VCITX question

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Topic Author
SantaClaraSurfer
Posts: 191
Joined: Tue Feb 19, 2019 11:09 am

VCITX question

Post by SantaClaraSurfer »

In addition to EE Bonds and I Bonds (@$8,000-$10,000 per year spread between both), we have a portion of our post-tax Fixed Income investing going to Long Term Bonds in the form of VCITX which is a Vanguard, Long Term, CA Tax Free Municipal bond mutual fund with an ER of .17% and a current 30 Day SEC Yield of 1.28%.

We just started purchasing VCITX and my question centers around understanding the mechanics of the investment.

We purchased $4,800 at $12.79 per share.

Since our purchase the share price has declined to $12.67 per share.

Normally, that would mean that the yield should go up, right?

However, bond yields are declining overall and 1.28% seems less than the yield when we initially made the investment in June. Everything I've read here seems to indicate your yield should go up if the index fund share price goes down, but am I correct in assuming that means the yield is only going up relative to where it was when the price declined and could still be trending downward (along with all bond yields) overall at a rate that makes for a situation where your share price declines AND your yield declines from when you started?

My question:

1) How do I track this? Is there a way to track the SEC Yield for when we initially purchased a lot? How can I make a good qualitative decision about this investment?

2) What is the best way to expectation set with this investment?

ie. Let's say we are purchasing $8,000 per year for the next 20 years.

Since it is a Long Term Municipal Bond fund we would expect that we will, more or less, protect our principal, and get tax free growth via the dividends, but we may have to weather periodic declines in share price that impact the overall value of the investment. Basically, even at low yields, it should grow tax free and add ballast to our portfolio.

I realize fully that bond yields have declined and are declining. But what would be a good yardstick for me to measure this investment at the 10 year mark ($80,000 invested) and the 20 year mark ($160,000 invested)?

Without going into a full portfolio review, the VCITX plays the role for us of having some Long Term Bond investment in taxable that we are highly likely NOT to use for rebalancing, but we could still leverage, as needed, prior to or during retirement. Either for use on a very big ticket item (down payment on a condo, for example), income supplement during pre-retirement bridge years or in an outright emergency (ie. need to leverage due to a major market downturn.)

The alternative for us, I am guessing, would be to max out our EE Bonds or I Bonds and just put all our taxable Fixed Income into Savings Bonds. We already have a solid equity strategy, so we definitely want to invest this money in the fixed income space.

Bottom line, I understand that the bond market has changed, but I'd like to be able to measure how VCITX is working for us and at least have some yardstick for how it's performing relative to our alternatives.

Can you help me understand how best to do this?

What are the best common sense alternatives? (Not looking for answers that reject Fixed Income entirely, that is not relevant to me.)
rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: VCITX question

Post by rkhusky »

I would ignore daily share price and focus on SEC yield and risk. Is the expected yield reasonably consistent with the risk you are taking, compared to other fixed income possibilities? For risk, look at the bond rating distribution, the historical default rates, and the return volatility over the last 10-20 years.

The share price depends on investor demand. The demand can go down at the same time as interest rates go down. For example, investors might decide that the prospects for CA defaulting on the bonds has increased. I don’t know how often the bond ratings are adjusted, but investors could get ahead of the bond raters. On the other hand, both investors and bond raters can misjudge the risk.
kirk1299
Posts: 12
Joined: Mon Oct 12, 2020 8:04 pm

Re: VCITX question

Post by kirk1299 »

My own worry with muni bonds in general and CA in particular is that we are collecting pennies in front of a freight train as the finances of many states continue to weaken! Whether your yield is 1.2% or 1.25%...... (that's my editorial comment, and I suggest you ignore it!)

But the other poster is absolutely right: don't over think it. There's a market out there for these bonds pricing daily, spreads change. The big picture move is not going to be whether your yield is 2-3 basis points higher or lower, but things like: will interest rates start increasing in a secular way, putting pressure on bond prices? will CA finances weaken putting upward pressure on spreads? will tax-exempt treatment of muni bonds change at some point, which would be a radical dislocation to the market? etc....
kirk1299
Posts: 12
Joined: Mon Oct 12, 2020 8:04 pm

Re: VCITX question

Post by kirk1299 »

Just to give you a more positive case, as well - if investors were to think that tax rates were to go up, and if investors were to think that the tax treatment of muni bonds were not going to change, then that would make muni bonds more attractive to many investors.

(We aren't allowed to speculate about what might happen with tax policy here, so I simply provide a counterfactual statement which is definitionally true, and does note portend any particular outcome.)
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Electron
Posts: 2118
Joined: Sat Mar 10, 2007 8:46 pm

Re: VCITX question

Post by Electron »

I've been investing in this fund since 1994 and hold it for tax-exempt income without reinvesting distributions.

You can track SEC Yield using the Vanguard Price History Search Tool.

https://personal.vanguard.com/us/funds/ ... &year=#res

Vanguard also provides the Distribution Yield for the fund which has been quite a bit higher than the SEC Yield.

https://investor.vanguard.com/mutual-fu ... ions/vcitx

"The fund's current monthly income dividend per share, annualized by dividing by the number of days in the month and multiplying by 365, and shown as a percentage of the fund's average net asset value (NAV) during the month."
Electron
Topic Author
SantaClaraSurfer
Posts: 191
Joined: Tue Feb 19, 2019 11:09 am

Re: VCITX question

Post by SantaClaraSurfer »

Electron wrote: Mon Oct 19, 2020 2:30 pm I've been investing in this fund since 1994 and hold it for tax-exempt income without reinvesting distributions.

You can track SEC Yield using the Vanguard Price History Search Tool.

https://personal.vanguard.com/us/funds/ ... &year=#res
Thank you, this was exactly what I was looking for!

It makes me wonder two things.

1) Given our modest taxable Bond investing if we shouldn't max out EE Bonds and reduce the amount we put in VCITX annually since a) we don't truly need the money b) the 3.5% for EE bonds is a very good rate currently

or

2) If we should set a "reconsider date" 5 years into the future and if VCITX and Long Term Municipals in general shows no signs of returning closer to 2.5-4% that we should consider alternatives then.

In the meantime, congrats on investing in VCITX since 1994, I am fairly sure that you have been happy so far!
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Electron
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Re: VCITX question

Post by Electron »

SantaClaraSurfer wrote: Wed Oct 21, 2020 3:30 pm
1) Given our modest taxable Bond investing if we shouldn't max out EE Bonds and reduce the amount we put in VCITX annually since a) we don't truly need the money b) the 3.5% for EE bonds is a very good rate currently.

2) If we should set a "reconsider date" 5 years into the future and if VCITX and Long Term Municipals in general shows no signs of returning closer to 2.5-4% that we should consider alternatives then.
The EE bonds are definitely worth considering and I believe the value will double if you hold 20 years. That represents the annual return of 3.5%.

Timing the bond market is probably as difficult as timing the stock market. There is no way to know when a better entry point might present itself. In addition, experts feel that stocks and bonds will return less than what we have seen in recent decades. As you know bond yields are very low at present which increases the risk and inflation is another concern.

Here are two charts that may be of interest. The first chart shows the Price (NAV) for VCITX going back to April 1986. Note that NAV is currently near the top of the range going back to inception of the fund.

The second chart shows the Growth of $10K from the same starting point. Growth assumes reinvestment of dividends. These charts also have an option to display rolling returns.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Electron
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