Please educate me re: ongoing confusion between VBTLX vs. VWIUX (tax-exempt) in a taxable account

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OkanePlease
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Please educate me re: ongoing confusion between VBTLX vs. VWIUX (tax-exempt) in a taxable account

Post by OkanePlease » Wed Feb 12, 2020 8:45 pm

I've read a bit about this, but I guess I can use explanation in "Dummies"-like format.

Why is VBTLX (Total Bond Market) better in a taxable account at my marginal tax rate (10%) than VWIUX (Intermediate-term Tax-Exempt)? I own some of both. (My tax-advantaged buckets are full, so bonds overflow into my taxable account.) I see the difference in the SEC yield, but when I look at dividends the past few months, VWIUX's dividends consistently lag VBTLX's dividends by less than 10%. (Is this what's known as the distribution yield?) Meanwhile, I don't see any real divergence in the NAVs.

Maybe I'm not going back far enough historically to appreciate the difference. Maybe I'm missing something completely. I wouldn't be surprised if that's the case, so kindly educate me. Thanks!

sycamore
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Re: Please educate me re: ongoing confusion between VBTLX vs. VWIUX (tax-exempt) in a taxable account

Post by sycamore » Wed Feb 12, 2020 9:15 pm

Here's a good explanation of distribution versus SEC yield.

Why does the yield difference seem low-ish? Imagine over the past year there was more of a drop in bond rates in Treasuries and corporates than in muni bonds. That made the yield gap between Total Bond and VWIUX shrink. Of course, the larger drop in Treasury/corporate rates also means that Total Bond's price went up more, so its total return was higher than VWIUX's.

So the relative movements of the underlying bond markets (Treasuries/corporiates/munis) might explain part of it. Hopefully others will chime in with better/other explanations.

I do believe Total Bond Fund had higher total return than VWIUX last year, FWIW. Just a reminder that it's hard to judge bond funds on yield alone.

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OkanePlease
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Re: Please educate me re: ongoing confusion between VBTLX vs. VWIUX (tax-exempt) in a taxable account

Post by OkanePlease » Thu Feb 13, 2020 11:15 am

Thanks for the link and information, Sycamore. Like you wrote, I hope that others can contribute other explanations.

Later, with more time, I will try to post some of the recent statistical information I have on the two funds to further illustrate my confusion.
sycamore wrote:
Wed Feb 12, 2020 9:15 pm
Here's a good explanation of distribution versus SEC yield.

Why does the yield difference seem low-ish? Imagine over the past year there was more of a drop in bond rates in Treasuries and corporates than in muni bonds. That made the yield gap between Total Bond and VWIUX shrink. Of course, the larger drop in Treasury/corporate rates also means that Total Bond's price went up more, so its total return was higher than VWIUX's.

So the relative movements of the underlying bond markets (Treasuries/corporiates/munis) might explain part of it. Hopefully others will chime in with better/other explanations.

I do believe Total Bond Fund had higher total return than VWIUX last year, FWIW. Just a reminder that it's hard to judge bond funds on yield alone.

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OkanePlease
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Re: Please educate me re: ongoing confusion between VBTLX vs. VWIUX (tax-exempt) in a taxable account

Post by OkanePlease » Thu Feb 13, 2020 6:44 pm

Okay, here's the recent data that adds to my confusion:

VWIUX (Intermediate-term Tax-exempt) net asset value:
10/31: 14.46
11/29: 14.45
12/31: 14.47
1/31: 14.67

VBTLX (Total Bond) net asset value:
10/31: 11.12
11/29: 11.09
12/31: 11.05
1/31: 11.26

They look comparable to me. (Mathematically, VWIUX is actually doing ever-so-slightly better.)

As for the monthly dividends I've received, the yield (monthlies multiplied by 12 to get an "APY")...

VWIUX (Intermediate-term Tax-exempt):
11/29: 2.54%
12/31: 2.61%
1/31: 2.57%

VBTLX (Total Bond):
11/29: 2.58%
12/31: 2.68%
1/31: 2.66%

So, even at a 10% marginal tax rate, VWIUX looks like a clear winner. But is it because I'm only doing a recent snapshot? Am I calculating/evaluating things incorrectly, and/or does anyone have any countering data?

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grabiner
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Re: Please educate me re: ongoing confusion between VBTLX vs. VWIUX (tax-exempt) in a taxable account

Post by grabiner » Thu Feb 13, 2020 10:22 pm

OkanePlease wrote:
Thu Feb 13, 2020 6:44 pm
So, even at a 10% marginal tax rate, VWIUX looks like a clear winner. But is it because I'm only doing a recent snapshot? Am I calculating/evaluating things incorrectly, and/or does anyone have any countering data?
You are doing a very short-term snapshot; munis gained more than taxable bonds in the last few months. The best forward-looking measure of bond returns is the SEC yield, which is currently 2.12% for Total Bond Market and 1.31% for Intermediate-Term Tax-Exempt. At those yields, the break-even would be a 38% tax rate, but that isn't a fair comparison because the muni fund has a shorter duration (4.8 versus 6.2 years) and thus less interest-rate risk.

Currently, Long-Term Tax-Exempt with a 1.68% yield has the same duration as Total Bond Market, and that would be break-even at a 21% tax rate. Here, even though the durations are equal, the muni fund is probably riskier, as its duration will increase if rates rise and bonds are less likely to be called. (Total Bond Market has a lot of Treasuries, which are not callable.)
Wiki David Grabiner

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OkanePlease
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Re: Please educate me re: ongoing confusion between VBTLX vs. VWIUX (tax-exempt) in a taxable account

Post by OkanePlease » Fri Feb 14, 2020 5:38 pm

grabiner wrote:
Thu Feb 13, 2020 10:22 pm
You are doing a very short-term snapshot; munis gained more than taxable bonds in the last few months. The best forward-looking measure of bond returns is the SEC yield, which is currently 2.12% for Total Bond Market and 1.31% for Intermediate-Term Tax-Exempt. At those yields, the break-even would be a 38% tax rate, but that isn't a fair comparison because the muni fund has a shorter duration (4.8 versus 6.2 years) and thus less interest-rate risk.
Thanks, Grabiner. I guess I should feel fortunate for the past few months in which I've been weighted more heavily toward the Intermediate-term Tax-Exempt fund, and should perhaps consider changing that weighting going forward.

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