Best Treasury Bond Fund/ETF for Taxable Accounts

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weltschmerz
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Best Treasury Bond Fund/ETF for Taxable Accounts

Post by weltschmerz » Wed Feb 14, 2018 12:59 pm

I am trying to determine the BEST intermediate-term US treasury bond fund/ETF for use in a taxable account. By best, I mean:
- should hold only US treasuries
- low expense ratio
- should be tax efficient (not a lot of yearly capital gains)

The contenders are:
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX)
Vanguard Intermediate-Term Treasury ETF (VGIT)
^(this is the ETF version of Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX))
Schwab Intermediate-Term U.S. Treasury ETF (SCHR)
iShares 3-7 Year Treasury Bond ETF (IEI)

All of these have > 99% treasuries and a duration of 4.5-5.5 years. And they all have more than $1B under management, so the bid/ask spreads are small for the ETFs.

Here are the expense ratios (ER):
VFIUX = 0.10%
VGIT/VSIGX = 0.07%
SCHR = 0.06%
IEI = 0.15%

Here is the distribution data for the past few years, pulled from Morningstar:

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Summary:
VFIUX had sizable capital gains in 2015 and 2016.
VGIT/VSIGX had small capital gains.
SCHR and IEI had no capital gains.
SCHR and IEI are the most tax-efficient, and since the ER of SCHR is less than half of IEI:

SCHR is the best choice for a taxable account.

Additional considerations:
If you have to pay a commission to buy SCHR, or if you are trying to only use Vanguard products to meet Voyager/Flagship requirements, then SCHR may not be the best for your situation.

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by oldcomputerguy » Wed Feb 14, 2018 1:10 pm

weltschmerz wrote:
Wed Feb 14, 2018 12:59 pm
- should be tax efficient (not a lot of yearly capital gains)
Capital gains are not the only concern when considering tax efficiency. Dividends from bond funds do not receive the same preferred tax treatment as do qualified stock dividends or long-term capital gains; they are taxed at your marginal tax rate just like any other regular income. Granted that dividends from Treasurys are not taxed at the state or local level, they are not generally considered "tax-efficient" in a taxable account at a Federal level.
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by robertmcd » Wed Feb 14, 2018 1:26 pm

I would say use VGIT at vanguard or SCHR if you are at schwab. Negligible difference.

If you believe that low cost active management can add value then use VFIUX if you can afford the 50k for admiral shares. I believe vanguard can make up 3 basis points of difference long term vs. the index.

In the end, these funds are all so ridiculously similar it will not make any difference what you use.

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by weltschmerz » Wed Feb 14, 2018 2:05 pm

robertmcd wrote:
Wed Feb 14, 2018 1:26 pm
I would say use VGIT at vanguard or SCHR if you are at schwab. Negligible difference.

If you believe that low cost active management can add value then use VFIUX if you can afford the 50k for admiral shares. I believe vanguard can make up 3 basis points of difference long term vs. the index.

In the end, these funds are all so ridiculously similar it will not make any difference what you use.
I agree with you regarding SCHR vs VGIT, they are very similar. IEI is also not bad, though it's expenses are >2x higher.

I also concur that the active management of VFIUX could give that fund better returns, but the capital gains that the fund managers create seem to make that fund less suitable for a taxable account than the others.

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by robertmcd » Wed Feb 14, 2018 2:41 pm

This being a bond fund, I believe capital gains would either be the same (if short term) or less (if long term) than the taxes on the ordinary income. So couldn't long term capital gains actually be a better way to generate total return than with income?

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by Doc » Wed Feb 14, 2018 4:22 pm

They are all very similar. The active Vanguard fund is not necessarily all treasuries all the time. My records show that it was only 90% Treasuries last June (M*) data with an average credit rating of AA. It's now 99.9% T's with a credit rating of AAA.

I use all of them in different accounts except for the Schwab fund and that's only because we have most of our Treasury ladder at Schwab and have little use for a fund.

You might want to look at the duration. With rates likely to go up the shorter duration funds might be given a closer look. IEI is about a year shorter.
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by grabiner » Wed Feb 14, 2018 10:50 pm

robertmcd wrote:
Wed Feb 14, 2018 2:41 pm
This being a bond fund, I believe capital gains would either be the same (if short term) or less (if long term) than the taxes on the ordinary income. So couldn't long term capital gains actually be a better way to generate total return than with income?
Long-term gains are taxed at a lower rate.

Short-term gains might wind up being taxed at a slightly higher rate, because most states tax short-term gains on Treasury funds, while they do not tax the dividends.

Treasury funds are unlikely to have much in short-term gains, so the gains will still make them more tax-efficient. The reason for long-term gains is that the Treasuries in the fund change. For example, a fund holding 5-10 year Treasuries will buy 10-year bonds and sell them five years later as 5-year bonds. If the 5-year yield now is 1% less than the 10-year yield five years ago, there will be a 5% gain on these bonds, which is 1% of the fund assets.
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by Noobvestor » Wed Feb 14, 2018 11:25 pm

Well this is fascinating. I didn't even realize there were two different intermediate-term Treasury funds at Vanguard!
weltschmerz wrote:
Wed Feb 14, 2018 2:05 pm
I also concur that the active management of VFIUX could give that fund better returns, but the capital gains that the fund managers create seem to make that fund less suitable for a taxable account than the others.
Given that VGIT and VSIGX are share classes of the same fund, maybe VSIGX would be the preferred fund over VFIUX from a tax standpoint, the same way that stock index funds sharing ETF classes can use the ETFs to effectively share cap gains burdens (as I understand it)?
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by raven15 » Thu Feb 15, 2018 1:23 am

I accidentally started a knock down drag out thread about this after forgetting how to use morningstar. It ended up being a better discussion than it should have.

Anyhow, the conclusion was that SCHR is the intermediate treasury bond champion.
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by weltschmerz » Thu Feb 15, 2018 9:31 pm

raven15 wrote:
Thu Feb 15, 2018 1:23 am
Anyhow, the conclusion was that SCHR is the intermediate treasury bond champion.
Good to see someone else came to the same conclusion. VGIT is definitely a very close second-place though.

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by radiowave » Thu Feb 15, 2018 10:48 pm

As an alternative, you can buy Treasuries directly in Fidelity and Vanguard or create a Treasury bill/note ladder. At Fidelity you can set up an automatic roll over on Treasuries.

Vanguard https://personal.vanguard.com/us/FixedIncomeTrading
Fidelity https://fixedincome.fidelity.com/ftgw/f ... Treasury

Note: you may have to log in to each to access
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by Fclevz » Thu Feb 15, 2018 11:33 pm

I’ve always liked the ‘total treasury’ ETF GOVT.

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by triceratop » Fri Feb 16, 2018 12:19 am

raven15 wrote:
Thu Feb 15, 2018 1:23 am
I accidentally started a knock down drag out thread about this after forgetting how to use morningstar. It ended up being a better discussion than it should have.

Anyhow, the conclusion was that SCHR is the intermediate treasury bond champion.
Are you referring to this thread? I don't see the consensus emerging that SCHR is better than VGIT. Anyway, since that thread the two funds have converged even more, as VGIT is now a pure treasury fund.
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by Doc » Fri Feb 16, 2018 7:47 am

triceratop wrote:
Fri Feb 16, 2018 12:19 am
Anyway, since that thread the two funds have converged even more, as VGIT is now a pure treasury fund.
I would expect that the move to all Treasuries would reduce the performance slightly before expenses.

Without looking I think the durations may be different. You could also have a roll yield effect.
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by raven15 » Fri Feb 16, 2018 4:11 pm

triceratop wrote:
Fri Feb 16, 2018 12:19 am
raven15 wrote:
Thu Feb 15, 2018 1:23 am
I accidentally started a knock down drag out thread about this after forgetting how to use morningstar. It ended up being a better discussion than it should have.

Anyhow, the conclusion was that SCHR is the intermediate treasury bond champion.
Are you referring to this thread? I don't see the consensus emerging that SCHR is better than VGIT. Anyway, since that thread the two funds have converged even more, as VGIT is now a pure treasury fund.
Oh. I guess I forgot my own conclusion. :mrgreen:
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by Noobvestor » Fri Feb 16, 2018 9:27 pm

FWIW, I just had to make this decision, and went with VSIGX over VFIUX (I prefer to stick to Vanguard funds, so those were the options). I decided the lower expense ratio, simplicity of indexing, and vague possible benefits of an ETF share class made it a potentially better choice.
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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by UpperNwGuy » Fri Feb 16, 2018 9:51 pm

Noobvestor wrote:
Fri Feb 16, 2018 9:27 pm
FWIW, I just had to make this decision, and went with VSIGX over VFIUX (I prefer to stick to Vanguard funds, so those were the options). I decided the lower expense ratio, simplicity of indexing, and vague possible benefits of an ETF share class made it a potentially better choice.
If I had to choose between VSIGX and VFIUX, I would go with VSIGX for the same reasons you gave.

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Re: Best Treasury Bond Fund/ETF for Taxable Accounts

Post by clown » Fri Feb 16, 2018 11:22 pm

I think it's simpler than some of the above posts suggest. Analysis Paralysis gets in the way.

Tresury Bond funds (of a similar maturity -- short, intermediate, long) are essentially commodities. Their results will be virtually identical except for fees. Therefore, go for the smallest expense ratio.

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