Best bonds securities for Taxable account

[johngabriell]

Currently, I have following allocation in my Taxable account:

90% - Vanguard Total Stock Market Index Fund (Admiral Shares)
10% - Vanguard Total Bond Market ETF
Tax bracket:22%
Plan to keep this money invested for 15-20 years

Basically, my questions are:

1. Should I change my allocation?
2. Is Vanguard Total Bond Market ETF is good to have in the taxable account or there are better options available.

Thanks.

[PFInterest]

no. you should change your location possibly.
good? depends. will you always be in 22%?

[JBTX]

Currently, I have following allocation in my Taxable account:

90% - Vanguard Total Stock Market Index Fund (Admiral Shares)
10% - Vanguard Total Bond Market ETF
Tax bracket:22%
Plan to keep this money invested for 15-20 years

Basically, my questions are:

1. Should I change my allocation?
2. Is Vanguard Total Bond Market ETF is good to have in the taxable account or there are better options available.

Thanks.

If I were really only going to keep it invested 15-20 years, 90% stocks seems a bit aggressive. I guess it depends on how badly you need it in 15-20 years.

As to bond market etf in taxable, at 22%, that is probably fine. A lot of people here will tell you that bonds should be in 401ks/IRA's/tax advantaged, but from the numbers I've run, it comes out about the same, as long as interest rates stay fairly modest.

[ivk5]

Allocation questions require the whole financial picture, not looking at each account in isolation.

See wiki on tax efficient fund placement. Equities are more tax efficient in taxable over the long term (range of interest rate environments). If you must have fixed income in taxable, TBM may not be the most tax efficient option (what is your state tax rate, if any?) but alternatives will mostly put you at different place on term/reinvestment risk, credit risk, and/or inflation/deflation risk. Alternatives may include short/intermediate treasuries, high yield savings, taxable/tax-exempt money market funds, CDs, etc.

[exigent]

Assuming you want/need to leave the bonds in taxable...

Vanguard’s Intermediate-Term Tax Exempt Fund (Admiral; VWIUX) has an SEC yield of 2.54%.

Vanguard’s Total Bond Market Index Fund (Admiral; VBTLX) has an SEC yield of 3.15%.

In the 22% tax bracket, the tax equivalent yield of VWIUX is 3.26%...

The avg stated maturity of VWIUX is slightly longer (8.7 vs. 8.1 years), but the avg duration is somewhat shorter (5.2 vs 6.1 years).

I’ve been wondering about similar things. Food for thought...

[Ricchan]

To expand on what exigent said, here's a table of the various municipal bond funds at Vanguard with their current tax equivalent SEC yields for the 22% bracket.

Code: Select all

                                         Term          Exp    SEC Yield   22% TEY  
VMLTX  Limited-Term Tax-Exempt           Short         0.19   1.95        2.50    
VWSTX  Short-Term Tax-Exempt             Short         0.19   1.68        2.15    
VWITX  Intermediate-Term Tax-Exempt      Intermediate  0.19   2.49        3.19    
VWAHX  High-Yield Tax-Exempt             Long          0.19   3.21        4.12    
VWLTX  Long-Term Tax-Exempt              Long          0.19   2.83        3.63    

VMLUX  Limited-Term Tax-Exempt Adm       Short         0.09   2.00        2.56    
VWSUX  Short-Term Tax-Exempt Adm         Short         0.09   1.73        2.22    
VWIUX  Intermediate-Term Tax-Exempt Adm  Intermediate  0.09   2.54        3.26    
VWALX  High-Yield Tax-Exempt Adm         Long          0.09   3.26        4.18    
VWLUX  Long-Term Tax-Exempt Adm          Long          0.09   2.88        3.69    

VTEB   Vanguard Tax-Exempt Bond ETF      Long          0.09   2.53        3.24    

You can compare these to Vanguard Total Bond Market ETF (BND) which has a current SEC yield of 3.15% and an expense ratio of 0.05%.

Of course, yield isn't everything. The longer term the bond fund, the more volatile its price will be. Depending on how much risk you want in the bond portion of your portfolio, you can skew towards short or long as you see fit.

[johngabriell]

Currently, I have following allocation in my Taxable account:

90% - Vanguard Total Stock Market Index Fund (Admiral Shares)
10% - Vanguard Total Bond Market ETF
Tax bracket:22%
Plan to keep this money invested for 15-20 years

Basically, my questions are:

1. Should I change my allocation?
2. Is Vanguard Total Bond Market ETF is good to have in the taxable account or there are better options available.

Thanks.

If I were really only going to keep it invested 15-20 years, 90% stocks seems a bit aggressive. I guess it depends on how badly you need it in 15-20 years.

As to bond market etf in taxable, at 22%, that is probably fine. A lot of people here will tell you that bonds should be in 401ks/IRA's/tax advantaged, but from the numbers I've run, it comes out about the same, as long as interest rates stay fairly modest.

Thanks for your response. My only goal is to grow money; I dont need that for any specific purpose 15-20 years from now. This money was saved in Marcus bank paying 1.87% so I decided to invest part of that. I am also thinking about changing my allocation to 70/30 by investing more in bonds but not sure if I should buy more BND or some other type of tax-exempt bonds. Any suggestions?

[JBTX]

Currently, I have following allocation in my Taxable account:

90% - Vanguard Total Stock Market Index Fund (Admiral Shares)
10% - Vanguard Total Bond Market ETF
Tax bracket:22%
Plan to keep this money invested for 15-20 years

Basically, my questions are:

1. Should I change my allocation?
2. Is Vanguard Total Bond Market ETF is good to have in the taxable account or there are better options available.

Thanks.

If I were really only going to keep it invested 15-20 years, 90% stocks seems a bit aggressive. I guess it depends on how badly you need it in 15-20 years.

As to bond market etf in taxable, at 22%, that is probably fine. A lot of people here will tell you that bonds should be in 401ks/IRA's/tax advantaged, but from the numbers I've run, it comes out about the same, as long as interest rates stay fairly modest.

Thanks for your response. My only goal is to grow money; I dont need that for any specific purpose 15-20 years from now. This money was saved in Marcus bank paying 1.87% so I decided to invest part of that. I am also thinking about changing my allocation to 70/30 by investing more in bonds but not sure if I should buy more BND or some other type of tax-exempt bonds. Any suggestions?

I'm not an expert on tax.exempt bonds but the posts above have some good recommendations. I suspect at 22% taxable vs tax exempt would be pretty much a push.

[Kevin8696]

To expand on what exigent said, here's a table of the various municipal bond funds at Vanguard with their current tax equivalent SEC yields for the 22% bracket.

Code: Select all

                                         Term          Exp    SEC Yield   22% TEY  
VMLTX  Limited-Term Tax-Exempt           Short         0.19   1.95        2.50    
VWSTX  Short-Term Tax-Exempt             Short         0.19   1.68        2.15    
VWITX  Intermediate-Term Tax-Exempt      Intermediate  0.19   2.49        3.19    
VWAHX  High-Yield Tax-Exempt             Long          0.19   3.21        4.12    
VWLTX  Long-Term Tax-Exempt              Long          0.19   2.83        3.63    

VMLUX  Limited-Term Tax-Exempt Adm       Short         0.09   2.00        2.56    
VWSUX  Short-Term Tax-Exempt Adm         Short         0.09   1.73        2.22    
VWIUX  Intermediate-Term Tax-Exempt Adm  Intermediate  0.09   2.54        3.26    
VWALX  High-Yield Tax-Exempt Adm         Long          0.09   3.26        4.18    
VWLUX  Long-Term Tax-Exempt Adm          Long          0.09   2.88        3.69    

VTEB   Vanguard Tax-Exempt Bond ETF      Long          0.09   2.53        3.24    

You can compare these to Vanguard Total Bond Market ETF (BND) which has a current SEC yield of 3.15% and an expense ratio of 0.05%.

Of course, yield isn't everything. The longer term the bond fund, the more volatile its price will be. Depending on how much risk you want in the bond portion of your portfolio, you can skew towards short or long as you see fit.

Ricchan... In calculating tax-equivalent SEC yields for these funds, are you taking into account the federal tax on capital gains ?

[johngabriell]

no. you should change your location possibly.
good? depends. will you always be in 22%?

I think it would go down in the coming years as I get close to the retirement.

[exigent]

no. you should change your location possibly.
good? depends. will you always be in 22%?

I think it would go down in the coming years as I get close to the retirement.

The difference between taxable and tax-exempt isn’t huge in the 22% bracket, and if you wind up in a lower bracket in the future, the small advantage will disappear. If, on the other hand, your tax rate increases, the advantage will increase. Grab your crystal ball...

[Ricchan]

Ricchan... In calculating tax-equivalent SEC yields for these funds, are you taking into account the federal tax on capital gains ?

The SEC yield formula excludes realized capital gains.

I'm just dividing SEC yield by ( 1 - tax_rate ). Since the SEC yield formula excludes capital gains and includes only interest income, I think comparing the SEC yield of a standard bond fund with the tax equivalent SEC yield of a municipal bond fund is valid.

Capital gains from selling a municipal bond fund are taxed at both federal and state levels like any other fund.

[Kevin8696]

Ricchan... In calculating tax-equivalent SEC yields for these funds, are you taking into account the federal tax on capital gains ?

The SEC yield formula excludes realized capital gains.

I'm just dividing SEC yield by ( 1 - tax_rate ). Since the SEC yield formula excludes capital gains and includes only interest income, I think comparing the SEC yield of a standard bond fund with the tax equivalent SEC yield of a municipal bond fund is valid.

Capital gains from selling a municipal bond fund are taxed at both federal and state levels like any other fund.

Thanks for clearing this up, I had assumed realized capital gains were included.

A bit of confusion exists depending on whose SEC yield definition is used.

The Morningstar definition of SEC yield uses the term "net investment income". Usually, net investment income is comprised of coupon interest received, plus accrued bond discount, minus amortized bond premium, minus expenses, plus/minus net capital gains from trading activities in the portfolio.

The Vanguard definition utilizes the term "yield to maturity", which would imply that the income for the period was comprised of coupon interest received, plus accrued bond discount, minus amortized bond premium... thus excluding any realized capital gains and losses.

In digging into this, I came across a muni bond whitepaper that compares the various bond fund yields that are often quoted.

https://www.fordham.edu/download/downlo ... r_3pdf.pdf

Good info for BH geeks.... good insomnia reading for most others

[Ricchan]

Ricchan... In calculating tax-equivalent SEC yields for these funds, are you taking into account the federal tax on capital gains ?

The SEC yield formula excludes realized capital gains.

Thanks for clearing this up, I had assumed realized capital gains were included.

A bit of confusion exists depending on whose SEC yield definition is used.

I might have to take back what said. I'm not 100% sure if SEC yield includes capital gains or not. Like you said, some definitions imply it does, while others say it doesn't.

Your post reminded me of another thread on these forums discussing SEC yield I saw a while ago. In there, Kevin M (not to be confused with Kevin8696) says,

SEC yield is a prior 30-day average yield to maturity (YTM) less expenses. YTM factors in coupon payments (income return) and change in bond price from today until the bond matures at par value of 100 on its maturity date (capital return).

He has also posted a more detailed thread on yield definitions.

For yet another point of comparison, Investopedia has this definition for SEC Yield (which is referenced in wikipedia).

[johngabriell]

To expand on what exigent said, here's a table of the various municipal bond funds at Vanguard with their current tax equivalent SEC yields for the 22% bracket.

Code: Select all

                                         Term          Exp    SEC Yield   22% TEY  
VMLTX  Limited-Term Tax-Exempt           Short         0.19   1.95        2.50    
VWSTX  Short-Term Tax-Exempt             Short         0.19   1.68        2.15    
VWITX  Intermediate-Term Tax-Exempt      Intermediate  0.19   2.49        3.19    
VWAHX  High-Yield Tax-Exempt             Long          0.19   3.21        4.12    
VWLTX  Long-Term Tax-Exempt              Long          0.19   2.83        3.63    

VMLUX  Limited-Term Tax-Exempt Adm       Short         0.09   2.00        2.56    
VWSUX  Short-Term Tax-Exempt Adm         Short         0.09   1.73        2.22    
VWIUX  Intermediate-Term Tax-Exempt Adm  Intermediate  0.09   2.54        3.26    
VWALX  High-Yield Tax-Exempt Adm         Long          0.09   3.26        4.18    
VWLUX  Long-Term Tax-Exempt Adm          Long          0.09   2.88        3.69    

VTEB   Vanguard Tax-Exempt Bond ETF      Long          0.09   2.53        3.24    

You can compare these to Vanguard Total Bond Market ETF (BND) which has a current SEC yield of 3.15% and an expense ratio of 0.05%.

Of course, yield isn't everything. The longer term the bond fund, the more volatile its price will be. Depending on how much risk you want in the bond portion of your portfolio, you can skew towards short or long as you see fit.

Thanks, that's really helpful.