Help me understand ways to think about bond funds

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helloeveryone
Posts: 67
Joined: Sun Sep 04, 2016 5:16 pm

Help me understand ways to think about bond funds

Post by helloeveryone » Wed Jun 13, 2018 9:53 am

I have a question about bond funds. We can use the Vanguard Total Bond Market Index Fund (VBTLX) as example. I understand the concept of a 2 or 3 fund portfolio to balance out risk.

When I look at the "Characteristics" in vanguard (https://investor.vanguard.com/mutual-fu ... file/VBTLX) it states
how much VBTLX has in total assets, then average effective maturity is 8.4 years, and average duration 6.1 years, yield to maturity 3.3%.

Does that mean that if you were to buy shares of VBTLX and held them for about 8 years, you would expect that the majority of the time the interest yield would be about 3.3%? ie: the longer you hold bond funds the more likely the yield will stay stable at ~3.3%.

The only reason I ask is I've noticed the value of VBTLX has dropped, which correlates with the performance chart showing the 1 year growth is negative, but if you mess with the line graph the 3/5/10 year graphs have continuous positive return.

Thank you!

dbr
Posts: 26987
Joined: Sun Mar 04, 2007 9:50 am

Re: Help me understand ways to think about bond funds

Post by dbr » Wed Jun 13, 2018 10:15 am

As one might appreciate by reading all the posts on this forum about bonds, the complexity of bonds is almost infinite and almost all of that complexity is not worth worrying about for most investors holding stock and bond portfolios.

If you want to go through the learning process two good starting points are these:

https://www.bogleheads.org/wiki/Bond_basics

https://www.bogleheads.org/wiki/Individ ... _bond_fund

dbr
Posts: 26987
Joined: Sun Mar 04, 2007 9:50 am

Re: Help me understand ways to think about bond funds

Post by dbr » Wed Jun 13, 2018 10:23 am

helloeveryone wrote:
Wed Jun 13, 2018 9:53 am
I have a question about bond funds. We can use the Vanguard Total Bond Market Index Fund (VBTLX) as example. I understand the concept of a 2 or 3 fund portfolio to balance out risk.

When I look at the "Characteristics" in vanguard (https://investor.vanguard.com/mutual-fu ... file/VBTLX) it states
how much VBTLX has in total assets, then average effective maturity is 8.4 years, and average duration 6.1 years, yield to maturity 3.3%.

Does that mean that if you were to buy shares of VBTLX and held them for about 8 years, you would expect that the majority of the time the interest yield would be about 3.3%? ie: the longer you hold bond funds the more likely the yield will stay stable at ~3.3%.

It might be a fair estimate that a lot of people agree with that the best estimate of the future return of the fund is the current SEC yield. Note the estimate is of return and not of future yield. Future yield is not predictable.

The only reason I ask is I've noticed the value of VBTLX has dropped, which correlates with the performance chart showing the 1 year growth is negative, but if you mess with the line graph the 3/5/10 year graphs have continuous positive return.

Yes, the net asset value of the fund can rise and fall. If you add that change to the dividend paid you get the return. The return varies from year to year and can be negative in any given year while the result over longer times tends to be positive. You can see the historical returns here: https://investor.vanguard.com/mutual-fu ... ance/vbtlx but I wouldn't read any particular meaning into those numbers.

What is the actual purpose of your question?


Thank you!

helloeveryone
Posts: 67
Joined: Sun Sep 04, 2016 5:16 pm

Re: Help me understand ways to think about bond funds

Post by helloeveryone » Thu Jun 14, 2018 1:46 pm

dbr wrote:
Wed Jun 13, 2018 10:23 am
helloeveryone wrote:
Wed Jun 13, 2018 9:53 am
I have a question about bond funds. We can use the Vanguard Total Bond Market Index Fund (VBTLX) as example. I understand the concept of a 2 or 3 fund portfolio to balance out risk.

When I look at the "Characteristics" in vanguard (https://investor.vanguard.com/mutual-fu ... file/VBTLX) it states
how much VBTLX has in total assets, then average effective maturity is 8.4 years, and average duration 6.1 years, yield to maturity 3.3%.

Does that mean that if you were to buy shares of VBTLX and held them for about 8 years, you would expect that the majority of the time the interest yield would be about 3.3%? ie: the longer you hold bond funds the more likely the yield will stay stable at ~3.3%.

It might be a fair estimate that a lot of people agree with that the best estimate of the future return of the fund is the current SEC yield. Note the estimate is of return and not of future yield. Future yield is not predictable.

The only reason I ask is I've noticed the value of VBTLX has dropped, which correlates with the performance chart showing the 1 year growth is negative, but if you mess with the line graph the 3/5/10 year graphs have continuous positive return.

Yes, the net asset value of the fund can rise and fall. If you add that change to the dividend paid you get the return. The return varies from year to year and can be negative in any given year while the result over longer times tends to be positive. You can see the historical returns here: https://investor.vanguard.com/mutual-fu ... ance/vbtlx but I wouldn't read any particular meaning into those numbers.

What is the actual purpose of your question?


Thank you!
Thank you for sharing the link and replying.
The purpose is really to understand it better. When I looked at that section of Vanguard I wasn't sure the exact way to interpret it. Clearly it's not actionable since I now have full buy in to asset allocations and just annual/biannual adjustments based on bands based on everything I've read on this site and through the books and links recommended. But periodically I want to know a little more about stocks/bonds etc...

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