The Real Risk In Bond Funds

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Leesbro63
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The Real Risk In Bond Funds

Post by Leesbro63 » Fri Aug 09, 2019 4:56 pm

In the just released September issue of Kiplinger's Personal Finance magazine, there is a "Reader Feedback" letter on page 8 titled "The Real Risk in Bonds". The author says he's puzzled why financial writers never seem to address how bond funds "really" operate by extensively trading bonds. He claims that some funds have a 1000% turnover and that even Vanguard Intermediate-Term Bond Fund (VBLIX) has an annual turn over of 53%.

Is this true? And if so is this risky? And if so why has this not been a frequent topic of discussion here and on other financial forums. Are we missing something?

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vineviz
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Re: The Real Risk In Bond Funds

Post by vineviz » Fri Aug 09, 2019 5:14 pm

Leesbro63 wrote:
Fri Aug 09, 2019 4:56 pm
Is this true?
The annual turnover of any fund will be provided in the fund’s website, so it should be easy to verify or disprove.
Leesbro63 wrote:
Fri Aug 09, 2019 4:56 pm
And if so is this risky?
No.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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SimpleGift
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Re: The Real Risk In Bond Funds

Post by SimpleGift » Fri Aug 09, 2019 5:18 pm

My sense is that the turnover percentage between active bond funds and index bond funds are not directly comparable.

All bond fund turnover numbers are comprised of 1) bonds that are sold, and 2) those that simply mature. But active bond funds tend to have a greater proportion of bond sales — which result in transaction costs — while bond index funds generally have a greater proportion of maturing bonds, which do not have the same direct transaction costs.

So even if an active and an index bond fund have the same reported turnover percentage, the index fund would generally have few associated transaction costs.
Last edited by SimpleGift on Fri Aug 09, 2019 5:19 pm, edited 1 time in total.

Hector
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Re: The Real Risk In Bond Funds

Post by Hector » Fri Aug 09, 2019 5:19 pm

Yes. Bond funds, even most index bond funds often trade a lot.
For example iShares 1-3 Year Treasury Bond ETF, SHY. It typically buys bond with 3 year maturity, hold it for 2 years and then sell it when 1 year maturity is left.

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aspirit
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Re: The Real Risk In Bond Funds

Post by aspirit » Fri Aug 09, 2019 5:22 pm

Leesbro63 wrote:
Fri Aug 09, 2019 4:56 pm
In the just released September issue of Kiplinger's Personal Finance magazine, there is a "Reader Feedback" letter on page 8 titled "The Real Risk in Bonds". The author says he's puzzled why financial writers never seem to address how bond funds "really" operate by extensively trading bonds. He claims that some funds have a 1000% turnover and that even Vanguard Intermediate-Term Bond Fund (VBLIX) has an annual turn over of 53%.

Is this true? And if so is this risky? And if so why has this not been a frequent topic of discussion here and on other financial forums. Are we missing something?
https://investor.vanguard.com/mutual-fu ... file/VBLIX :oops:
Thats LT Bonds.
Review the link. Good Luck!
Time & tides wait for no one. A man has to know his limitations. | "Give me control of a nation's money and I care not who makes it's laws" | — Mayer Amschel Bauer Rothschild ~

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Nate79
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Re: The Real Risk In Bond Funds

Post by Nate79 » Fri Aug 09, 2019 5:23 pm

Step 1: don't read stupid financial magazines like Kiplinger's.

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J G Bankerton
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Re: The Real Risk In Bond Funds

Post by J G Bankerton » Fri Aug 09, 2019 6:27 pm

aspirit wrote:
Fri Aug 09, 2019 5:22 pm
https://investor.vanguard.com/mutual-fu ... file/VBLIX :oops:
Thats LT Bonds.
Review the link. Good Luck!
"Minimum investment $100,000,000" I'm buying some next pay day. :greedy

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Leesbro63
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Re: The Real Risk In Bond Funds

Post by Leesbro63 » Fri Aug 09, 2019 6:59 pm

Nate79 wrote:
Fri Aug 09, 2019 5:23 pm
Step 1: don't read stupid financial magazines like Kiplinger's.
Actually I consider Kiplinger’s to be pretty “Bogleheadish”.

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nisiprius
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Re: The Real Risk In Bond Funds

Post by nisiprius » Fri Aug 09, 2019 7:22 pm

First, for an index fund, the proof of the pudding is in the index tracking. I can't read the letter so I don't know what it says, but if there were huge trading costs involved, Total Bond would lag its index accordingly... and it doesn't. Similarly, an idiot with a radio show claimed that Vanguard's index funds were concealing hidden costs of 1.4%/year in trading expenses. Hidden expenses? How? With an index fund, there's no place to hide them.

Second, there's nothing secret about this.
vineviz wrote:
Fri Aug 09, 2019 5:14 pm
...The annual turnover of any fund will be provided in the fund’s website, so it should be easy to verify or disprove....
It's even easier than that. It seems to be part of basic panel of information provided for every fund in most places, maybe everywhere. It's as easy to find as the expense ratio and the SEC yield. Here it is at Morningstar:

Morningstar page for VBTLX

Image

Yahoo! Finance, too.

Image

Fidelity, too.

Image
Last edited by nisiprius on Fri Aug 09, 2019 7:34 pm, edited 5 times in total.
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stlutz
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Re: The Real Risk In Bond Funds

Post by stlutz » Fri Aug 09, 2019 7:26 pm

The total bond index itself (not funds tracking it), generates about 40% turnover per year due to new issuance, bonds being called reaching <1 year before maturity, paydown of mortgages, credit downgrades & upgrades, and having to reinvest coupons.

alex_686
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Re: The Real Risk In Bond Funds

Post by alex_686 » Fri Aug 09, 2019 7:54 pm

SimpleGift wrote:
Fri Aug 09, 2019 5:18 pm
All bond fund turnover numbers are comprised of 1) bonds that are sold, and 2) those that simply mature. But active bond funds tend to have a greater proportion of bond sales — which result in transaction costs — while bond index funds generally have a greater proportion of maturing bonds, which do not have the same direct transaction costs.
This is not true. Bond indexes don't work like stock indexes.

Total Bond Fund's underlying index only covers about 10% of the bond market. It is a invetable index, so it only covers the investable parts - that is, the most liquid. Most bonds in the market don't trade, or do so at very high spreads. And the liquid bonds change every month. The classic example is on-the-run/off-the-run Treasuries. So every month the index provider reconstitutes the index, moving off the illquid bonds and replacing them with liquid ones.

You can easily get 100% turnover without coupons, maturing bonds, etc. It is also pretty easy to get a higher turnover in a passive bond fund than a active one.

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SimpleGift
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Re: The Real Risk In Bond Funds

Post by SimpleGift » Fri Aug 09, 2019 8:55 pm

alex_686 wrote:
Fri Aug 09, 2019 7:54 pm
You can easily get 100% turnover without coupons, maturing bonds, etc. It is also pretty easy to get a higher turnover in a passive bond fund than a active one.
True, but the point of my post was that turnover in bond index funds doesn't appear to incur transaction costs to the same degree as actively-managed bond funds. As mentioned upthread, if they did, these costs would show up their index tracking error — which have historically been quite small over the long term.

See the Boglehead Wiki page, Vanguard Bond Index Fund Tracking Error.

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jeffyscott
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Re: The Real Risk In Bond Funds

Post by jeffyscott » Sat Aug 10, 2019 10:31 am

Turnover can give you a sense of a manager's trading activity, but don't read too much into a fund's turnover rate, particularly with bond funds.
...
With bond funds, though, quite often managers employ cash management strategies that inflate turnover rates. It's not uncommon to see turnover rates of 300% or more, even in funds that aren't particularly aggressive.
http://news.morningstar.com/classroom2/ ... &CN=sample
Time is your friend; impulse is your enemy. - John C. Bogle

TBillT
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Re: The Real Risk In Bond Funds

Post by TBillT » Sat Aug 10, 2019 10:55 am

The "market timers" risk in the current bond market is if we have a moderate to severe recession, the lower quality corporates could go down. So if short term Treasures were paying highest interest rates, why not obviously do that? But that was an unsual past year, so now TBills are getting more normal (low) and the recesson is looking perhaps mild if it comes, so perhaps back to normal. If i am looking for an active Bond fund (eg; PONAX) I hope the guy (or gal) in charge is looking at the tea leaves and making the correct decisions and trades.

optimpessim
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Re: The Real Risk In Bond Funds

Post by optimpessim » Sun Aug 11, 2019 10:02 am

I am surprised to see (above) that the Vanguard Total Bond Index Fund has an "Above Average" Morningstar Risk Rating. What gives? I think they compare similar funds.

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Re: The Real Risk In Bond Funds

Post by sksbog » Sun Aug 11, 2019 10:16 am

I don’t look at these “ratings agencies “. Who they get paid by, any guesses?
A week before Lehman brothers collapsed, these agencies had a stellar ratings on it :D .

This is what happens when they don’t have consequences of bad behavior. It’s like in American idol, I will give you 9 today as everyone else is impressed by you :)

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Re: The Real Risk In Bond Funds

Post by midareff » Sun Aug 11, 2019 11:28 am

Nate79 wrote:
Fri Aug 09, 2019 5:23 pm
Step 1: don't read stupid financial magazines like Kiplinger's.
There are ideas everywhere in this world besides this board. You never know when you might run across something that might help you in your particular situation. Having said that, most of the stuff in financial rags is pure pablum for the financial illiterates, and that includes the TV talking heads as well, especially the loud mouth bald guy..

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J G Bankerton
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Re: The Real Risk In Bond Funds

Post by J G Bankerton » Sun Aug 11, 2019 1:27 pm

midareff wrote:
Sun Aug 11, 2019 11:28 am
Nate79 wrote:
Fri Aug 09, 2019 5:23 pm
Step 1: don't read stupid financial magazines like Kiplinger's.
There are ideas everywhere in this world besides this board. You never know when you might run across something that might help you in your particular situation. Having said that, most of the stuff in financial rags is pure pablum for the financial illiterates, and that includes the TV talking heads as well, especially the loud mouth bald guy..
When it comes to investing nobody knows nothing. The talkin heads on CNBC, many hustling books, used to have a public competition to see who could get the best returns. They stopped that when none of them could beat the S&P 500. Most had losses wile the market did just fine.

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midareff
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Re: The Real Risk In Bond Funds

Post by midareff » Tue Aug 13, 2019 8:38 am

J G Bankerton wrote:
Sun Aug 11, 2019 1:27 pm
midareff wrote:
Sun Aug 11, 2019 11:28 am
Nate79 wrote:
Fri Aug 09, 2019 5:23 pm
Step 1: don't read stupid financial magazines like Kiplinger's.
There are ideas everywhere in this world besides this board. You never know when you might run across something that might help you in your particular situation. Having said that, most of the stuff in financial rags is pure pablum for the financial illiterates, and that includes the TV talking heads as well, especially the loud mouth bald guy..
[/quote]When it comes to investing nobody knows nothing. The talkin heads on CNBC, many hustling books, used to have a public competition to see who could get the best returns. They stopped that when none of them could beat the S&P 500. Most had losses wile the market did just fine.
Except for those of us who know we and they, know nothing, and thereby ignore the noise.

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