Vanguard Total Bond Market (VBMFX)

[jkern]

This index fund only has a Morningstar rating of 3 stars. Is this anything to be concerned about or is there a better choice?

 

[samclem]

This index fund only has a Morningstar rating of 3 stars. Is this anything to be concerned about or is there a better choice?

It is a fine choice. Morningstar liked everything about it (stewardship, low costs, etc). The only "ding" was on its performance, and that was more a function of the time period chosen and other factors that just come with the territory of an index fund:

More recently, in the trailing five years through June 2015, the fund underperformed its category average by an annualized 0.45%--primarily a result of its below-average exposure to credit risk while spreads were tightening. The fund’s standard deviation of returns over the same period (2.9%) matched the category average. However, over the past decade the fund's risk-adjusted performance topped the category average by 0.21% annualized and did so with less volatility (3.36% standard deviation versus 3.92%).

 

[LOL!]

Star ratings at Morningstar are not to be used to decide anything with mutual funds. By definition, the best index funds will very likely have 3 stars all the time.

Is there a better choice? If you want a stock fund, then yes, there is a better choice. What do you want?

 

[OrcasIslandBound]

Vbmfx is the mutual fund, BND is the same thing in an ETF. If you use fidelity, the trade fee may be much lower for the etf version. Sometimes fidelity charges $75 to trade mutual funds outside their network.

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[LOL!]

If one was using Fidelity, then one would not use BND nor VBMFX.

Instead, at Fidelity one would use FBIDX, FSITX, or perhaps AGG which all trade without commissions at Fidelity.

 

[W2R]

It is a fine choice. Morningstar liked everything about it (stewardship, low costs, etc). The only "ding" was on its performance, and that was more a function of the time period chosen and other factors that just come with the territory of an index fund:

+1

It's a total bond market index fund. As such, I'm perfectly happy with it.

 

[Closet_Gamer]

If one was using Fidelity, then one would not use BND nor VBMFX.

Instead, at Fidelity one would use FBIDX, FSITX, or perhaps AGG which all trade without commissions at Fidelity.

Agreed, every brokerage house has their own version of the same thing.

My question would be interest rate risk. Looks like the duration on VBMFX is 5.7 while the yield is about 2.3 - 2.4%. That means that if the Fed follows through with its 1 pp increase next year, it should wipe out the 2.5 years of yield.

I'm currently only holding shorter duration bond funds. YMMV.

 

[OrcasIslandBound]

I'm with Fidelity because of a lot of reasons but don't hesitate to use Vanguard products when I think it is appropriate. I use AGG for small buys of bonds but don't trust it for mainstay holdings of bonds. An $8 fee is nothing if the investment is $100k + as BND is for my family's retirement.

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[audreyh1]

Agreed, every brokerage house has their own version of the same thing.

My question would be interest rate risk. Looks like the duration on VBMFX is 5.7 while the yield is about 2.3 - 2.4%. That means that if the Fed follows through with its 1 pp increase next year, it should wipe out the 2.5 years of yield.

I'm currently only holding shorter duration bond funds. YMMV.

Not necessarily. It's unlikely that intermediate rates will go up as much as the Fed funds rate. They might even stay the same or drop. Sometimes the bond market thinks the Fed is too aggressive in tightening, and as a result the yield curve flattens, or even inverts.

 

[Mulligan]

Not necessarily. It's unlikely that intermediate rates will go up as much as the Fed funds rate. They might even stay the same or drop. Sometimes the bond market thinks the Fed is too aggressive in tightening, and as a result the yield curve flattens, or even inverts.

+1..... If I had a dollar for every time I have heard "when rates are normalized again".........I am so glad I threw in the towel and went long in 2014.


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[Options]

Star ratings at Morningstar are not to be used to decide anything with mutual funds....

+1

 

[OrcasIslandBound]

Agreed on the interest rate risk. The choices out there aren't easy. Part of my investment recipe for bonds kind of begs the question, if stocks take a direct hit and lose 20-30%, which bonds provide the best protection. More than likely, the Fed will pause on all the interest rate hikes. While continuing to hold 45% in stocks, I'm always looking for defensive plays. Long term treasuries are a great defensive tool for these sorts of market drops.

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[Closet_Gamer]

+1..... If I had a dollar for every time I have heard "when rates are normalized again".........I am so glad I threw in the towel and went long in 2014.

Will be interesting to see what happens. Back in '09/'10 I made some decisions predicated on rates staying low for a long time. I just felt that the Fed was pushing on a rope -- anyone who could get debt didn't want it and anyone who wanted it couldn't get it. So slashing rates wouldn't stimulate borrowing or the economy and therefore rates would stay low for a long time. I'm very glad I took that approach back then.

That said, one of the comments after '08 that really stuck with me was Warren Buffett's comment that "There was a systemic under-pricing of risk. Investors weren't demanding the compensation necessary to justify the risks they were taking."

Very unclear how fast this will unwind (or how the market reacts) but for my money there is a bond bubble right now -- and therefore more underlying risk to principle than usually goes along with bonds. I won't go so far as to avoid the asset class, but I am reining in the durations a bit. I think the great interest rate unwind could cause a lot of damage.

My views are tainted, however, because I have access to investments options through work that serve the function of the longer term/higher rate part of my bond allocation without the rate risk. To a certain extent I've been able to "hide" from this rate environment. (If by some bizarre twist my employer went bankrupt I would be 1000% screwed though...)

 

[Mulligan]

Will be interesting to see what happens. Back in '09/'10 I made some decisions predicated on rates staying low for a long time. I just felt that the Fed was pushing on a rope -- anyone who could get debt didn't want it and anyone who wanted it couldn't get it. So slashing rates wouldn't stimulate borrowing or the economy and therefore rates would stay low for a long time. I'm very glad I took that approach back then.



That said, one of the comments after '08 that really stuck with me was Warren Buffett's comment that "There was a systemic under-pricing of risk. Investors weren't demanding the compensation necessary to justify the risks they were taking."



Very unclear how fast this will unwind (or how the market reacts) but for my money there is a bond bubble right now -- and therefore more underlying risk to principle than usually goes along with bonds. I won't go so far as to avoid the asset class, but I am reining in the durations a bit. I think the great interest rate unwind could cause a lot of damage.



My views are tainted, however, because I have access to investments options through work that serve the function of the longer term/higher rate part of my bond allocation without the rate risk. To a certain extent I've been able to "hide" from this rate environment. (If by some bizarre twist my employer went bankrupt I would be 1000% screwed though...)

I dont disagree with what you are saying. I have never been a "contrarian" investor but I did go long whenever most were still talking "rates have to go up". Now that people are throwing in the towel and agreeing it does make me nervous. However I certainly have zero interest in a sub 3 handle yield long govt bond. I went with a more calculated gamble of higher yield, relative high safety, investment grade preferred stocks that yield more than double that. If I am going to risk my money, I am at least going to get yield out of it, not that pittance with 30 years attached to it.


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[bUU]

Star ratings at Morningstar are not to be used to decide anything with mutual funds.

I agree. If I'm going to rely on ratings and such, I'll rely on Lipper Leader ratings, and FundMojo ratings.

 

[mathjak107]

If one was using Fidelity, then one would not use BND nor VBMFX.

Instead, at Fidelity one would use FBIDX, FSITX, or perhaps AGG which all trade without commissions at Fidelity.

fidelity has fbnd

 

[mathjak107]

If one was using Fidelity, then one would not use BND nor VBMFX.

Instead, at Fidelity one would use FBIDX, FSITX, or perhaps AGG which all trade without commissions at Fidelity.

fidelity has fbnd . volatility is higher then bnd because it trades so thinly .

 

[ripper1]

This index fund only has a Morningstar rating of 3 stars. Is this anything to be concerned about or is there a better choice?

Yeah, PenFed 5 year CD at 3.04. Made a decision a couple of years ago to get out of bonds completely.

 

[Lsbcal]

Not necessarily. It's unlikely that intermediate rates will go up as much as the Fed funds rate. They might even stay the same or drop. Sometimes the bond market thinks the Fed is too aggressive in tightening, and as a result the yield curve flattens, or even inverts.

Good points Audrey. I notice that the intermediate bond rates went up well ahead of the actual Fed Funds increase in December. We read that many in the bond market are pricing in maybe 2 quarter point increaes in the Fed rate. But that doesn't necessarily translate up the yield curve.

My guess is a very gradual rise in the 5 year Treasury rate over several years. Also the credit spread for corporates over Treasuries is pretty high, another good omen for funds like Total Bond Market.

I really have struggled to understand bond investing . Not an easy subject I think.

 

[mathjak107]

bond rates have gone up way more then any changes in the feds fund rate so far since their lows last year . .

the problem is bonds are moving on their own and not taking cues from the short term rates .


intermediate term bonds have had yields go up so much so far they wiped out the entire years interest and then some over 2015 .don't forget the ytd's last year are not the whole story . bonds were up more the end of january then the beginning of january , so it is the gains and the interest that were given up ..

 

[Markola]

I own the Vanguard Total Bond Index Fund as my only bond position. When I run the portfolio analyzer on the Vanguard website it flags my bond holdings with a caution icon, saying "Your bond holdings are moderately weighted toward long-term bonds, which typically provide higher yields but decline more sharply in value when interest rates rise." This agrees with others' comments above and it seems the long-term bond bias is built into the index.


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[pb4uski]

Just noticed today that Vanguard has announced a broad-based managed bond fund.

https://personal.vanguard.com/us/insights/article/fund-announcement-C2-032016

Vanguard Core Bond Fund will offer broad exposure primarily to the U.S. fixed income market, and can serve as a low-cost, core holding for investors who prefer active management. The fund is designed to provide a transparent, risk-controlled option, especially in comparison with many competitor funds. Some bond funds use active investment approaches that may introduce significant exposure to high-yield bonds1, reducing the diversification benefits many investors want. The Vanguard Core Bond Fund limits exposure to these high-yield bonds to 5% of its holdings.

 

[photoguy]

This index fund only has a Morningstar rating of 3 stars. Is this anything to be concerned about or is there a better choice?

It's a vanguard bond fund. Which means it's likely best in category (or very close to the best) for what it claims to do: index the entire bond market at lowest cost.

You need to decide if that is what you want.

As others have mentioned, you may want to look at duration and sec yield. Some other reasons to like or not like the bond fund is that it only has 60% in government bonds -- some people want more government (i.e. 100% treasuries for their bond portion), some people want more corporate. The total bond fund also has something like 20% in mortgage backed securities, again, you need to decide if you want to have that in your portfolio. If what I'm writing makes no sense to you, then it may help to read a book on bonds.

FWIW I have a chunk in vanguard's total bond fund. Not because I necessarily like everything in it, or feel that it's optimal but rather I feel it's "good enough" and comes with a super low expense ratio. Also sometimes you don't have much choice in funds especially in retirement accounts.

In addition to total bond, I also have bond money in short-term corporate and CDs. I'd also invest in TIPS if real yields ever rise enough above 0.