Help please- Managed Bonds vs Bond Index funds

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Topic Author
Katoswims
Posts: 44
Joined: Fri Nov 06, 2020 9:44 pm

Help please- Managed Bonds vs Bond Index funds

Post by Katoswims »

Hello,

I have a meeting with Fidelity next week and have a few questions for this forum in advance of that meeting.

I currently have a portion of our bond allocation in Fidelity's managed bond portfolio, which holds individual bonds. YTD this account is
down -3.47% with an expense ratio of .45.

Fidelity US Bond Index (FXNAX) is down -2.57% YTD with expense ratio of .25

The Bloomberg Barclays US aggregate Bond Index is down -1.58%

Fidelity keeps telling me that by holding individual bonds long term performance will be better. It doesn't look that way to me based on these numbers.

What am I missing ?
Would I-Bonds be better than any of the above options ?

Thanks for your thoughts !
fabdog
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Location: Williamsburg VA

Re: Help please- Managed Bonds vs Bond Index funds

Post by fabdog »

a few observations:

How long have you had this managed portfolio of bonds? you say Fidelity promised you better long term performance but everything you reference is YTD. YTD is not long term

What did Fidelity tell you they were bench marking against? if against Barclays aggregate, they have tracking error for this year. If something else, how does it compare?

IBonds would certainly have a better interest rate for the next 6 months and no chance of principal loss... but you can buy limited amounts. And IBonds are inflation protection... if that's what you wanted that may be very different from what you have

What specifically was it you were expecting this bond allocation to do in your portfolio?

Unless they are tracking something different than Barclay's aggregate (which you must have agreed to) then yes they are under performing and a straight index fund will do better. But it's not clear what they are providing you with

so you certainly have some reasonable questions for them but also for yourself....

Mike
afan
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Re: Help please- Managed Bonds vs Bond Index funds

Post by afan »

The bond market is efficient. No one can reliably beat it. Don't waste your money paying someone to try.

To the extent you want bonds, buy a simple cap weighted index fund and be done with it. The fund will give you the risk adjusted return of the bond market, no more, no less. It will do this for under 10 basis points.

Depending on your circumstances, CDs, I bonds, or munis might be better than a taxable bond fund.

A managed bond fund, taxable or muni, is at best a waste of money. Some have turned into terrible investments with returns far worse than the bond market.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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JonL
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Location: San Diego, CA

Re: Help please- Managed Bonds vs Bond Index funds

Post by JonL »

Katoswims wrote: Wed Nov 24, 2021 5:51 pm Hello,

I have a meeting with Fidelity next week and have a few questions for this forum in advance of that meeting.

I currently have a portion of our bond allocation in Fidelity's managed bond portfolio, which holds individual bonds. YTD this account is
down -3.47% with an expense ratio of .45.

Fidelity US Bond Index (FXNAX) is down -2.57% YTD with expense ratio of .25

The Bloomberg Barclays US aggregate Bond Index is down -1.58%

Fidelity keeps telling me that by holding individual bonds long term performance will be better. It doesn't look that way to me based on these numbers.

What am I missing ?
Would I-Bonds be better than any of the above options ?

Thanks for your thoughts !
Costs are a main driver of future investment returns. If you pay more to invest, your investments will underperform - on average - by that extra amount you pay. This applies to both stock funds and bond funds. The data on the subject is overwhelming.

You are a living example of this. FIdelity tells a nice story - but it's quite obvious to you already that the numbers don't add up.

Keeping costs low gives investors the best odds of investment success. It's that simple.

Also, you missed a digit in the expense ratio of FXNAX. It's 0.025%.

I hope that helps.

Good luck!
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grabiner
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Re: Help please- Managed Bonds vs Bond Index funds

Post by grabiner »

Katoswims wrote: Wed Nov 24, 2021 5:51 pm Fidelity US Bond Index (FXNAX) is down -2.57% YTD with expense ratio of .25
The expense ratio is 0.025%, not 0.25%; this is a significant difference, and a reason that the index fund is a good choice.
The Bloomberg Barclays US aggregate Bond Index is down -1.58%
This comparison is not consistent; I would guess that one of these numbers is through the end of the month. Morningstar has the fund -2.56% and the index -2.33%, which is consistent with the normal tracking error of this index fund. Over longer periods of time, random tracking error averages out; the fund is 0.01% below the index over ten years.
afan wrote: Wed Nov 24, 2021 6:48 pm The bond market is efficient. No one can reliably beat it. Don't waste your money paying someone to try.

To the extent you want bonds, buy a simple cap weighted index fund and be done with it. The fund will give you the risk adjusted return of the bond market, no more, no less. It will do this for under 10 basis points.
Or of whatever part of the bond market you want. If you want to take more risk for the potential of higher returns, Vanguard has corporate-only bond indexes; if you want the best diversification with a limited bond holding, there are Treasury-only indexes.
A managed bond fund, taxable or muni, is at best a waste of money. Some have turned into terrible investments with returns far worse than the bond market.
However, at Vanguard, the actively-managed funds have comparable costs to the index funds, and thus may make sense if you don't have an index fund available. In particularly, if Vanguard offers a low-cost muni fund for your state, you should use that even though it is actively-managed; the single-state muni ETFs are much more expensive.
Wiki David Grabiner
Topic Author
Katoswims
Posts: 44
Joined: Fri Nov 06, 2020 9:44 pm

Re: Help please- Managed Bonds vs Bond Index funds

Post by Katoswims »

fabdog wrote: Wed Nov 24, 2021 6:23 pm a few observations:

How long have you had this managed portfolio of bonds? you say Fidelity promised you better long term performance but everything you reference is YTD. YTD is not long term

What did Fidelity tell you they were bench marking against? if against Barclays aggregate, they have tracking error for this year. If something else, how does it compare?

IBonds would certainly have a better interest rate for the next 6 months and no chance of principal loss... but you can buy limited amounts. And IBonds are inflation protection... if that's what you wanted that may be very different from what you have

What specifically was it you were expecting this bond allocation to do in your portfolio?

Unless they are tracking something different than Barclay's aggregate (which you must have agreed to) then yes they are under performing and a straight index fund will do better. But it's not clear what they are providing you with

so you certainly have some reasonable questions for them but also for yourself....

Mike
Thanks for your feedback. I do need to ask myself questions, The index they provide for performance benchmark is the one I referenced. Only been in this arrangement for a year, and I know a year is short term, but I'm seeing the writing on the wall I think.
Topic Author
Katoswims
Posts: 44
Joined: Fri Nov 06, 2020 9:44 pm

Re: Help please- Managed Bonds vs Bond Index funds

Post by Katoswims »

afan wrote: Wed Nov 24, 2021 6:48 pm The bond market is efficient. No one can reliably beat it. Don't waste your money paying someone to try.

To the extent you want bonds, buy a simple cap weighted index fund and be done with it. The fund will give you the risk adjusted return of the bond market, no more, no less. It will do this for under 10 basis points.

Depending on your circumstances, CDs, I bonds, or munis might be better than a taxable bond fund.

A managed bond fund, taxable or muni, is at best a waste of money. Some have turned into terrible investments with returns far worse than the bond market.

Thanks. You articulated my feelings, better than I did.
Topic Author
Katoswims
Posts: 44
Joined: Fri Nov 06, 2020 9:44 pm

Re: Help please- Managed Bonds vs Bond Index funds

Post by Katoswims »

JonL wrote: Wed Nov 24, 2021 6:51 pm
Katoswims wrote: Wed Nov 24, 2021 5:51 pm Hello,

I have a meeting with Fidelity next week and have a few questions for this forum in advance of that meeting.

I currently have a portion of our bond allocation in Fidelity's managed bond portfolio, which holds individual bonds. YTD this account is
down -3.47% with an expense ratio of .45.

Fidelity US Bond Index (FXNAX) is down -2.57% YTD with expense ratio of .25

The Bloomberg Barclays US aggregate Bond Index is down -1.58%

Fidelity keeps telling me that by holding individual bonds long term performance will be better. It doesn't look that way to me based on these numbers.

What am I missing ?
Would I-Bonds be better than any of the above options ?

Thanks for your thoughts !
Costs are a main driver of future investment returns. If you pay more to invest, your investments will underperform - on average - by that extra amount you pay. This applies to both stock funds and bond funds. The data on the subject is overwhelming.

You are a living example of this. FIdelity tells a nice story - but it's quite obvious to you already that the numbers don't add up.

Keeping costs low gives investors the best odds of investment success. It's that simple.

Also, you missed a digit in the expense ratio of FXNAX. It's 0.025%.

I hope that helps.

Good luck!
Thanks. I appreciate your comment and correction of expense ratio.
Topic Author
Katoswims
Posts: 44
Joined: Fri Nov 06, 2020 9:44 pm

Re: Help please- Managed Bonds vs Bond Index funds

Post by Katoswims »

grabiner wrote: Wed Nov 24, 2021 7:48 pm
Katoswims wrote: Wed Nov 24, 2021 5:51 pm Fidelity US Bond Index (FXNAX) is down -2.57% YTD with expense ratio of .25
The expense ratio is 0.025%, not 0.25%; this is a significant difference, and a reason that the index fund is a good choice.
The Bloomberg Barclays US aggregate Bond Index is down -1.58%
This comparison is not consistent; I would guess that one of these numbers is through the end of the month. Morningstar has the fund -2.56% and the index -2.33%, which is consistent with the normal tracking error of this index fund. Over longer periods of time, random tracking error averages out; the fund is 0.01% below the index over ten years.
afan wrote: Wed Nov 24, 2021 6:48 pm The bond market is efficient. No one can reliably beat it. Don't waste your money paying someone to try.

To the extent you want bonds, buy a simple cap weighted index fund and be done with it. The fund will give you the risk adjusted return of the bond market, no more, no less. It will do this for under 10 basis points.
Or of whatever part of the bond market you want. If you want to take more risk for the potential of higher returns, Vanguard has corporate-only bond indexes; if you want the best diversification with a limited bond holding, there are Treasury-only indexes.
A managed bond fund, taxable or muni, is at best a waste of money. Some have turned into terrible investments with returns far worse than the bond market.
However, at Vanguard, the actively-managed funds have comparable costs to the index funds, and thus may make sense if you don't have an index fund available. In particularly, if Vanguard offers a low-cost muni fund for your state, you should use that even though it is actively-managed; the single-state muni ETFs are much more expensive.
Thanks. I'll explore options, but I'm not inclined to continue on the current path. Signing up for managed options was a cautious, timid move on my part as I entered retirement in a pandemic. That's my story and I'm sticking to it :happy !
RetiredCSProf
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Re: Help please- Managed Bonds vs Bond Index funds

Post by RetiredCSProf »

I met with my Fido advisor last week and asked a similar question about bond funds. My advisor recommended that I stick with my actively-managed bond funds. Based on my experience, I agree with my advisor.

In 2020, I added FNDSX (Fido sustainable, intermediate-term bond fund) and FNSOX (Fido short-term bond fund). I have been in the red on both funds since the moment I invested in them, even after pouring more money into them. That is, they have "underperformed" my MM fund. OTOH, the actively-managed bond funds that I added in 2020, such as FBND, have stayed in the black.

My experience has been that passively-managed S&P 500 index funds are hard to beat with active management, but this does not seem to apply to fixed income, unless you are talking about MMs or fixed income funds limited to US Treasury.
VaR
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Re: Help please- Managed Bonds vs Bond Index funds

Post by VaR »

RetiredCSProf wrote: Sat Nov 27, 2021 8:24 pm I met with my Fido advisor last week and asked a similar question about bond funds. My advisor recommended that I stick with my actively-managed bond funds. Based on my experience, I agree with my advisor.

In 2020, I added FNDSX (Fido sustainable, intermediate-term bond fund) and FNSOX (Fido short-term bond fund). I have been in the red on both funds since the moment I invested in them, even after pouring more money into them. That is, they have "underperformed" my MM fund. OTOH, the actively-managed bond funds that I added in 2020, such as FBND, have stayed in the black.

My experience has been that passively-managed S&P 500 index funds are hard to beat with active management, but this does not seem to apply to fixed income, unless you are talking about MMs or fixed income funds limited to US Treasury.
Just remember that "actively-managed" bond funds like FBND may be juicing their returns by taking more risk - in FBND's case, it is taking on risk in the form of a reduced allocation to Treasury bonds and agency mortgage bonds and an increased allocation to investment-grade corporate bonds and high-yield corporate bonds.

This isn't necessarily a bad thing, but you should be aware.

Note: You can be like other people here and do your own juicing of returns from your bond allocation by overweighting corporates. Or you can be like others and go all-Treasury but overweight equities.
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