Vanguard Total Bond Index question- does it act like a bond ladder?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
idoc2020
Posts: 1025
Joined: Mon Oct 22, 2007 3:40 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by idoc2020 »

km91 wrote: Mon Dec 12, 2022 10:22 pm
idoc2020 wrote: Mon Dec 12, 2022 10:04 pm The best case scenario for him was rates drop by 1%. The worst case is that rates rise by 5~7%
0% yield is a best case scenario? Earning 5-8% risk free on your money is a worst case?
That is correct for Bond ETFs. If you purchase an intermediate duration bond fund (BND) when rates are 1% and they drop to 0% the price should increase by about 6.5%. Your investment has gone up in value. If rates go from 1% to 4%, then BND price decreases by 18%. Your upside was limited to about 6.5% but your downside was much larger. I was wary of piling into bond funds when it was at 1% for this reason. If inflation continues to increase and the fed fund rate rises then I may market-time in the opposite direction ie: perhaps diverting new money into BND since I strongly anticipate inflation coming down eventually. So yes, anyone who invests in bonds should be looking at the inflation and geopolitical environments and include those factors in their investments as well as the usual mantras. This includes perhaps the possibility of accumulating ibonds, actual bonds, TIPS and other adjustments as so many of us are doing.
km91
Posts: 572
Joined: Wed Oct 13, 2021 12:32 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by km91 »

idoc2020 wrote: Tue Dec 13, 2022 1:06 pm That is correct for Bond ETFs. If you purchase an intermediate duration bond fund (BND) when rates are 1% and they drop to 0% the price should increase by about 6.5%. Your investment has gone up in value. If rates go from 1% to 4%, then BND price decreases by 18%. Your upside was limited to about 6.5% but your downside was much larger. I was wary of piling into bond funds when it was at 1% for this reason. If inflation continues to increase and the fed fund rate rises then I may market-time in the opposite direction ie: perhaps diverting new money into BND since I strongly anticipate inflation coming down eventually. So yes, anyone who invests in bonds should be looking at the inflation and geopolitical environments and include those factors in their investments as well as the usual mantras. This includes perhaps the possibility of accumulating ibonds, actual bonds, TIPS and other adjustments as so many of us are doing.
I don't know, I still think 4% yield is better than 0%. I might give the market timing thing a try though. Should I only do it if I strongly anticipate that something will happen eventually or can I do it if there's a likely possibility that it will happen?
idoc2020
Posts: 1025
Joined: Mon Oct 22, 2007 3:40 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by idoc2020 »

km91 wrote: Tue Dec 13, 2022 2:14 pm
idoc2020 wrote: Tue Dec 13, 2022 1:06 pm That is correct for Bond ETFs. If you purchase an intermediate duration bond fund (BND) when rates are 1% and they drop to 0% the price should increase by about 6.5%. Your investment has gone up in value. If rates go from 1% to 4%, then BND price decreases by 18%. Your upside was limited to about 6.5% but your downside was much larger. I was wary of piling into bond funds when it was at 1% for this reason. If inflation continues to increase and the fed fund rate rises then I may market-time in the opposite direction ie: perhaps diverting new money into BND since I strongly anticipate inflation coming down eventually. So yes, anyone who invests in bonds should be looking at the inflation and geopolitical environments and include those factors in their investments as well as the usual mantras. This includes perhaps the possibility of accumulating ibonds, actual bonds, TIPS and other adjustments as so many of us are doing.
I don't know, I still think 4% yield is better than 0%. I might give the market timing thing a try though. Should I only do it if I strongly anticipate that something will happen eventually or can I do it if there's a likely possibility that it will happen?
km91 I just want to make sure that I was clear. Of course if you purchase a bond with a 4% yield, it is much better than a bond with a "0%" yield (not that something like that actually exists). My point was not "yield" but interest rates. If the fed fund interest rate is very low ie: 1% or less, this means that when you purchase a bond ETF (such as BND) it is full of different bonds that were probably purchased at low interest rates. If interest rates drop further (to zero) then BND makes money. If interest rates rise then BND starts to lose money. This was obviously the case because BND is chock full of lower paying coupon bonds that nobody wants to own at the old prices. Since BND has a duration of 6 years it will mean that every 1% rise of interest rates results in a drop of 6% of BND's price. Over the last year interest rates rose about 3% and consequently BND dropped 18% in value. This is completely normal. There are definitely times that you may want to market time and this was one of them. For example, in 2020 there was a lot of noise in the market and people were starting to look at bonds for "safety" against stocks. At the same time there was a lot of federal spending and reasonable fears of inflation. Many bond traders were warning that bonds had far more downside at this point because interest rates were already so low. It turns out that they were correct and we just went through one of the biggest routs in bond history. However, if you read through the pages of these forums you will see that many people were advocating to "just stay the course", "go ahead and purchase the bonds to match the duration" etc. I understand that this is the conventional wisdom in this forum but there are times that common sense dictates a little bit of market timing. Going forward it would be reasonable to think that interest rates could go as high as 5-6% or could eventually come down to their long term averages closer to 2%. At this point I agree that it's reasonable to buy a bond ETF and simply find one that matches your duration.
User avatar
Beensabu
Posts: 3216
Joined: Sun Aug 14, 2016 3:22 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Beensabu »

jdamo wrote: Fri Dec 09, 2022 1:29 pm (I can't seem to find the total bond index range of duration, just the average....)
Go to M* here:

https://www.morningstar.com/funds/xnas/vbtlx/portfolio

Scroll down to "Fixed Income Exposure Analysis". It defaults to "Effective Duration". You can see the range there.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Topic Author
jdamo
Posts: 200
Joined: Tue Apr 30, 2019 8:47 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by jdamo »

Bud wrote: Mon Dec 12, 2022 1:54 pm
jdamo wrote: Fri Dec 09, 2022 1:29 pm I have a Vanguard Total Bond Index Fund (VBTLX)question- does it act like a bond ladder?

Since VBTLX has a 69% turnover every year and a average duration of 6.41 years, does it act like a bond ladder in a way as the interest rates rise and therefore cut the bond fund's losses we have experienced lately as the fund manager buys new bonds every year? (I can't seem to find the total bond index range of duration, just the average....) Is it a lazy person's bond ladder in a way?

I'm trying to weigh staying with VBTLX vs say taking some % and buying 6 month Treasuries that are yielding ~4.5% now and likely to rise as the FED continues to raise rates into next year, and re-buying them as the curve goes up and stabilizes.
No, it does not act as a bond ladder, the function of the VBTLX and a bond ladder are different. The reason why is VBTLX does not (always) buy and hold bonds until their duration. The mutual fund will buy and sell bonds to align with the index it follows. This means that if money is moving into the bond market changing the overall duration of the market, VBTLX will buy or sell to approximate accordingly. At a macro (and practical) level, those moves probably do not amount to much for the individual investor. In real terms, a bond ladder provides you more control of your duration and yield to maturity.

For many investors, as you noted, VBTLX will serve fine instead of building a bond ladder.

All the best.
This is a good answer on why VBTLX would sell a bond before maturity based on the market and matching the index. I didn't know that!
I mean, I knew it followed the index but not to match duration of the market.
Topic Author
jdamo
Posts: 200
Joined: Tue Apr 30, 2019 8:47 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by jdamo »

Would it be better for the individual investor following the 3-Fund approach that the Vanguard Total Bond Index ,VBTLX, kept their bonds to maturity?
Then you would always get your principal back plus the coupon at the time the Bond Fund bought the bond.....
It has about a 69% turnover every year it said when I first started the thread...I haven't checked recently....
Tom_T
Posts: 3195
Joined: Wed Aug 29, 2007 2:33 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Tom_T »

jdamo wrote: Tue Jan 24, 2023 3:06 pm Would it be better for the individual investor following the 3-Fund approach that the Vanguard Total Bond Index ,VBTLX, kept their bonds to maturity?
Then you would always get your principal back plus the coupon at the time the Bond Fund bought the bond.....
It has about a 69% turnover every year it said when I first started the thread...I haven't checked recently....
VBTLX has over 10,000 bonds. :)
Bud
Posts: 332
Joined: Sun Jul 22, 2007 6:59 am

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Bud »

jdamo wrote: Tue Jan 24, 2023 3:06 pm Would it be better for the individual investor following the 3-Fund approach that the Vanguard Total Bond Index ,VBTLX, kept their bonds to maturity?
Then you would always get your principal back plus the coupon at the time the Bond Fund bought the bond.....
It has about a 69% turnover every year it said when I first started the thread...I haven't checked recently....
You should have a clear reason to use bond ladder instead of a bond mutual fund. Personally, I have never bought individual bonds and have no plans to buy them. If you can clearly discern that the ladder will provide something the mutual fund doesn't, then buy a ladder.

All the best.
Topic Author
jdamo
Posts: 200
Joined: Tue Apr 30, 2019 8:47 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by jdamo »

No I can't say a bond ladder is better than the total bond index fund. That would take a lot of analysis and assumptions (inflation etc,)and execution to even put your plan in action I would think (?) Unless only a few big $$$ bonds (?)
I don't think anyone really could because there are more expenses in buying individual bonds due to the broker/manager/firm needed....and less diversification vs the ~10,000 bonds VBTLX holds ....at low expense.... as has been pointed out. So you would have more default risk w individual bonds to certain companies...but the coupon should be close if you match the mix of type (risk category) of bonds....I would think!

This has been a good discussion for me to learn more about bond funds and VBTLX ...and to compliment my knowledge of the 3-Fund portfolio....

I wonder if there is a bond fund that holds its bonds to maturity but is like VBTLX otherwise in huge # of bonds and low expenses?
Apathizer
Posts: 1902
Joined: Sun Sep 26, 2021 2:56 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by Apathizer »

jdamo wrote: Tue Jan 24, 2023 3:06 pm Would it be better for the individual investor following the 3-Fund approach that the Vanguard Total Bond Index ,VBTLX, kept their bonds to maturity?
Then you would always get your principal back plus the coupon at the time the Bond Fund bought the bond.....
It has about a 69% turnover every year it said when I first started the thread...I haven't checked recently....
No as is often the tendency you're making it more difficult and complicated than it needs to be. Just maintain a consistent asset allocation and don't worry about when to buy and sell otherwise. As others have said, you're trying to time the market which is unlikely to work.

It seems one of the hardest lessons for many investors to learn is that it's often better to do nothing rather than something.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
secondopinion
Posts: 3960
Joined: Wed Dec 02, 2020 1:18 pm

Re: Vanguard Total Bond Index question- does it act like a bond ladder?

Post by secondopinion »

jdamo wrote: Tue Jan 24, 2023 3:38 pm No I can't say a bond ladder is better than the total bond index fund. That would take a lot of analysis and assumptions (inflation etc,)and execution to even put your plan in action I would think (?) Unless only a few big $$$ bonds (?)
I don't think anyone really could because there are more expenses in buying individual bonds due to the broker/manager/firm needed....and less diversification vs the ~10,000 bonds VBTLX holds ....at low expense.... as has been pointed out. So you would have more default risk w individual bonds to certain companies...but the coupon should be close if you match the mix of type (risk category) of bonds....I would think!

This has been a good discussion for me to learn more about bond funds and VBTLX ...and to compliment my knowledge of the 3-Fund portfolio....

I wonder if there is a bond fund that holds its bonds to maturity but is like VBTLX otherwise in huge # of bonds and low expenses?
Diversification in treasuries (which is a good portion of the fund) is pointless because it is the same issuer. Hence, you will see some of investors here elect to hold them individually in a liability-matching manner (far more common are TIPS held in this manner). A rolling ladder probably does not make tons of sense in this philosophy.

I tend to favor holding corporate bonds via a fund but treasuries/TIPS individually.

As to your question, there are some choices. iShares has some ETFs, but you are talking about 0.07% for treasuries, 0.10% for corporate bonds, 0.18% for municipals, and 0.35% for high-yield. I would skip on treasuries personally (because it is simple to just buy one bond in this case) and only consider their corporate bonds ETFs (which might be harder to trade otherwise in practice after commissions and bid-ask spread). Municipals are not understood well enough by myself to tell if this is a decent option; I would skip high-yield bonds since safety is important.

https://www.ishares.com/us/strategies/b ... nd-ladders
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Post Reply