Using separate funds instead of Total Bond.

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GaryA505
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Using separate funds instead of Total Bond.

Post by GaryA505 » Tue Sep 10, 2019 9:38 pm

If I wanted to approximate the total bond market but didn't want to use a Vanguard Total Bond fund (VBTLX or VBMFX), what 3 separate funds would I use for corporate, treasury and MBS?

VICSX - Vanguard Intermediate-Term Corporate Bond Index Fund Admiral Shares
VSIGX - Vanguard Intermediate-Term Treasury Index Fund Admiral Shares
VMBSX - Vanguard Mortgage-Backed Securities Index Fund Admiral Shares

Or ETFs:

VCIT - Vanguard Intermediate-Term Corporate Bond ETF
VGIT - Vanguard Intermediate-Term Treasury ETF
VMBS - Vanguard Mortgage-Backed Securities ETF

Yes, I know the simplicity provided by using a total bond fund (and the slightly lower ER), but I might like to have them separate.

venkman
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Re: Using separate funds instead of Total Bond.

Post by venkman » Tue Sep 10, 2019 10:20 pm

To truly approximate VBTLX, you'd need to invest separately in short, intermediate, and long maturities. VBTLX has an average intermediate duration, but it doesn't necessarily track the same as an all-intermediate fund, since different parts of the yield curve can move independently of one another.

For comparison, the generally-recommended substitute for VBTLX is VBILX (Intermediate-Term Bond Index). Since 2002, VBILX has returned almost 1% more annually that VBTLX, but with a significantly higher standard deviation and higher drawdowns. (VBTLX has the better Sharpe ratio: .92 to .81).

Topic Author
GaryA505
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Location: New Mexico

Re: Using separate funds instead of Total Bond.

Post by GaryA505 » Tue Sep 10, 2019 10:24 pm

venkman wrote:
Tue Sep 10, 2019 10:20 pm
To truly approximate VBTLX, you'd need to invest separately in short, intermediate, and long maturities. VBTLX has an average intermediate duration, but it doesn't necessarily track the same as an all-intermediate fund, since different parts of the yield curve can move independently of one another.

For comparison, the generally-recommended substitute for VBTLX is VBILX (Intermediate-Term Bond Index). Since 2002, VBILX has returned almost 1% more annually that VBTLX, but with a significantly higher standard deviation and higher drawdowns. (VBTLX has the better Sharpe ratio: .92 to .81).
Thanks, I hadn't thought about that.

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Cyclesafe
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Re: Using separate funds instead of Total Bond.

Post by Cyclesafe » Wed Sep 11, 2019 12:14 am

In my notes I have jotted down the following. I don't know the source. I think there are many other combinations (infinite?) that get you to the underlying approximate characteristics of VTBLX. But these funds and percentages might get you started.

VICSX Intermediate Corporate Bonds (t-IRA) 36.2%
VMBSX Mortgage Backed Securities (t-IRA) 21.8%
VSBSX Short Term Treasury Index 14.5%
VSIGX Intermediate Term Treasury Index 16.8%
VLGSX Long Term Treasury Index 10.7%

BTW, I was trying to see if I could save on state taxes by locating VSBSX, VSIGX, and VLGSX in taxable. I calculated at the time (late August 2019) that using SEC yields, I could save $149 in Cali taxes on a $100k total annual investment compared to VBTLX in tax deferred.
"Plans are useless; planning is indispensable.” - Dwight Eisenhower

MotoTrojan
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Re: Using separate funds instead of Total Bond.

Post by MotoTrojan » Wed Sep 11, 2019 12:17 am

I think it would help to know what you aim to accomplish. I personally only hold US treasury bonds, but can't see any reason to try and make your own Total Bond. Are you trying to exclude or tilt a certain class?

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GaryA505
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Location: New Mexico

Re: Using separate funds instead of Total Bond.

Post by GaryA505 » Wed Sep 11, 2019 9:32 pm

MotoTrojan wrote:
Wed Sep 11, 2019 12:17 am
I think it would help to know what you aim to accomplish. I personally only hold US treasury bonds, but can't see any reason to try and make your own Total Bond. Are you trying to exclude or tilt a certain class?
I was really just thinking about whether or not this was doable and/or practical, and yes the reason would be to tilt or maybe even exclude a class.

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willthrill81
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Re: Using separate funds instead of Total Bond.

Post by willthrill81 » Wed Sep 11, 2019 9:39 pm

As long as you're fine with intermediate-term bonds (long-term bonds may be a better diversifier from stocks), I'd get an intermediate-term Treasury fund and call it a day.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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