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indexing bonds
Old 11-30-2006, 06:31 AM   #1
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indexing bonds

Like most on this board I am a believer or indexing stocks. Does indexing bonds really makes sense too, or does relying on bond rating and maturity sufficient?

I am in FBIDX in Fidelity for the fixed income portion of a tax deferred account. Is there any reason for me to stay in this rather than switching to FTBFX?

Seems to have a higher turn over ratio and expenses but results seem better over time so...?


2 Funds Comparison
FBIDX FTBFX
Non-Load Adj. Returns
YTD 3.81 4.34
1 Yr 5.20 5.81
3 Yr 3.96 4.55
Expenses
Expense Ratio 0.32 0.45
Turnover Rate % 42 99
Transaction Fee No No
Volatility Measures
Beta 0.99 0.93
R2 0.99 0.97
Standard Deviation 3.16 3.03
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Re: indexing bonds
Old 11-30-2006, 07:01 AM   #2
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Re: indexing bonds

It depends on your reasons for maintaining a bond position. I tend to like the indexes because you know exactly what you are getting. There is (virtually) no chance that the manager made a big bet on credit or duration at an inopportune time. If you truly think you have found a superior manager in the bond world that will not do stupid things, then it might be worth departing from the index fund, but I would have a hard time believing that it would be worth bothering with a high grade bond fund.
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Re: indexing bonds
Old 11-30-2006, 07:16 AM   #3
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Re: indexing bonds

perinova,

fyi - FBIDX tracks the LBA index, which includes investment grade bonds, but excludes stuff like HY and EM bonds.

From Fidelity's website on FTBFX:

Quote:
Strategy
The fund normally invests at least 80% of its assets in debt securities of all types and repurchase agreements for those securities. The fund uses the Lehman Brothers U.S. Universal Index as a guide in allocating its assets across the investment-grade, high yield, and emerging market asset classes, and in managing the fund's overall interest rate risk. The fund may invest up to 15% of its assets in high yield and emerging market debt securities and may invest in domestic and foreign issuers.
FTBFX Holdings:
Investment Grade Bonds 83.5
High Yield Investments 10.8
Emerging Market Investments 2.9
Cash & Net Other Assets 2.8

If you want pure investment grade bonds, I'd go with FBIDX.

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Re: indexing bonds
Old 11-30-2006, 09:43 AM   #4
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Re: indexing bonds

Quote:
Originally Posted by brewer12345
It depends on your reasons for maintaining a bond position. I tend to like the indexes because you know exactly what you are getting.

I don't know about that. Don't tell investors in Vanguard's total bond market index who got clipped 1%+ by the manager's loading up on Worldcom bonds at exactly the wrong time.

The sampling methods used in equity indexing are much different than those used in Fixed Income indexing (Brewer I know you know this already) and a lot more flexibility is left to the portfolio manager, not always with good results.

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Re: indexing bonds
Old 11-30-2006, 09:51 AM   #5
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Re: indexing bonds

Quote:
Originally Posted by saluki9

I don't know about that. Don't tell investors in Vanguard's total bond market index who got clipped 1%+ by the manager's loading up on Worldcom bonds at exactly the wrong time.

The sampling methods used in equity indexing are much different than those used in Fixed Income indexing (Brewer I know you know this already) and a lot more flexibility is left to the portfolio manager, not always with good results.

Yeah, its a problem that has no obvious solution. I suppose that you could always just stick with individual treasury bonds.
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Re: indexing bonds
Old 11-30-2006, 10:49 AM   #6
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Re: indexing bonds

Quote:
Originally Posted by saluki9

I don't know about that. Don't tell investors in Vanguard's total bond market index who got clipped 1%+ by the manager's loading up on Worldcom bonds at exactly the wrong time.

The sampling methods used in equity indexing are much different than those used in Fixed Income indexing (Brewer I know you know this already) and a lot more flexibility is left to the portfolio manager, not always with good results.
I recently read an article about how to squeeze alpha out of a bond manager............interesting idea, not sure if it has practical applications...........
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Re: indexing bonds
Old 11-30-2006, 11:13 AM   #7
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Re: indexing bonds

There are plenty of bond managers that deliver alpha, but few of them are working at mutual funds.
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Re: indexing bonds
Old 11-30-2006, 11:31 AM   #8
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Re: indexing bonds

Brewer, it looks like your prediction about what upside-down (high-short vs lower-long) portends is true. Sandy Lincoln is blowing current data off, but if the lower middle income household in the mid-west pulls back there is no avoiding the impact.
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Re: indexing bonds
Old 11-30-2006, 11:32 AM   #9
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Re: indexing bonds

Quote:
Originally Posted by Brat
Brewer, it looks like your prediction about what upside-down (high-short vs lower-long) portends is true. Sandy Lincoln is blowing current data off, but if the lower middle income household in the mid-west pulls back there is no avoiding the impact.
Excuse my ignorance, but who the hell is Sandy Lincoln?
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Re: indexing bonds
Old 11-30-2006, 11:36 AM   #10
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Re: indexing bonds

Ol' man Lincoln's daughter son? :P
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Re: indexing bonds
Old 11-30-2006, 02:24 PM   #11
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Re: indexing bonds

I like the slice and dice approach to equities and BOND Mutual funds. BUT if I could only choose one BOND fund, I do like the FTBFX Holdings:
Quote:
Investment Grade Bonds 83.5
High Yield Investments 10.8
Emerging Market Investments 2.9
Cash & Net Other Assets 2.8
It gives a nice balance IMHO. Overall, I feel that Fidelity has great Bond funds.
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Re: indexing bonds
Old 11-30-2006, 10:44 PM   #12
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Re: indexing bonds

Sandy Lincoln was an 'expert' opining on a financial channel this am. He is a new face to me too.
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Re: indexing bonds
Old 12-01-2006, 07:11 AM   #13
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Re: indexing bonds

Quote:
Originally Posted by Brat
Sandy Lincoln was an 'expert' opining on a financial channel this am. He is a new face to me too.
Aha. I sort of figured as much, but I had never heard of him before.

I think we are headed for not-so-happy times in the next 18 months. Looks an awful lot like a stagflation scenario. Think hard assets, inflation-indexed bonds, short term highgrade bonds, and foreign currency denominated bonds.
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Re: indexing bonds
Old 12-01-2006, 07:56 AM   #14
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Re: indexing bonds

Quote:
Originally Posted by brewer12345
I think we are headed for not-so-happy times in the next 18 months. Looks an awful lot like a stagflation scenario. Think hard assets, inflation-indexed bonds, short term highgrade bonds, and foreign currency denominated bonds.
Uh oh. Brewer, you aren't wearing one of those shiny silver hats are you?

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Re: indexing bonds
Old 12-01-2006, 08:06 AM   #15
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Re: indexing bonds

Yep - it snowed here the other day - and I'm getting that old deja vue feeling myself.

Great Society and Vietnam - er ah tax cuts and Iraq. my defensive brilliance last time - in hindsight was only so so - Wellesley was good - still have 10% of a non working gold mine, timberland - the foriegn closed end bonds, mining stocks are gone.

This time - balanced index and stay the course.

History doesn't repeat but sometimes it rhymes - ??

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Re: indexing bonds
Old 12-01-2006, 08:10 AM   #16
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Re: indexing bonds

Quote:
Originally Posted by REWahoo!
Uh oh. Brewer, you aren't wearing one of those shiny silver hats are you?

Nah. If I were, you'd hear me talking about "Gold, GOLD, GOLD!!!!!!!!!"

I am just calling it like I see it: inverted yield curve, falling USD, commodity prices rising again, median and lower US consumer flagging, and housing continuing its descent.

But I am a DMT and a retrograde stock and bond picker. If you are an allocator with an appropriately balanced portfolio, feel free to ignore my prognosticating.
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Re: indexing bonds
Old 12-01-2006, 08:22 PM   #17
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Re: indexing bonds

Quote:
Originally Posted by REWahoo!
Uh oh. Brewer, you aren't wearing one of those shiny silver hats are you?
Hey, a big seasonality runup followed by "sell in May" in the year after an voter-pandering election Congress, before either party is ready to pump up the 2008 election economy.

Or have we all partied hearty enough to forget last May-July yet?

Don't mind me-- I'll be investing overseas.
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Re: indexing bonds
Old 12-01-2006, 10:24 PM   #18
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Re: indexing bonds

Thanks all for your inputs!
Conclusion FTBFX is also an index fund but follwing the Universal Lehman Index. Lower grade bonds provide higher volatility and return.
So far I don't have any lower grade fund I am otherwise using VG. Tot. Bond Ix...
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