Vanguard Short-Term Bond Index Fund Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
rattlenap
Posts: 324
Joined: Wed May 25, 2016 6:22 pm

Vanguard Short-Term Bond Index Fund Question

Post by rattlenap » Sat Jan 07, 2017 8:29 pm

Any thoughts on putting your emergency fund into the Vanguard Short-Term Bond Index Fund VBIRX in a taxable account? I know you will pay taxes on this, but historically there doesn't seem to be much in terms of volatility with this fund. In fact, it appears to just about keep your money up with the rate of inflation. Even after you pay the taxes.

User avatar
Uncle Pennybags
Posts: 1836
Joined: Tue Oct 28, 2014 2:05 am

Re: Vanguard Short-Term Bond Index Fund Question

Post by Uncle Pennybags » Sat Jan 07, 2017 8:34 pm

Vanguard has an ultra short bond, VUSFX, for your situation; it's more than a MM but not by much.

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Phineas J. Whoopee » Sat Jan 07, 2017 8:44 pm

Hi rattlenap,

Putting one's emergency fund into anything the least bit volatile usually garners a lot of vocal resistance around here, but it's perfectly fine if you plan in advance for the volatility. Short-term bond, or ultra-short as the prior poster suggested, or short Treasury all have limited volatility, but they do have some. If you put, just to make up a number, 5% more in than you need for emergency purposes, it should be fine. Maybe for an intermediate-term bond fund it would be 10% more. Maybe for Total Stock it would be 120% more.

You don't have to do it this way, but the concept I just laid out is one part of our wiki article Placing cash needs in a tax-advantaged account.

Or, you could keep it entirely taxable and nonvolatile. That works too.

PJW

User avatar
nisiprius
Advisory Board
Posts: 40248
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Vanguard Short-Term Bond Index Fund Question

Post by nisiprius » Sat Jan 07, 2017 8:51 pm

The obvious comparison is with a plain old FDIC-insured bank account. (I think the tax consequences are similar). Savings rates, according to depositaccounts.com, seem to be running around 1% to 1.25% for actual savings accounts (including money market deposit accounts). I'm not drawing any conclusions here, there are tradeoffs. I agree that the degree of volatility in a short-term bond index fund isn't a problem, in itself, in an emergency fund. If you need to use it when the fund is, say, 2% or 3% down, that doesn't seem like a problem--after all, it's an emergency. But the point is that this fund isn't giving you an awful lot more than a bank account.

By the way, Vanguard offers a checkwriting option on this bond fund--and many others. This seems like a worthwhile option if you do decide to go this route. You get a book of what look like ordinary checks, although you can only write them for a minimum of $250, and they draw directly on the bond fund. If you are dealing with someone willing to accept checks, you can just write one, no need to place any orders or explicitly transfer funds.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by lack_ey » Sat Jan 07, 2017 9:08 pm

With respect to the above performance of the fund, note that five years ago (checking the annual report for the period ending December 2011), the SEC yield for admiral shares was 0.86% on an expense ratio of 0.11%. Three years ago, 0.78% with an ER of 0.10%.

We're now looking at an SEC yield of 1.70% with an ER of 0.09%. It's very possible that the next five years see similar pre-tax performance a bit above 1% as in those years, but it's more likely that returns will be higher, closer to 2%.

Topic Author
rattlenap
Posts: 324
Joined: Wed May 25, 2016 6:22 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by rattlenap » Sat Jan 07, 2017 9:10 pm

What is "checkwriting option on this fund"? You mean one can actually write a check with this fund to another entity and have the money pay directly out of the account rather than transferring the cash to your bank account in order to use it?

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Phineas J. Whoopee » Sat Jan 07, 2017 9:12 pm

rattlenap wrote:What is "checkwriting option on this fund"? You mean one can actually write a check with this fund to another entity and have the money pay directly out of the account rather than transferring the cash to your bank account in order to use it?
That's right. Because the Net Asset Value will fluctuate each check creates its own tax consequences, to track separately, but yes, you can do it. Vanguard's offered the option on many, but not all, short-term bond funds for a long time.

Upon reflection, I should think using the checkwriting option precludes the specific identification method, but for a fund that doesn't fluctuate much that's not likely to be a big problem.

PJW
Last edited by Phineas J. Whoopee on Sat Jan 07, 2017 9:24 pm, edited 1 time in total.

User avatar
Uncle Pennybags
Posts: 1836
Joined: Tue Oct 28, 2014 2:05 am

Re: Vanguard Short-Term Bond Index Fund Question

Post by Uncle Pennybags » Sat Jan 07, 2017 9:23 pm

lack_ey wrote:We're now looking at an SEC yield of 1.70% with an ER of 0.09%. It's very possible that the next five years see similar pre-tax performance a bit above 1% as in those years, but it's more likely that returns will be higher, closer to 2%.
With the FED raising rates 4 times in 2017 fixed income coupon is looking good but the ride up could be bumpy.

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Phineas J. Whoopee » Sat Jan 07, 2017 9:26 pm

Uncle Pennybags wrote:
lack_ey wrote:We're now looking at an SEC yield of 1.70% with an ER of 0.09%. It's very possible that the next five years see similar pre-tax performance a bit above 1% as in those years, but it's more likely that returns will be higher, closer to 2%.
With the FED raising rates 4 times in 2017 fixed income coupon is looking good but the ride up could be bumpy.
The Fed does not set bond rates of any term. If there are indeed four Federal Funds Rate increases coming in 2017 everybody else already knows what you know. They're taking the time value of money into account, too.
PJW

rai
Posts: 1289
Joined: Tue Apr 06, 2010 7:11 am

Re: Vanguard Short-Term Bond Index Fund Question

Post by rai » Sat Jan 07, 2017 9:35 pm

Phineas J. Whoopee wrote:
You don't have to do it this way, but the concept I just laid out is one part of our wiki article Placing cash needs in a tax-advantaged account.

PJW
hi,

I have a question about taxes. Since we are talking about saving money (ie. we put the safe non volatile assets that throw off 'short term' income in tax shelter)

but since this short term income is very low, is it really that important to be in the tax shelter.

when you consider:

1) long term gains are 23.8% in a taxable account and
2) dividend income in a taxable account is also 23.8%

would it make any sense for the highest tax bracket to put EF in a tax shelter and possible have to sell appreciated stocks with 23.8% tax on the gain?
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Phineas J. Whoopee » Sat Jan 07, 2017 9:39 pm

rai wrote:...
would it make any sense for the highest tax bracket to put EF in a tax shelter and possible have to sell appreciated stocks with 23.8% tax on the gain?
The wiki article lays out a method one could use if it made sense in their situation. It sounds like yours is complicated. You probably should seek personal tax advice, but whoever is doing the advising may not have thought of the specific method in the wiki. It might or might not be a good choice for any individual.
PJW

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by lack_ey » Sat Jan 07, 2017 9:40 pm

Phineas J. Whoopee wrote:
Uncle Pennybags wrote:
lack_ey wrote:We're now looking at an SEC yield of 1.70% with an ER of 0.09%. It's very possible that the next five years see similar pre-tax performance a bit above 1% as in those years, but it's more likely that returns will be higher, closer to 2%.
With the FED raising rates 4 times in 2017 fixed income coupon is looking good but the ride up could be bumpy.
The Fed does not set bond rates of any term. If there are indeed four Federal Fund Rate increases coming in 2017 everybody else already knows what you know. They're taking the time value of money into account, too.
PJW
Fed says three, for what it's worth, not four. Implied market forecast based on futures market indicates about two-ish, between two and three.

I'm not sure any of that actually refutes Uncle Pennybags's assertion, though. I've not seen the stats but could believe that years in which it is before-the-fact expected that the Fed changes its target multiple times are more volatile years for the bond market than other years. In some sense there is more action and information to digest. You're just addressing the fact that baseline expectations and possibilities are already considered by the market and presumably in some fashion priced in.

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Phineas J. Whoopee » Sat Jan 07, 2017 9:51 pm

lack_ey wrote:...
Fed says three, for what it's worth, not four. Implied market forecast based on futures market indicates about two-ish, between two and three.

I'm not sure any of that actually refutes Uncle Pennybags's assertion, though. I've not seen the stats but could believe that years in which it is before-the-fact expected that the Fed changes its target multiple times are more volatile years for the bond market than other years. In some sense there is more action and information to digest. You're just addressing the fact that baseline expectations and possibilities are already considered by the market and presumably in some fashion priced in.
Uncle Pennybags, if I understand correctly and please, Uncle, if I'm wrong chime in, is asserting that a 2% coupon, which is not what a 2% SEC yield means, will be swamped out by the Fed raising the Federal Funds Rate four times 2017. That's the assertion I was responding to.

I agree bond prices are volatile, and may become more or less so at any time. I also agree that market expectations, which can be read fairly accurately from futures prices, may change.

I do not agree the Fed raising the FFR four times, which was the assertion, will by itself cause the values of short-term bond funds to go down. If Uncle Pennybags knows it's four, then the major bond market participants must know that too, and are taking it into account in the yields they seek across the yield curve, while calculating in the time value of money.

I think we're in vehement agreement.

PJW

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by lack_ey » Sat Jan 07, 2017 9:56 pm

To be clear, I interpreted "the ride up could be bumpy" as about volatility, not return. Maybe that's wrong.

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Phineas J. Whoopee » Sat Jan 07, 2017 10:06 pm

lack_ey wrote:To be clear, I interpreted "the ride up could be bumpy" as about volatility, not return. Maybe that's wrong.
I interpreted "the ride up could be bumpy" as downward movement in the price, volatile or otherwise, exceeding the 2% coupon which isn't one, thereby creating a completely-foreseeable negative one-year total return.

That's why four FFR increases of 0.25% makes sense. That's 1%, so a 2.5 year average duration fund goes down 2.5% which is more than 2%. Therefore, we're guaranteed to lose money, and only an egghead would invest.

But the Fed doesn't set bond yields, and the major participants in the fixed income market know everything you or I, or Uncle Pennybags, know, and more.

Uncle - once again, if I'm misrepresenting your position please say so and I'll profusely apologize and gladly retract what I claimed about it.

PJW

User avatar
Uncle Pennybags
Posts: 1836
Joined: Tue Oct 28, 2014 2:05 am

Re: Vanguard Short-Term Bond Index Fund Question

Post by Uncle Pennybags » Sat Jan 07, 2017 10:10 pm

lack_ey wrote:To be clear, I interpreted "the ride up could be bumpy" as about volatility, not return. Maybe that's wrong.
Phineas J. Whoopee wrote:The Fed does not set bond rates of any term.
I know but money becomes more expensive so people pay more to use it. Volatility goes up along with rates but the principal loses value. The shorter the bond the better chance one has to be even if an emergency comes up. Of course held to maturity the principal returns to par.

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Phineas J. Whoopee » Sat Jan 07, 2017 10:14 pm

Uncle Pennybags wrote:...
I know but money becomes more expensive so people pay more to use it. Volatility goes up along with rates but the principal loses value. The shorter the bond the better chance one has to be even if an emergency comes up. Of course held to maturity the principal returns to par.
Thanks Uncle Pennybags. Looks like I wasn't too far off in my interpretation.
PJW

User avatar
nisiprius
Advisory Board
Posts: 40248
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Vanguard Short-Term Bond Index Fund Question

Post by nisiprius » Sat Jan 07, 2017 10:17 pm

The duration of VBIRX is 2.8 years. The yield on a 3-year Treasury is currently 1.5% which is also within shouting distance of the last 1-year total return of the fund.

The Fed usually raises interest rates 0.25% at at time, so four increases within a year would be a 1% increase. That's the overnight rate. Let's assume the interest rate for the bonds in the fund also increases 1%, although that isn't necessarily true.

This simulation shows a rolling ladder of bonds that has a duration of 2.88 years. It's not a simulation of VBIRX but it ought to be in roughly the same ballpark. (The term of each bond is 6.5 years). The interest rate starts at 1.5%, and then undergoes a rise of 1% over a period of 1 year. The chart show total return, with coupon payments reinvested.

The $1,000 initial investment grows to $1,053. Then during the one year of interest rate increases, it gets knocked down to $1,042, a loss of 1.08%.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Vanguard Short-Term Bond Index Fund Question

Post by saltycaper » Sat Jan 07, 2017 10:24 pm

Sometimes we get a little carried away here with the phrase, "already priced into the market". A scenario playing out according to market expectations often means more than what the market expects. That's why it's true the Fed raising the FFR four times will not by itself cause short-term bond prices to fall, but the statement means pretty much nothing, since market events never occur in isolation.
Quod vitae sectabor iter?

beardsworth
Posts: 2135
Joined: Fri Jun 15, 2007 4:02 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by beardsworth » Sat Jan 07, 2017 10:39 pm

It's obviously a matter of personal choice.

But I wouldn't want to keep emergency money in a vehicle whose value can change constantly, even if not very dramatically, with credit and interest rate markets.

And I wouldn't want an emergency vehicle whose every use, i.e., taking out any amount of money, however small, creates a separate "taxable event" to complicate my tax return at year-end.

Concerning Vanguard Ultra Short, I wouldn't want to keep emergency money in something with almost 30% of its holdings in corporate securities and almost 39% in assorted "asset-backed" holdings

http://portfolios.morningstar.com/fund/summary?t=VUSFX

whose very names, let alone internal workings, I find difficult to understand

http://portfolios.morningstar.com/fund/holdings?t=VUSFX

And, regarding Vanguard Short-Term Bond Index, I wouldn't want emergency money in a fund with a quarter of assets rated below triple-A and double-A.

http://portfolios.morningstar.com/fund/summary?t=VBIRX

But then, I look at an emergency fund as something to be as safe, and cash-like, and free of additional tax headaches, as possible, rather than something to "make money on." Ours is parked in an insured credit union money market account. A number of other people on this forum have mentioned their use of U.S. Savings Bonds.

As I said, it's a personal choice.

User avatar
Index Fan
Posts: 2574
Joined: Wed Mar 07, 2007 12:13 pm
Location: The great Midwest

Re: Vanguard Short-Term Bond Index Fund Question

Post by Index Fan » Sun Jan 08, 2017 12:34 am

I used to keep part of my emergency fund in VG STBI in taxable. I'm in a low tax bracket and I had no problem with that.
"Optimum est pati quod emendare non possis." | -Seneca

beardsworth
Posts: 2135
Joined: Fri Jun 15, 2007 4:02 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by beardsworth » Thu Jan 12, 2017 12:29 pm

The OP here specifically asked for opinions about the use of Vanguard Short-Term Bond Index as an emergency fund.

The OP and other readers of this thread may also want to look at the following newer and more general thread about "Where do you keep your emergency fund?"

viewtopic.php?f=2&t=207926

Rupert
Posts: 4122
Joined: Fri Aug 17, 2012 12:01 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Rupert » Thu Jan 12, 2017 12:45 pm

VBIRX is a completely fine choice for holding part of your emergency fund. The ability to write checks on it is handy when you need money quickly. You don't have to hold your entire emergency fund there. I recommend splitting up your emergency savings into different accounts, such as your checking account, an online savings account, I Bonds, and a short-term bond fund. It is also reasonable to consider the funds in your Roth IRA and the credit limits on your credit cards as emergency funds in an extreme emergency.

User avatar
abuss368
Posts: 18731
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Vanguard Short-Term Bond Index Fund Question

Post by abuss368 » Thu Jan 12, 2017 11:09 pm

We build our cash fund in a savings account. There is an old saying: "Cash is king!"

I do not look at our cash for a return anymore but rather security, safety, and a lot of flexibility.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success." || Buy Total Stock until it hurts. Then find a way to buy even more!

User avatar
patrick013
Posts: 2846
Joined: Mon Jul 13, 2015 7:49 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by patrick013 » Fri Jan 13, 2017 2:04 pm

Phineas J. Whoopee wrote:
Uncle Pennybags wrote:
lack_ey wrote:We're now looking at an SEC yield of 1.70% with an ER of 0.09%. It's very possible that the next five years see similar pre-tax performance a bit above 1% as in those years, but it's more likely that returns will be higher, closer to 2%.
With the FED raising rates 4 times in 2017 fixed income coupon is looking good but the ride up could be bumpy.
The Fed does not set bond rates of any term. If there are indeed four Federal Funds Rate increases coming in 2017 everybody else already knows what you know. They're taking the time value of money into account, too.
PJW
Yes, but by buying or selling TRSY's the Fed can have a dramatic effect on
interest rates, especially long term. This increases or decreases the money
supply, increases or decreases the supply of bonds available for sale, and those
effects along with any change to the FFR will change the market yield curve.
So you have supply and demand, monetary theory, market equilibration, and
liquidity preference following a little unanticipated buying and selling activity
by the Fed to arrive at a new current yield curve. They can deliberately reset
the interest rate of any term by concentrated buy/selling in that term.

Sometimes they do it inadvertently, by buying or selling TRSY's in response to
funding requirements of the Social Security Trust Fund they manage. :)

If you include foreign purchases, any effect of the stock market, volume changes,
you can explain any change in the yield curve with actual data. It's a pretty
complete input/result approach.

Or just buy a VG short or intermediate term investment grade bond fund and
forget about it.

I read once where if the Fed changes the FFR by 1% and the yield curve doesn't
change they'll just change the FFR by 2% then. Well, there's a few other things
they can do or might happen.
age in bonds, buy-and-hold, 10 year business cycle

User avatar
Uncle Pennybags
Posts: 1836
Joined: Tue Oct 28, 2014 2:05 am

Re: Vanguard Short-Term Bond Index Fund Question

Post by Uncle Pennybags » Fri Jan 13, 2017 9:59 pm

Rupert wrote: It is also reasonable to consider the funds in your Roth IRA and the credit limits on your credit cards as emergency funds in an extreme emergency.
IMHO not a good idea to eat one's seed corn.

Glamdring
Posts: 4
Joined: Mon May 11, 2015 9:16 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by Glamdring » Tue Mar 24, 2020 11:17 pm

This turned out as timely topic than the OP foresaw. With the Vanguard ultra-short bond fund (VUSFX) currently at -.55% YTD I am unpleasantly surprised and continue to watch it fall on days that corporate bonds are sporting a bold but partial recovery.

I am curious on the poor performance on something I considered to be just a small notch down fro a MM. Any theories on what is happening here?

I wish this was my biggest problem but I think there is some education potential here.

User avatar
FelixTheCat
Posts: 1738
Joined: Sat Sep 24, 2011 12:39 am

Re: Vanguard Short-Term Bond Index Fund Question

Post by FelixTheCat » Wed Mar 25, 2020 12:47 pm

My short term money is in the ETF version of Vanguard's Short-Term Bond Index fund (BSV). According to the wiki, it is very tax efficient https://www.bogleheads.org/wiki/Tax-eff ... _placement
Efficient
Low-yield money market, cash, short-term bond funds
Tax-managed stock funds
Large-cap and total-market stock index funds
Felix is a wonderful, wonderful cat.

petulant
Posts: 1038
Joined: Thu Sep 22, 2016 1:09 pm

Re: Vanguard Short-Term Bond Index Fund Question

Post by petulant » Wed Mar 25, 2020 12:56 pm

Glamdring wrote:
Tue Mar 24, 2020 11:17 pm
This turned out as timely topic than the OP foresaw. With the Vanguard ultra-short bond fund (VUSFX) currently at -.55% YTD I am unpleasantly surprised and continue to watch it fall on days that corporate bonds are sporting a bold but partial recovery.

I am curious on the poor performance on something I considered to be just a small notch down fro a MM. Any theories on what is happening here?

I wish this was my biggest problem but I think there is some education potential here.
Down half a percent doesn't seem that bad. It was part of the risk-reward tradeoff discussed in the thread--volatility with small drawdown possible in exchange for higher yield.

Post Reply