm

aristotelian wrote:
Tue Oct 17, 2017 9:39 am
I am comfortable putting at risk in stocks, and then putting what I want to have stable in intermediate term bonds.
I agree with this,bonds are for stability short or intermediate government bonds
I just don't consider long term or corporate for my investments

JustinR
Posts: 406
Joined: Tue Apr 27, 2010 11:43 pm

Re: Does bond length matter for investing in bond funds?

Post by JustinR » Tue Oct 17, 2017 9:12 pm

GuineaPig wrote:
Tue Oct 17, 2017 3:15 pm
Thank you for posting this thread, though I know it has been discussed many times. I also live in California and share the overall "meh" feeling about investing my HSA in an investment that bears 1.7% interest (that's the current SEC Yield for ITE, the intermediate Treasury ETF).

And yet, a couple of things:
1) That is still better than most any regular savings account. And deposits are deducted from your AGI for federal taxes.
2) It will be fully tax-free most years, with no fussing over paperwork for CA until I sell the investment, at which point there will be capital gains/losses for the state.
3) I will simply readjust other accounts to make up for this account. In other words, this will be my safest investment account and bonds that I hold elsewhere can be switched to equities.

For me, it's worth it to avoid having to examine dividends and whatnot every year just for the state taxes (or risk a state tax audit).

Now, that still taxes us back to, "Why not long-term bonds?" Long-term bonds have done well for a long time due to falling interest rates. There's nowhere left for interest rates to fall really, unless we go into a deflationary period (possible!). If interest rates go up, those long-term bonds are not going to look so hot.

GOVT -- the iShares full Treasury ETF -- is about 85% bonds that are 10 years or less, with about 15% at 20+ years. Its SEC yield has been 1.8% over the last 30 days, not much better than ITE. The long-term fund has had a 2.67% SEC yield. Meh.
SPTL on the other hand is 2.7%. So 1% more than ITE.

If interest rates go up, will the long term bonds go negative?

Johm221122
Posts: 5039
Joined: Fri May 13, 2011 6:27 pm

Re: Does bond length matter for investing in bond funds?

Post by Johm221122 » Tue Oct 17, 2017 9:36 pm

JustinR
If interest rates go up, will the long term bonds go negative?
Depends on how much rates go up,dividend(interest) may keep it from going negative

Zithron
Posts: 4
Joined: Sat Jan 16, 2016 7:49 pm

Re: Does bond length matter for investing in bond funds?

Post by Zithron » Tue Oct 17, 2017 9:41 pm

Sounds like you're using bond funds in place of equities to avoid losing gains to taxes. So why not do a mix of the two, similar what you'd do with equities and lower risk bonds?

JustinR
Posts: 406
Joined: Tue Apr 27, 2010 11:43 pm

Re: Does bond length matter for investing in bond funds?

Post by JustinR » Tue Oct 17, 2017 9:48 pm

Zithron wrote:
Tue Oct 17, 2017 9:41 pm
Sounds like you're using bond funds in place of equities to avoid losing gains to taxes. So why not do a mix of the two, similar what you'd do with equities and lower risk bonds?
Nope. This is part of my bond allocation.

It's just depressing to see it making 0.5% more than my savings account.

JustinR
Posts: 406
Joined: Tue Apr 27, 2010 11:43 pm

Re: Does bond length matter for investing in bond funds?

Post by JustinR » Tue Oct 17, 2017 10:43 pm

Johm221122 wrote:
Tue Oct 17, 2017 9:36 pm
JustinR
If interest rates go up, will the long term bonds go negative?
Depends on how much rates go up,dividend(interest) may keep it from going negative
Then it doesn't seem like there's any downside to going the higher yield long term bonds?

Johm221122
Posts: 5039
Joined: Fri May 13, 2011 6:27 pm

Re: Does bond length matter for investing in bond funds?

Post by Johm221122 » Wed Oct 18, 2017 4:24 am

JustinR wrote:
Tue Oct 17, 2017 10:43 pm
Johm221122 wrote:
Tue Oct 17, 2017 9:36 pm
JustinR
If interest rates go up, will the long term bonds go negative?
Depends on how much rates go up,dividend(interest) may keep it from going negative
Then it doesn't seem like there's any downside to going the higher yield long term bonds?
viewtopic.php?t=53592
SQUAWK Wrote

The Vanguard Long Term Treasury fund (VUSTX) has a duration of 12 years. Long term i-grade also has duration of 12.

If long term interest rates rise by 1%, the value of those bonds will fall by 12%.
If long term interest rates rise by 2%, the value of those bonds will fall by 24%.
If long term interest rates rise by 3%, the value of those bonds will fall by 36%.
Your fund is average 17 years to maturity

rkhusky
Posts: 4401
Joined: Thu Aug 18, 2011 8:09 pm

Re: Does bond length matter for investing in bond funds?

Post by rkhusky » Wed Oct 18, 2017 7:28 am

Johm221122 wrote:
Wed Oct 18, 2017 4:24 am
SQUAWK Wrote

The Vanguard Long Term Treasury fund (VUSTX) has a duration of 12 years. Long term i-grade also has duration of 12.

If long term interest rates rise by 1%, the value of those bonds will fall by 12%.
If long term interest rates rise by 2%, the value of those bonds will fall by 24%.
If long term interest rates rise by 3%, the value of those bonds will fall by 36%.
Your fund is average 17 years to maturity
Note that the above relation between interest rates and bond fund values is an approximation, based on certain assumptions, and not an absolute fact.

scrabbler1
Posts: 1988
Joined: Fri Nov 20, 2009 2:39 pm

Re: Does bond length matter for investing in bond funds?

Post by scrabbler1 » Wed Oct 18, 2017 7:46 am

I have been investing in bond funds for the last 27 years and own a variety of them today. In fact, it is a long-term bond fund whose monthly dividend pays most of my monthly expenses in my early retirement for the last 9 years.

I am willing to take the risk of the bond fund's NAV bouncing around a lot due to changes in interest rates because I don't plan on selling any shares. Declining returns in bond funds in general in the last 9 years have resulted in lower monthly dividend payments although I have been able to buy many more shares to offset this decline.

I have a considerable chunk of money in an intermediate-term corporate bond fund in my rollover IRA. I chose that fund because its composition was fairly close to the specialized Stable Return fund in my old company's 401k. This fund is a counterweight to the S&P 500 funds also in the IRA.

And I have a smaller amount of money in my own muni bond funds, the ones I have been in since the 1990s. Today, they act as my second-tier emergency funds. One of these funds is an intermediate-term muni bond fund. I chose this because I want more stability in its principal than I have in a longer-term fund, but I also want a better return than I would find in a short-term muni bond fund. This fund is a reasonable compromise between those two goals.

Post Reply