fantasytensai wrote: ↑
Thu May 24, 2018 9:29 pm
Wait, does 1 share of VBTLX give the same yield regardless of its NAV? If so what you say make sense, NAV doesn't matter. I had no idea that's how it worked. I always assumed that 1 share of VBTLX at a NAV of $30 will give off more dividend per month than 1 share of VBTLX at a NAV of $20.
Not exactly. Fund distributions are not necessarily exactly consistent from month to month even under conditions where you don't expect a change on average and where the NAV is constant, even beyond the number of days in a month being different. So they will not be exactly the same generally, regardless of NAV.
Bond fund NAV can drift over time while changing distributions because of drops from downgrades and selling bonds early that are not recovered. The evolving portfolio over time makes things less exact.
For an individual bond, though, if there's no default, the coupon will be the same no matter what the price is. The price could start out at $100 with two payments of $1.50 twice a year, and later the market price is $95 or $105 and it's still paying $1.50 twice a year.
It would generally be very difficult for a fund like total bond to lose 33% of its value. We're talking massively unprecedented levels of defaults, or rates spiking by 6% very rapidly (more likely needs to be more than that). If it happened instantaneously on the basis of interest rate changes, then the distributions should be the same as before, and would gradually start to increase. The actual yields (yield to maturity) would be much higher instantaneously, but the actual distributions are based on coupons received.
There are paths from $30 to $20 that might mean lower distributions, but most likely they would be higher if anything on a dollar basis.
Generally price is a part of return, though. If bond prices drop and there's no default, they will recover value as they move towards maturity (and new bonds bought will be at the higher yields). The net effect of yields of the bonds owned rising is positive for a bond fund investor in the long term, increasing returns in the long run, though it's a negative in the shorter term owing to the price drop. The breakeven point is roughly the duration of a fund, though of course it's not like rates change once and stop moving; future events will have their own effects.
Here's a quick look at some distribution history via Yahoo Finance, which is not always actually 100% accurate and doesn't distinguish between the income distributions and capital gains distributions (the latter are the smaller ones near the end of years):
https://finance.yahoo.com/quote/VBTLX/h ... quency=1mo