Keep VWIUX (muni bonds) or switch to VBTLX (total bond)?

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Topic Author
ishkadetto
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Keep VWIUX (muni bonds) or switch to VBTLX (total bond)?

Post by ishkadetto » Thu Aug 15, 2019 10:09 pm

Federal tax bracket: 24%
State tax bracket: 9.3%

VWIUX (Vanguard Intermediate Tax-Ex Muni): 1.57% SEC yield -> 2.13% tax effective yield
VBTLX (Vanguard Total Bond): 2.38% SEC yield

I got into VWIUX back at the end of 2018. My question is, at what point would it be best to switch from VWIUX to VBTLX (if at all)? I have no space in tax-deferred to keep bonds at this time, so this is in taxable. The total amount of VWIUX I have is about $54,000 with about $3,000 in unrealized capital gains and have been reinvesting the monthly dividend. It looks like the current tax effective yield is 0.25% more if I were to be in VBTLX vs the VWIUX.
Last edited by ishkadetto on Sat Aug 24, 2019 3:41 pm, edited 1 time in total.

bluquark
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by bluquark » Thu Aug 15, 2019 10:25 pm

When I apply your tax rate I get an almost identical tax-equivalent yield, check your math. I find the calculation simpler if I do the reverse: 2.38*(100%-24%-9.3%) = 1.59.

EDIT: Ah sorry, I forgot your Muni fund is not state tax exempt. So the yield is a bit better, never mind.
Last edited by bluquark on Thu Aug 15, 2019 11:00 pm, edited 1 time in total.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by bluquark » Thu Aug 15, 2019 10:41 pm

The way to think about this is to calculate the yearly yield on the portion of the capital gains that will be lost to tax. I assume here your tax rate on capital gain is 15%.

If you do nothing: next year you will earn: 57000*1.43% = 815$

If you switch to VBTLX: (57000-(3000*0.15))*1.59% = 899.145

So, you should switch, and I suppose you might as well do it now. I don't think there's much point trying to balance it with TLH elsewhere because you'd prefer that tax loss to count against your normal income anyway. (Although one reason not to do it is if you do have accumulated losses you want to preserve for income.). Maybe the capital gains will go away but you might be waiting forever for that.

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ishkadetto
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by ishkadetto » Thu Aug 15, 2019 11:19 pm

Is this the correct calculation?
2.38*(100%-24%) = 1.81
Which means if the VWIUX was 1.81% or greater yield it would be better than VBTLX at 2.38%? (and currently VWIUX is yielding 1.57%, so that is not better)

Also am I calculating this right:
If I do nothing, next year I will earn: 54000 [current value of VWIUX] * 2.13% [my tax effective yield of VWIUX] = $1150
If I switch to VBTLX I will earn: (54000-(3000 [capital gains incurred by selling] * (0.15 [fed capital gains rate]+0.093 [CA capital gains rate])) * 2.38% [the yield of VBTLX] = $1267

I have about $30k carryover losses from tax loss harvesting last December.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by bluquark » Thu Aug 15, 2019 11:23 pm

Your calculation is an overestimate because you need to apply the state tax on both sides, but the mistake balances out on both sides so it's equally good for decision-making.
ishkadetto wrote:
Thu Aug 15, 2019 11:19 pm
I have about $30k carryover losses from tax loss harvesting last December.
OK, that's so many it'll take 10 years to apply them to income (there's a limit of 3000$ per year) so might as well use some of it now.

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ishkadetto
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by ishkadetto » Thu Aug 15, 2019 11:46 pm

bluquark wrote:
Thu Aug 15, 2019 11:23 pm
Your calculation is an overestimate because you need to apply the state tax on both sides

Ah ok let me try again :)

If I do nothing, next year I will earn: 54000 [current value of VWIUX] * 1.42% [my after tax yield of VWIUX (1.57%*(1-.093)] = $767
If I switch to VBTLX I will earn: (54000-(3000 [capital gains incurred by selling] * (0.15 [fed capital gains rate]+0.093 [CA capital gains rate])) * 1.59% [my after tax yield of VBTLX (2.38%*(1-.24-0.093)] = $847

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by bluquark » Thu Aug 15, 2019 11:51 pm

Yep, looks right. You fixed a few mistakes I made.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by Cyclesafe » Fri Aug 16, 2019 6:08 am

Confirm that you aren't also paying the 3.8% NIIT for federal income over $250k (MFJ). Use of VWIUX (or VCADX) rather than VTBLX in taxable better keeps you below this NIIT threshold, which, BTW, was enacted to NOT increase with inflation.

Your respective numbers for VWIUX and VTBLX with the NIIT are as follows:

VWIUX: $767

VBTLX (sale of VWIUX <365 days since purchase): ($54000-$3000*(24%+3.8%+9.3%))*1.497% [2.38%*(1-.24-.038-.093)] = $791
VBTLX (sale of VWIUX >365 days since purchase): ($54000-$3000*(15%+3.8%+9.3%))*1.497% = $796

IMHO, these minor differences are well within the normal relative fluctuations of these funds. Next week, the small advantage of VBTLX could easily be gone. Also, bear in mind that VWIUX, with a duration of 4.9 (versus 6.0 for VBTLX), is slightly less sensitive to interest rate changes. OTOH, VWIUX is very slightly more risky than VBTLX.
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by grabiner » Fri Aug 16, 2019 9:31 pm

ishkadetto wrote:
Thu Aug 15, 2019 10:09 pm
Federal tax bracket: 24%
State tax bracket: 9.3%
Given that tax rate, do you live in California? If so, you might want to put half your munis in Vanguard CA Long-Term Tax-Exempt, and half in Limited-Term Tax-Exempt. This would give you an overall intermediate-term duration, with only half your bonds in CA, but more than half your bond interest exempt from CA state tax.
Wiki David Grabiner

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ishkadetto
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by ishkadetto » Sat Aug 17, 2019 11:46 pm

Cyclesafe wrote:
Fri Aug 16, 2019 6:08 am
Confirm that you aren't also paying the 3.8% NIIT for federal income over $250k (MFJ).
I do not think we pay NIIT. Our AGI was right at $200k last year (MFJ).
Cyclesafe wrote:
Fri Aug 16, 2019 6:08 am
IMHO, these minor differences are well within the normal relative fluctuations of these funds. Next week, the small advantage of VBTLX could easily be gone. Also, bear in mind that VWIUX, with a duration of 4.9 (versus 6.0 for VBTLX), is slightly less sensitive to interest rate changes. OTOH, VWIUX is very slightly more risky than VBTLX.
Ahh thank you, that is reassuring. When I decided to use VWIUX over VBTLX in the first place I'm sure it had a small advantage yield-wise (at that time). Perhaps I should not worry and just wait it out.

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ishkadetto
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by ishkadetto » Sat Aug 17, 2019 11:59 pm

grabiner wrote:
Fri Aug 16, 2019 9:31 pm
Given that tax rate, do you live in California? If so, you might want to put half your munis in Vanguard CA Long-Term Tax-Exempt, and half in Limited-Term Tax-Exempt. This would give you an overall intermediate-term duration, with only half your bonds in CA, but more than half your bond interest exempt from CA state tax.
We do live in California.
Posting current numbers (8/17/19) for posterity (using tax rate 24% federal+9.3% state) :D
VBTLX (total bond) yield = 2.34% --> 1.56% after tax
VWIUX (interm muni) yield = 1.55% --> 1.41% after tax
VCLAX (CA long muni) yield = 1.78% --> 1.78% after tax
VMLUX (limited muni) yield = 1.36% --> 1.23% after tax
Half VCLAX/half VMLUX = 1.57% --> 1.50% after tax
VUSXX (treasury MMF) = 2.09% --> 1.59% after tax

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Sun Aug 18, 2019 6:35 am

ishkadetto, are you using the SEC yield to figure this? I would use the distribution yield as that's what you are actually being paid....but you probably already knew that. VWIUX paid 2.65% on August 1.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by CoastalWinds » Sun Aug 18, 2019 11:29 am

hudson wrote:
Sun Aug 18, 2019 6:35 am
ishkadetto, are you using the SEC yield to figure this? I would use the distribution yield as that's what you are actually being paid....but you probably already knew that. VWIUX paid 2.65% on August 1.
Not the OP, but this confused me. Where is the distribution yield advertised? What is the difference between SEC yield and distribution yield?

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Sun Aug 18, 2019 12:42 pm

CoastalWinds wrote:
Sun Aug 18, 2019 11:29 am
hudson wrote:
Sun Aug 18, 2019 6:35 am
ishkadetto, are you using the SEC yield to figure this? I would use the distribution yield as that's what you are actually being paid....but you probably already knew that. VWIUX paid 2.65% on August 1.
Not the OP, but this confused me. Where is the distribution yield advertised? What is the difference between SEC yield and distribution yield?
go to the distributions tab on this page for the distribution yield:
https://investor.vanguard.com/mutual-fu ... view/vwiux

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ishkadetto
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by ishkadetto » Mon Aug 19, 2019 1:05 pm

hudson wrote:
Sun Aug 18, 2019 6:35 am
ishkadetto, are you using the SEC yield to figure this? I would use the distribution yield as that's what you are actually being paid....but you probably already knew that. VWIUX paid 2.65% on August 1.
What would be the advantage to using distribution yield? A quick Google search for "sec yield vs distribution yield" gave me many articles saying SEC yield is what I should use when comparing two funds.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Mon Aug 19, 2019 1:21 pm

ishkadetto wrote:
Mon Aug 19, 2019 1:05 pm
hudson wrote:
Sun Aug 18, 2019 6:35 am
ishkadetto, are you using the SEC yield to figure this? I would use the distribution yield as that's what you are actually being paid....but you probably already knew that. VWIUX paid 2.65% on August 1.
What would be the advantage to using distribution yield? A quick Google search for "sec yield vs distribution yield" gave me many articles saying SEC yield is what I should use when comparing two funds.
I agree that SEC yield is useful when comparing two funds. There are many other things to look at.
A $500K investment in VWIUX actually paid out $1104 last month.
The SEC Yield is 1.56%...that's $650 per month.

I also like funds with a high percentage of AAA/AA bonds. I've never found anything that beats BMBIX...but I own VWIUX because of the higher distribution yield.

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ishkadetto
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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by ishkadetto » Mon Aug 19, 2019 1:57 pm

hudson wrote:
Mon Aug 19, 2019 1:21 pm
I agree that SEC yield is useful when comparing two funds. There are many other things to look at.
A $500K investment in VWIUX actually paid out $1104 last month.
The SEC Yield is 1.56%...that's $650 per month.
Ah I see. I would calculate like this then? (again using tax rate 24% federal+9.3% state):

SEC Yield
VWIUX yield = 1.55% --> 1.41% after tax
VBTLX yield = 2.34% --> 1.56% after tax

Distribution Yield
VWIUX paid out 2.65% last month --> 2.40% after tax
VBTLX paid out 2.77% last month --> 1.85% after tax

Then it really looks like VWIUX would give greater net income despite the SEC yield making it look like VBTLX would give greater net income?

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Mon Aug 19, 2019 2:12 pm

ishkadetto wrote:
Mon Aug 19, 2019 1:57 pm
hudson wrote:
Mon Aug 19, 2019 1:21 pm
I agree that SEC yield is useful when comparing two funds. There are many other things to look at.
A $500K investment in VWIUX actually paid out $1104 last month.
The SEC Yield is 1.56%...that's $650 per month.
Ah I see. I would calculate like this then? (again using tax rate 24% federal+9.3% state):

SEC Yield
VWIUX yield = 1.55% --> 1.41% after tax
VBTLX yield = 2.34% --> 1.56% after tax

Distribution Yield
VWIUX paid out 2.65% last month --> 2.40% after tax
VBTLX paid out 2.77% last month --> 1.85% after tax

Then it really looks like VWIUX would give greater net income despite the SEC yield making it look like VBTLX would give greater net income?
looks good! but the distribution yield is a moving target...VWIUX's distribution yield appears to slowly be receding.
I own VWIUX and will continue to own it until something else pays more. VWIUX's price or NAV has also gone up a lot; if I sold, I'd have to pay capital gains....so I'd have to look at that.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by grabiner » Mon Aug 19, 2019 6:30 pm

hudson wrote:
Mon Aug 19, 2019 1:21 pm
ishkadetto wrote:
Mon Aug 19, 2019 1:05 pm
hudson wrote:
Sun Aug 18, 2019 6:35 am
ishkadetto, are you using the SEC yield to figure this? I would use the distribution yield as that's what you are actually being paid....but you probably already knew that. VWIUX paid 2.65% on August 1.
What would be the advantage to using distribution yield? A quick Google search for "sec yield vs distribution yield" gave me many articles saying SEC yield is what I should use when comparing two funds.
I agree that SEC yield is useful when comparing two funds. There are many other things to look at.
A $500K investment in VWIUX actually paid out $1104 last month.
The SEC Yield is 1.56%...that's $650 per month.
The reason for this is that muni rates have fallen, so the distribution you are receiving is paying back part of the principal. If a bond's price rises after the fund purchases it, and thus its yield falls, the coupon will remain the same. However, if the bond is held to maturity, it will be worth par, so the price is guaranteed to decline over that time period. In contrast, a newly-issued bond would retain its full value if held to maturity, and would have the same return with a lower distribution.

You will see the opposite phenomenon when rates rise; a fund with a 4% SEC yield may pay out only 3% of its value in dividends annually, but its net asset value will rise by 1% if rates don't change.
I also like funds with a high percentage of AAA/AA bonds.
And this is quite reasonable, as lower-rated bonds tend to lose value when the stock market also falls, and thus provide less diversification benefit. This is why I don't recommend Vanguard High-Yield Tax-Exempt or its corporate bond indexes as core bond holdings; those funds are not junk funds, but even with ratings of A and BBB, they have more risk of downgrades.
Wiki David Grabiner

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Tue Aug 20, 2019 1:05 pm

grabiner wrote:
Mon Aug 19, 2019 6:30 pm
The reason for this is that muni rates have fallen, so the distribution you are receiving is paying back part of the principal.
Would VWIUX distribute part of the principal? I thought that they only distributed interest?
If VWIUX distributed principal, wouldn't the NAV fall?

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Tue Aug 20, 2019 1:08 pm

The big question on comparing bond funds is, "What are the most useful things to look at?"

SEC Yield...of course
Distribution Yield....important to me
Duration...I like intermediate
Expense Ratio...below .25
High percentage of AAA/AA bonds
What else?

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by grabiner » Tue Aug 20, 2019 7:50 pm

hudson wrote:
Tue Aug 20, 2019 1:05 pm
grabiner wrote:
Mon Aug 19, 2019 6:30 pm
The reason for this is that muni rates have fallen, so the distribution you are receiving is paying back part of the principal.
Would VWIUX distribute part of the principal? I thought that they only distributed interest?
If VWIUX distributed principal, wouldn't the NAV fall?
The NAV will fall. The distribution isn't principal in the usual sense, but an erosion of the principal value.

Consider a bond with a par value of $1000 which distributes $30 annually in interest. Five years before maturity, the bond is worth $1050 because current bond rates are close to 2%. If you hold the bond for five years, you will receive $150 in interest, but you will also have a bond worth only $1000 at maturity. Therefore, if you spend all the interest, you will have less than the current bond value left.
Wiki David Grabiner

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by bluquark » Tue Aug 20, 2019 8:37 pm

hudson wrote:
Tue Aug 20, 2019 1:08 pm
The big question on comparing bond funds is, "What are the most useful things to look at?"
[...]
What else?
- Taxation treatment
- Foreign currency exposure
- Inflation protection
- Sovereign vs corporate

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Wed Aug 21, 2019 4:04 pm

grabiner wrote:
Tue Aug 20, 2019 7:50 pm
hudson wrote:
Tue Aug 20, 2019 1:05 pm
grabiner wrote:
Mon Aug 19, 2019 6:30 pm
The reason for this is that muni rates have fallen, so the distribution you are receiving is paying back part of the principal.
Would VWIUX distribute part of the principal? I thought that they only distributed interest?
If VWIUX distributed principal, wouldn't the NAV fall?
The NAV will fall. The distribution isn't principal in the usual sense, but an erosion of the principal value.

Consider a bond with a par value of $1000 which distributes $30 annually in interest. Five years before maturity, the bond is worth $1050 because current bond rates are close to 2%. If you hold the bond for five years, you will receive $150 in interest, but you will also have a bond worth only $1000 at maturity. Therefore, if you spend all the interest, you will have less than the current bond value left.
Thanks again David! I understand your explanation and example! The internal workings of a bond fund seem complex, but if you look at one bond at a time, it's simple.

SEC Yield is probably the buyers best way to see inside a fund...and compare funds as far as the above changes in bond prices and interest rates.

I think that many funds sell holdings early to maintain their goal. VWIUX is intermediate; it appears to turnover 15% a year. I would think that VWIUX would do a great job with these transactions; much better than me.

I continue to believe that the distribution yield is worthwhile because it's what you get; it's real. If you buy X dollars of VWIUX today, you'll likely get paid about 2.65% on August 2. You'll likely get more than the SEC Yield for a while.

The future NAV of VWIUX is unknown. Many times it seems to move with the stock market. When the market dropped recently, VWIUX went up 4 cents. I guess that's because investors started selling stocks and buying bonds; since the bonds were in demand, the prices went up, moving up the value of Vanguard's holdings. (I don't know this; I'm speculating.)

I found a nice 3.5% CD recently; I was going to sell some VWIUX and buy a CD; after taxes the CD wouldn't have hurt too much; but the short term capital gains were too high. I guess that's a good problem. I'll look at that the CD deal again in October when VWIUX switches to long term gains...if conditions remain the same.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Wed Aug 21, 2019 4:07 pm

bluquark wrote:
Tue Aug 20, 2019 8:37 pm
hudson wrote:
Tue Aug 20, 2019 1:08 pm
The big question on comparing bond funds is, "What are the most useful things to look at?"
[...]
What else?
- Taxation treatment
- Foreign currency exposure
- Inflation protection
- Sovereign vs corporate
Thanks bluquark! I agree!

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by grabiner » Wed Aug 21, 2019 8:44 pm

hudson wrote:
Wed Aug 21, 2019 4:04 pm
I continue to believe that the distribution yield is worthwhile because it's what you get; it's real. If you buy X dollars of VWIUX today, you'll likely get paid about 2.65% on August 2. You'll likely get more than the SEC Yield for a while.

The future NAV of VWIUX is unknown. Many times it seems to move with the stock market. When the market dropped recently, VWIUX went up 4 cents. I guess that's because investors started selling stocks and buying bonds; since the bonds were in demand, the prices went up, moving up the value of Vanguard's holdings. (I don't know this; I'm speculating.)
You are confusing the systematic and random price changes here. Yes, the change of bond prices is unknown. However, if bond A is at a premium, and bond B with the same duration and issuer is at par (because bond A has a higher coupon), then the values of bond A and bond B are guaranteed to become closer as time passes, moving to equality at maturity.

For example, suppose that bond A has a $15 semi-annual coupon, bond B has a $10 semi-annual coupon, both bonds have a par value of $1000 and are five years from maturity, and current yields are 2%. Bond B is worth $1000, because its coupon rate is equal to the yield. Bond A is currently worth $1046; the extra $46 is the value of getting an extra $5 every six months for the next five years.

Thus bond A has a 2.87% distribution yield, and bond B has a 2% distribution yield. I don't know what the bonds will be worth next year because I don't know what will happen to four-year bond rates, but Bond A will be worth $38 more than Bond B; they may be $1038 and $1000 if rates don't change, or $1000 and $962 if rates rise to 3%. Thus you get the extra $10 in your pocket, but if you don't reinvest that $10, you will have $8 less in principal for buying Bond A (and the extra $2, which is actually about $1.20 before rounding, is not a benefit; it is the result of having more money invested, and less of the return five years off). Funds work the same way.
Wiki David Grabiner

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by hudson » Fri Aug 23, 2019 11:59 am

grabiner wrote:
Wed Aug 21, 2019 8:44 pm
hudson wrote:
Wed Aug 21, 2019 4:04 pm
I continue to believe that the distribution yield is worthwhile because it's what you get; it's real. If you buy X dollars of VWIUX today, you'll likely get paid about 2.65% on August 2. You'll likely get more than the SEC Yield for a while.

The future NAV of VWIUX is unknown. Many times it seems to move with the stock market. When the market dropped recently, VWIUX went up 4 cents. I guess that's because investors started selling stocks and buying bonds; since the bonds were in demand, the prices went up, moving up the value of Vanguard's holdings. (I don't know this; I'm speculating.)
You are confusing the systematic and random price changes here. Yes, the change of bond prices is unknown. However, if bond A is at a premium, and bond B with the same duration and issuer is at par (because bond A has a higher coupon), then the values of bond A and bond B are guaranteed to become closer as time passes, moving to equality at maturity.

For example, suppose that bond A has a $15 semi-annual coupon, bond B has a $10 semi-annual coupon, both bonds have a par value of $1000 and are five years from maturity, and current yields are 2%. Bond B is worth $1000, because its coupon rate is equal to the yield. Bond A is currently worth $1046; the extra $46 is the value of getting an extra $5 every six months for the next five years.

Thus bond A has a 2.87% distribution yield, and bond B has a 2% distribution yield. I don't know what the bonds will be worth next year because I don't know what will happen to four-year bond rates, but Bond A will be worth $38 more than Bond B; they may be $1038 and $1000 if rates don't change, or $1000 and $962 if rates rise to 3%. Thus you get the extra $10 in your pocket, but if you don't reinvest that $10, you will have $8 less in principal for buying Bond A (and the extra $2, which is actually about $1.20 before rounding, is not a benefit; it is the result of having more money invested, and less of the return five years off). Funds work the same way.
Thanks again Grabiner! So SEC yield is the best indicator of the items above...although not perfect.
Many things in the bond market are not under our control. It looks like ishkadetto, the OP and others have a lot to study before moving to another fund.

- Taxation treatment
- Foreign currency exposure
- Inflation protection
- Sovereign vs corporate....all from bluquark
SEC Yield (Many mistakenly believe that SEC Yield is the distribution yield)
Distribution Yield....important to me....I could be the only one?
Duration...I like intermediate
Expense Ratio...below .25
High percentage of AAA/AA bonds
It's already on the list, state taxation is big.
Capital gains and losses if selling a fund.

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Re: Keep VWIUX (muni bonds) or switch to VBLTX (total bond)?

Post by FireHorse » Fri Aug 23, 2019 8:48 pm

VWIUX price unchanged today while total bond up significantly :confused

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