Vanguard Short-Term Bond Index Fund Investor Shares vs. CD

[FANOFJESUS]

Vanguard Short-Term Bond Index Fund Investor Shares vs. a 2 year CD for 2%

Which would you buy and why looking out two years?

 

[Texas Proud]

ST bond fund... I like to be liquid...

 

[Bluemoon]

The fund has had a 1 year return of 2.96% and a 3 year return of 3.72%. I would buy the fund. I own the Admiral class + CDs with the CDs as part of my emergency funds.

 

[Chuckanut]

The CD will return your money with interest in 2 years. The bond fund will probably yield more, but there is no guarantee that you will get your capital back in 2 years. You might lose money if the share price goes down. Which bothers you more? Losing your capital if the share price declines, or limiting your gains to 2% a year.?

 

[Alan]

ST bond fund... I like to be liquid...

+1

I cashed my last CD in Dec. The rates are just too low these days so my cash is now all in I-Bonds and the VG ST bond fund.

 

[Onward]

I use Vanguard Short-Term Bond Index for all my short-term (< 1yr) funds.

 

[afntrn56]

Nobody is wondering where he found a 2 year CD for 2%??

 

[FANOFJESUS]

Local Credit Union

 

[Dawg52]

Nobody is wondering where he found a 2 year CD for 2%??

Good point.

Edit: Can't get that at Penfed.

 

[FANOFJESUS]

Bernanke said he would not raise rates for two year which do you think will have a high return?

 

[Midpack]

I do own a big chunk of VFSUX and no CD's for all the reasons above (liquidity, better returns expected vs any CD I have access to, Fed rates essentially nil into 2014). But we all have to do what's best for ourselves...

 

[afntrn56]

I do own a big chunk of VFSUX and no CD's for all the reasons above (liquidity, better returns expected vs any CD I have access to, Fed rates essentially nil into 2014). But we all have to do what's best for ourselves...

I wonder if it pays to employ this strategy if you already have a good deal invested in VBTLX? Is there a diversification in using alongside VFSUX? Is it reasonable to assume that since no rate increases until 2014 that VFSUX would be a better deal than say a brokered CD at 3% for 10 years? Or should one just go with more VBTLX and stay the course so to speak.

 

[Midpack]

I wonder if it pays to employ this strategy if you already have a good deal invested in VBTLX? Is there a diversification in using alongside VFSUX? Is it reasonable to assume that since no rate increases until 2014 that VFSUX would be a better deal than say a brokered CD at 3% for 10 years? Or should one just go with more VBTLX and stay the course so to speak.

Fair enough, and I could argue both sides. I am 50/50 VFSUX & VBTLX and ordinarily I would be comfortable with all VBTLX - and was until the Fed started "committing" to holding down rates for years. I wanted to shorten duration to reduce the inevitable hit bond fund NAVs will take once the Fed increases rates - that 99% of us won't be able to act fast enough to avoid. But I realize I am giving up some yield with VFSUX in the meantime and it may all come out in the wash, hopefully no better no worse in the end?

As for a 10-year CD at 3%, I'd rather have the liquidity. I expect yields close to that near term (and much better than short term cash equivalents, MMF, etc.), and I expect to do better with bonds in a few years, certainly less than 10 years out though my crystal ball is almost useless.

If there is a clear right answer re: cash & bonds today, I haven't found it. Reasoned critiques are always welcome.

 

[afntrn56]

It really does pose a dilemma for us all. I am still in the process of investing the rest of a lump sum and have basically a four fund philosophy plus CD's at the moment. I am considering what you are proposing Midpack as another option in the short term. I sure wish my crystal ball would work as well. Sometimes I wonder if it is all worth the effort or should I just go for the sure thing and put it all in 10 year Cd's for 3 percent and be done with it. I guess time will tell as they say. I too am always open for new suggestions and this one (VFSUX) is interesting to me indeed.

 

[Chuckanut]

Sometimes I wonder if it is all worth the effort or should I just go for the sure thing and put it all in 10 year Cd's for 3 percent and be done with it .

10 year CD's at these rates bother me. Ten years ago I would have never thought we would have 1 year T-bill rates at under 1%, much less near zero. So, I am very careful going out more than 3 years. I have several 5 year CD's at about 2.2% only because the penalty for breaking them is very small.

 

[ziggy29]

If I were a fund manager I don't think I'd like it if my fund's ticker ended in "SUX"...

 

[tightasadrum]

If deflation ensues over the 5 or 10 years, those 10 year CD will look like a genius move.

 

[grasshopper]

I have about 10 years of income supplement in VFSUX Vanguards ST investment grade. To my little pea brain it is as good as cash. Never had a CD in my entire life.

 

[tightasadrum]

It's interesting that the TOTAL Bond Index (VBTLX) is invested 69.2% in government securities. Somehow I thought it would be a more uniform distribution across the bond market.

 

[flotsamandjetsam]

Okay, So here's a question. I have a large slug of money set aside to pay taxes on a windfall on April 15th. Right now it is in the bank at 0.95%. Would it be appropriate to put it in VFSUX for 2-1/2 months? Is that too short term?

 

[ejman]

History may (or may not) repeat but I bought into this fund in September of 2009, with the same concerns expressed elsewhere on this thread and so far I'm quite happy with the 3.7% overall return per year (per Quicken). I'm not reinvesting dividends since I'm already ER'd and using the dividends (and CG) as part of my cash flow.

 

[Midpack]

If I were a fund manager I don't think I'd like it if my fund's ticker ended in "SUX"...

It did give me pause, Vanguard isn't much focused on marketing are they.