What is not to like about iShares Core Total USD Bond Market?

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Erwin
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What is not to like about iShares Core Total USD Bond Market?

Post by Erwin » Fri Apr 15, 2016 11:53 pm

If you believe that high yield bonds should be part of your bond portfolio in small doses, like Ferri preaches, than iShares Core Total USD Bond Market ETF (IUSB) does the job for you in only one fund. It tracks the Barclays U.S. Universal Bond Index; thus includes minor allocation of junk bonds.
Further, it is cheap at annual expense of 0.12% and if you are worried about rising rates, it is short term (Avg Eff Duration= 0.04 Yrs, Avg Eff Maturity= 2.67 Yrs)
Erwin

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by Coles » Sat Apr 16, 2016 12:22 am

Erwin wrote:Avg Eff Duration= 0.04 Yrs, Avg Eff Maturity= 2.67 Yrs
Do you really believe these numbers are realistic or do you just like to blindly copy-and-paste from third-party sources?

Try using first-party sources next time and ponder what a duration of 0.04 years means.
https://www.ishares.com/us/products/264 ... market-etf

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by NMJack » Sat Apr 16, 2016 1:11 am

Coles wrote:
Erwin wrote:Avg Eff Duration= 0.04 Yrs, Avg Eff Maturity= 2.67 Yrs
Do you really believe these numbers are realistic or do you just like to blindly copy-and-paste from third-party sources?

Try using first-party sources next time and ponder what a duration of 0.04 years means.
https://www.ishares.com/us/products/264 ... market-etf
Morningstar? Aren't they supposed to be the "experts" in telling us who to give our money to? Yikes! :twisted:

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Erwin
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Re: What is not to like about iShares Core Total USD Bond Market?

Post by Erwin » Sat Apr 16, 2016 1:57 am

Coles wrote:
Erwin wrote:Avg Eff Duration= 0.04 Yrs, Avg Eff Maturity= 2.67 Yrs
Do you really believe these numbers are realistic or do you just like to blindly copy-and-paste from third-party sources?

Try using first-party sources next time and ponder what a duration of 0.04 years means.
https://www.ishares.com/us/products/264 ... market-etf
Mr Coles,
I am very, very, very sorry. Morningstar has been always very accurate and a great companion, so I am surprised, to say the least. Now, notwithstanding this terrible, forgive me, terrible mistake, and focusing on the big picture (do you think that it would be possible?), I still ask the same question.
In fact, I even like it more, since in the long term, my preference, and the preference of most in this forum, is to invest in intermediate term instruments.
So, now, let us get your comments?
Erwin

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by lack_ey » Sat Apr 16, 2016 2:12 am

Seems reasonable enough.

Though for what it's worth if you want a dash of high-yield exposure (looks like 8% for IUSB), you can just mix a BarCap Agg fund with a junk bond fund. For example, 92% BND (ER = 0.07%) and 8% HYG (ER = 0.50%), which has a weighted ER less than IUSB. It's even cheaper by ER if you use JNK or better yet Vanguard's active high yield corporate fund. Or actually by using SCHZ instead of BND (though at a higher spread) and potentially a commission to trade.

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by stlutz » Sat Apr 16, 2016 9:32 am

A "normal" total bond fund (e.g. AGG/BND) will take all of the losses when an issue is downgraded to junk and participate in the none of the gains when it gets upgraded. This fund of course still takes the losses from downgrades but it does get the gains when an issue is upgraded.

On the other hand this fund does bear the full cost of any defaults.

The other thing to watch out for on IUSB is that it trades with much wider spreads than AGG and BND do. Not so much of a problem if you are buying and holding for 10+ years, but not a good fund for trading in and out of a lot.

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by Erwin » Sat Apr 16, 2016 10:17 am

stlutz wrote:A "normal" total bond fund (e.g. AGG/BND) will take all of the losses when an issue is downgraded to junk and participate in the none of the gains when it gets upgraded. This fund of course still takes the losses from downgrades but it does get the gains when an issue is upgraded.

On the other hand this fund does bear the full cost of any defaults.

The other thing to watch out for on IUSB is that it trades with much wider spreads than AGG and BND do. Not so much of a problem if you are buying and holding for 10+ years, but not a good fund for trading in and out of a lot.
I get your point, but from a theoretical point of view, I would like someone to explain to me why we push so hard to invest in the total equity market (at least I do) and we do not do the same when it comes to the bond market?
Erwin

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by nisiprius » Sat Apr 16, 2016 11:09 am

Because both advocates of investing in "high-yield," speculative, low-credit-quality, "junk" bonds and skeptics agree that it is a distinct asset class. It is not the same kind of investment as investment-grade bonds, and there's no fundamental reason to mix them together. It might help, it might not, but the whole point is that it is claimed to be a unique asset class with imperfect correlation to bonds.

The fundamental characteristic of investment-grade bonds is a relatively high degree of predictability and a low degree of risk. The bond is a contract to pay out specific numbers of dollars on specific dates (with variations and footnotes). If it is investment-grade, it is almost certain that the promise will be kept. If the issuer has a bad year its stock will go down, but if it is investment grade it has been judged to have a good enough safety margin that it can still stay in business and pay its bills--including bond interest and principal. The market's valuation of the bond depends mostly on the bond's stated terms and expectations of future interest rates.

The fundamental characteristic of "high-yield" bonds is that you are trading off a higher yield against real uncertainty as to whether the promises of payment will be kept. The company has been judged by the credit rating agencies to be shaky and not have much safety margin. The same business problems that lead to a fall in stock value will also lead to increased danger of bond default, to which the market will respond by deciding that the bond is worth less. Thus the bond's value doesn't just depend on its terms and interest rates. Like stocks, it responds to the market's judgements of the particular company's business situation. In 2008-2009, stocks dropped 50%, Total Bond almost went straight through--maybe 4% down at one point but back up even before stocks hit bottom. High-yield bonds dropped 20%.

To say that we should all automatically invest in both investment-grade bonds and non-investment-grade bonds because they are both called "bonds" is like saying that everyone who invests in "stocks" should put most of their money in equities, but some of it into wooden restraint devices because they, too, are "stocks."
Image
Oh, OK, that's silly.

In any case, according to Barclay's, the U.S. Aggregate Bond Index accounts for 87% (5/6ths) of the U.S. Universal Bond Index... and junk bonds only account for 5.3% of that index. So, just as there isn't really an awful lot of difference between the S&P 500, which accounts for 80% of the total stock market, and a total market index. there isn't really an awful lot of difference between the Barclay's U. S. Aggregate and U.S. Universal bond indices.
Image
All that said, if, for whatever reasons
  • you want to"invest in bonds that are not investment-grade, and
  • you want to put about 1/20th as much into the "high yield bond" asset class as you put into the "Investment-grade bond" asset class, and
  • you don't want to cobble it together for yourself out of Total Bond and the Vanguard Corporate High Yield [not-an-index] Bond Fund, and
  • yet, for some reason, you feel that taxable bonds are somehow part of the total bond market but that tax-exempt bonds are not, then...
sure, iShares Core looks like an appropriate choice.
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Re: What is not to like about iShares Core Total USD Bond Market?

Post by stlutz » Sat Apr 16, 2016 11:51 am

Because both advocates of investing in "high-yield," speculative, low-credit-quality, "junk" bonds and skeptics agree that it is a distinct asset class. It is not the same kind of investment as investment-grade bonds, and there's no fundamental reason to mix them together. It might help, it might not, but the whole point is that it is claimed to be a unique asset class with imperfect correlation to bonds.
High yield bonds are not a distinct asset class. They are a subset of the asset class called "corporate bonds".

Corporate bonds have credit risk; they have call risk; and they have duration risk. "High yield" bonds have the same risks, just to a greater degree in the case of the former two.

Take away the letter grades from S&P or Moody's and how do you determine the difference between and investment grade corporate bond and a high yield one? You would just come up with an arbitrary cutoff to distinguish between the two (e.g. "Let's call the highest yielding 20% of bonds "high yield"). These is nothing intrinsic that makes them different from each other.

Even with the letter grades brought back in, there is nothing super special that makes BBB and above "investment grade" and anything below as "junk" You could make the cutoff at single A or at BB. Just like determining the difference between a "large cap" stock and a "small cap" one--the cutoff point is completely arbitrary--there is is not a fundamental structural difference at that cutoff point.

From a theoretical standpoint, that is the advantage of IUSB over AGG/BND: You just own the total taxable bond market without arbitrarily cutting out segments of it.

Some people argue (and my sympathies and money lie with this view) that credit risk has historically not been well rewarded in a balanced portfolio historically--i.e. if you want more risk just buy more stocks. If one holds this view, they should eschew corporate bonds altogether and focus their fixed income investments on Treasury bonds and CDs. "Investment-grade" corporate bonds are not the same thing as Treasury bonds. For example, the former lost money in 2008; the later made money.

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by Erwin » Sat Apr 16, 2016 11:57 am

Nisiprius, I am impressed! Thank you for the detailed explanation.
But allow me to add a few words to your equity example.
We all must agree that the S&P500 is not the total market, but it represents it close enough, so some call it the total equity market. However, if you were very picky about it and wanted to really invest in the total market, you would be having to invest in stocks of some marginal companies. Well, in my view, those marginal companies are the equivalent to the high yield bonds in the total bond market. Right?
Erwin

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by lack_ey » Sat Apr 16, 2016 12:13 pm

edit: whoops, stlutz beat me to some of the same arguments
nisiprius wrote:Because both advocates of investing in "high-yield," speculative, low-credit-quality, "junk" bonds and skeptics agree that it is a distinct asset class. It is not the same kind of investment as investment-grade bonds, and there's no fundamental reason to mix them together. It might help, it might not, but the whole point is that it is claimed to be a unique asset class with imperfect correlation to bonds.[...]
Really? I think credit risk is something more like a continuum, with every bond at risk of default but some with more of a concern than others. You could reasonably draw the high yield line between A and Baa, or perhaps Ba and B, rather than where it is between Baa and Baa Ba (edit: typo). It's not like Baa default rate is negligible and rounds to zero, and there's also a significant difference between Ba and B. The more credit risk you take the more you get something different from the safest bonds like Treasuries, capturing something distinct from but correlated with equity risk.

...Then again, perhaps you can chalk me in as between skeptic and advocate.

Erwin wrote:
stlutz wrote:A "normal" total bond fund (e.g. AGG/BND) will take all of the losses when an issue is downgraded to junk and participate in the none of the gains when it gets upgraded. This fund of course still takes the losses from downgrades but it does get the gains when an issue is upgraded.

On the other hand this fund does bear the full cost of any defaults.

The other thing to watch out for on IUSB is that it trades with much wider spreads than AGG and BND do. Not so much of a problem if you are buying and holding for 10+ years, but not a good fund for trading in and out of a lot.
I get your point, but from a theoretical point of view, I would like someone to explain to me why we push so hard to invest in the total equity market (at least I do) and we do not do the same when it comes to the bond market?
I don't push that hard for the total equity market. For those with more of an ideological justification for the total market you may have something of a point (though note the iShares fund is missing tax-exempt bonds, inflation-linked bonds, and international bonds). It's a good option because of low fees relative to other options and getting extra securities lending income from the micro caps, among other things. Despite the extra trading costs in mid/small/micro caps and the same fee, Vanguard TSM tracks slightly closer than Vanguard S&P 500 does.

The fund you're asking about, IUSB, on the other hand, is a bit more expensive and isn't nearly as popular as standard BarCap Agg funds, trading at wider spreads. It's a little more representative but with minor drawbacks attached that dig into any potential advantage here and more. And some people aren't convinced it's even an advantage.
Last edited by lack_ey on Sat Apr 16, 2016 9:38 pm, edited 2 times in total.

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by bondsr4me » Sat Apr 16, 2016 4:16 pm

nisiprius wrote:Because both advocates of investing in "high-yield," speculative, low-credit-quality, "junk" bonds and skeptics agree that it is a distinct asset class. It is not the same kind of investment as investment-grade bonds, and there's no fundamental reason to mix them together. It might help, it might not, but the whole point is that it is claimed to be a unique asset class with imperfect correlation to bonds.

The fundamental characteristic of investment-grade bonds is a relatively high degree of predictability and a low degree of risk. The bond is a contract to pay out specific numbers of dollars on specific dates (with variations and footnotes). If it is investment-grade, it is almost certain that the promise will be kept. If the issuer has a bad year its stock will go down, but if it is investment grade it has been judged to have a good enough safety margin that it can still stay in business and pay its bills--including bond interest and principal. The market's valuation of the bond depends mostly on the bond's stated terms and expectations of future interest rates.

The fundamental characteristic of "high-yield" bonds is that you are trading off a higher yield against real uncertainty as to whether the promises of payment will be kept. The company has been judged by the credit rating agencies to be shaky and not have much safety margin. The same business problems that lead to a fall in stock value will also lead to increased danger of bond default, to which the market will respond by deciding that the bond is worth less. Thus the bond's value doesn't just depend on its terms and interest rates. Like stocks, it responds to the market's judgements of the particular company's business situation. In 2008-2009, stocks dropped 50%, Total Bond almost went straight through--maybe 4% down at one point but back up even before stocks hit bottom. High-yield bonds dropped 20%.

To say that we should all automatically invest in both investment-grade bonds and non-investment-grade bonds because they are both called "bonds" is like saying that everyone who invests in "stocks" should put most of their money in equities, but some of it into wooden restraint devices because they, too, are "stocks."
Image
Oh, OK, that's silly.

In any case, according to Barclay's, the U.S. Aggregate Bond Index accounts for 87% (5/6ths) of the U.S. Universal Bond Index... and junk bonds only account for 5.3% of that index. So, just as there isn't really an awful lot of difference between the S&P 500, which accounts for 80% of the total stock market, and a total market index. there isn't really an awful lot of difference between the Barclay's U. S. Aggregate and U.S. Universal bond indices.
Image
All that said, if, for whatever reasons
  • you want to"invest in bonds that are not investment-grade, and
  • you want to put about 1/20th as much into the "high yield bond" asset class as you put into the "Investment-grade bond" asset class, and
  • you don't want to cobble it together for yourself out of Total Bond and the Vanguard Corporate High Yield [not-an-index] Bond Fund, and
  • yet, for some reason, you feel that taxable bonds are somehow part of the total bond market but that tax-exempt bonds are not, then...
sure, iShares Core looks like an appropriate choice.
nisiprius...
nice post...Thanks for the info.
I won't show my wife that pic tho'....see may get ideas about using one of those things on me the next time I am bad...
which is just about every day!
Don

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by nisiprius » Sat Apr 16, 2016 4:24 pm

stlutz wrote:
Because both advocates of investing in "high-yield," speculative, low-credit-quality, "junk" bonds and skeptics agree that it is a distinct asset class. It is not the same kind of investment as investment-grade bonds, and there's no fundamental reason to mix them together. It might help, it might not, but the whole point is that it is claimed to be a unique asset class with imperfect correlation to bonds.
High yield bonds are not a distinct asset class. They are a subset of the asset class called "corporate bonds"...
I guess I misspoke, sorry. I was thinking of something like this comment by Rick Ferri:
...My belief [is] that US corporate high yield bonds are a unique part of the US bond market and should be included in a portfolio.
"Unique part of the US bond market" doesn't equate to "distinct asset class."

Several advisor's websites quote a paper attributed only to "BAM" with the title "High-Yield Corporate Bonds as an Asset Class."

Barclay's talks about Our roster of nine asset classes which according to them are
  • Cash and Short-maturity Bonds
  • Developed government bonds
  • Investment grade [corporate] bonds
  • High Yield and Emerging Markets Bonds
  • Developed markets equities
  • Emerging markets equities
  • Commodities
  • Real estate
  • Alternative trading strategies
I cite that just to show that I'm not nuts, but what constitutes a distinct "asset class" is evidently in the eye of the beholder.
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Re: What is not to like about iShares Core Total USD Bond Market?

Post by nisiprius » Sat Apr 16, 2016 4:40 pm

Erwin wrote:Nisiprius, I am impressed! Thank you for the detailed explanation.
But allow me to add a few words to your equity example.
We all must agree that the S&P500 is not the total market, but it represents it close enough, so some call it the total equity market. However, if you were very picky about it and wanted to really invest in the total market, you would be having to invest in stocks of some marginal companies. Well, in my view, those marginal companies are the equivalent to the high yield bonds in the total bond market. Right?
Maybe, but my spin would be this:

The difference in behavior between investment-grade bonds (blue, Total Bond, VBMFX) and high-yield bonds (orange, Vanguard High-Yield Corporate Bond Fund, VWEHX), for example in 2008-2009,

Image

...was much larger than the difference in behavior between large-cap stocks (blue, Vanguard 500 Index) and small-and-mid-cap stocks (orange, Vanguard Extended Index Fund, VEXMX, = all the stocks that aren't in the S&P 500).

Image

Now, to advocates of high-yield bonds, that difference might be a reason for holding them. But that doesn't make it reason for lumping them together in the same category with investment-grade bonds.

The "it's a continuum" argument is valid, but at some point a big enough difference in degree becomes a difference in kind. After all, penny stocks are in the stock continuum, too, but I don't hear many people arguing for including them in a portfolio.

P.S. Deceptive chart alert--because these are semilog charts and because Morningstar scales them automatically, it may not be obvious that the two stock funds declined about 50% while the high-yield bond fund only declined about 20%.
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Re: What is not to like about iShares Core Total USD Bond Market?

Post by acanthurus » Sat Apr 16, 2016 9:30 pm

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by investorguy1 » Sat Apr 16, 2016 10:13 pm

Total bond market includes both very short and very long term bonds and those could move very differently. High yields are similar in that they are debt issued by corporations. They are different in that they are more likely to default.

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by nisiprius » Sun Apr 17, 2016 12:07 pm

There's certainly an argument to be made for an allocation to non-investment-grade bonds.

But I think the argument that you should do so in the interest of being "total" is spurious. Here are some reasons why.

Reason number 1: The "iShares Core Total" ETF isn't total either, even though, if you like, it's "more total" than "Vanguard Total Bond."

Like Vanguard, iShares uses the word "total" in the name of its fund. But it tracks the Barclay's U.S. "Universal" index. Why doesn't Barclay's call that index the Barclay's U.S. "Total" index? Because it isn't total. According to the factsheet
The U.S. Universal Index represents the union of the U.S. Aggregate Index, U.S. Corporate High Yield Index, Investment Grade 144A Index, Eurodollar Index, U.S. Emerging Markets Index, and the non-ERISA eligible portion of the CMBS Index The index covers USD-denominated, taxable bonds that are rated either investment grade or high-yield.
So, clearly, it does cover more than the Aggregate index. And, just as clearly, it does not cover the total U.S. bond market.They give a long list of exclusions. Among them are at least two kinds of bonds that are surely part of "the bond market," and popular investments among forum members, that you do not get in the "iShares Core Total" ETF:

Image

In my personal opinion, it would be more honest for Vanguard to call their fund the Vanguard Aggregate Bond Index Fund. And it would be more honest for iShares to call theirs the iShares Core Universal USD Bond Market. Perhaps they both want to distance themselves from a specific provider's chosen names in order to retain flexibility to change indexes.

Reason number 2: Vanguard Total Stock Market Index Fund isn't "total" either, and neither is the "CRSP U.S. Total Market Index" it tracks, because they only include common stock, yet nobody complains about that.

Should we have preferred stocks in our portfolio? If we consider it to be a separate asset class, we can ask that question on the merits, and the answer, according to Larry Swedroe and Jared Kizer's book on alternative investments is "no." But if the idea is to be "total," then preferred stocks are certainly part of the total stock market.

The thing is, I don't think I've ever heard anyone complain that Vanguard's Total Stock Market Index isn't total because it only includes common stocks.

CRSP's methodology guide, on page 3, gives a detailed table of what's in and what's out. It's worth a look. In the part of the table describing "share classes" it mentions that common stocks and something called "Shares of Beneficial Interest" (????) are in, and nine kinds--including several different flavors of preferred and convertible stocks--are out.

First column of Y's and N's is "CRSP Index Eligible", second is "eligible for market cap assignment."
Image

Should we all be looking around for something that tracks a more inclusive universe of stocks, or buying preferred and convertible stock mutual funds to patch up the holes? Is this a big problem with Total Stock? In my opinion: it's not a problem at all.

And in my opinion it's not a problem with Total Bond, either.
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Re: What is not to like about iShares Core Total USD Bond Market?

Post by investorguy1 » Sun Apr 17, 2016 12:37 pm

nisiprius - Thank you for all that great information and insight. By not being real "Total" investors (total bond including high yield and the rest of it or stock market including preferred) are we not using active management by selecting assets that we think will do better and leave out others?

I'm guessing also there is a reason why most index funds leave out things like high yield and preferred stock. If there was a clear advantage someone would have come up with the idea of adding them in by now.

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by patrick » Mon Apr 18, 2016 1:49 am

nisiprius wrote:Like Vanguard, iShares uses the word "total" in the name of its fund. But it tracks the Barclay's U.S. "Universal" index. Why doesn't Barclay's call that index the Barclay's U.S. "Total" index? Because it isn't total. According to the factsheet
The U.S. Universal Index represents the union of the U.S. Aggregate Index, U.S. Corporate High Yield Index, Investment Grade 144A Index, Eurodollar Index, U.S. Emerging Markets Index, and the non-ERISA eligible portion of the CMBS Index The index covers USD-denominated, taxable bonds that are rated either investment grade or high-yield.
So, clearly, it does cover more than the Aggregate index. And, just as clearly, it does not cover the total U.S. bond market.They give a long list of exclusions. Among them are at least two kinds of bonds that are surely part of "the bond market," and popular investments among forum members, that you do not get in the "iShares Core Total" ETF:

Image
Tax exempt is fundamentally different, not in the underlying investment itself, but in the tax rules that apply to it. Using market weight of taxable versus tax exempt doesn't seem like it would make sense unless your tax situation matches the weighted average tax situation of all investors. For inflation-linked, they are somewhat unique that inflation adjustment is all or none (I guess you could make a bond that only adjusts by 30% or 70% of the CPI change, but I doubt that such securities are widespread), rather than credit risk which is a matter of degree.
nisiprius wrote:Reason number 2: Vanguard Total Stock Market Index Fund isn't "total" either, and neither is the "CRSP U.S. Total Market Index" it tracks, because they only include common stock, yet nobody complains about that.

Should we have preferred stocks in our portfolio? If we consider it to be a separate asset class, we can ask that question on the merits, and the answer, according to Larry Swedroe and Jared Kizer's book on alternative investments is "no." But if the idea is to be "total," then preferred stocks are certainly part of the total stock market.
The thing is, I don't think I've ever heard anyone complain that Vanguard's Total Stock Market Index isn't total because it only includes common stocks.

CRSP's methodology guide, on page 3, gives a detailed table of what's in and what's out. It's worth a look. In the part of the table describing "share classes" it mentions that common stocks and something called "Shares of Beneficial Interest" (????) are in, and nine kinds--including several different flavors of preferred and convertible stocks--are out.

First column of Y's and N's is "CRSP Index Eligible", second is "eligible for market cap assignment."
Image

Should we all be looking around for something that tracks a more inclusive universe of stocks, or buying preferred and convertible stock mutual funds to patch up the holes? Is this a big problem with Total Stock? In my opinion: it's not a problem at all.[/quote]

Preferred stocks? They also have different tax rules than normal stocks, making the decision there different based on tax situation, so market weighting them again makes little sense. ADRs? They included in Vanguard's index funds -- they just go in Total International Stock Market instead. The other excluded categories? Perhaps some of them should be included in some of the indexes, but I suspect they would be very small portions of the fund if included at market weight. Plus you need to be careful not to double count the convertibles in both stock and bond indexes.

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Re: What is not to like about iShares Core Total USD Bond Market?

Post by selters » Mon Apr 18, 2016 3:18 am

For those who are not that familiar with the different credit ratings and credit rating providers, this well arranged table may be helpful in this discussion:

Image

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