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Vanguard Total Bond Market (VBMFX)
Old 01-10-2016, 10:50 AM   #1
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Vanguard Total Bond Market (VBMFX)

This index fund only has a Morningstar rating of 3 stars. Is this anything to be concerned about or is there a better choice?
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Old 01-10-2016, 11:44 AM   #2
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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:

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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 fundís 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%).
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Old 01-10-2016, 11:46 AM   #3
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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?
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Old 01-10-2016, 12:26 PM   #4
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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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Old 01-10-2016, 12:30 PM   #5
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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.
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Old 01-10-2016, 12:38 PM   #6
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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.
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Old 01-10-2016, 12:40 PM   #7
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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.
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Old 01-10-2016, 01:09 PM   #8
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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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Old 01-10-2016, 01:54 PM   #9
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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.
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Old 01-10-2016, 02:09 PM   #10
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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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Old 01-10-2016, 04:04 PM   #11
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Star ratings at Morningstar are not to be used to decide anything with mutual funds....
+1
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Old 01-10-2016, 04:36 PM   #12
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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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Old 01-10-2016, 07:53 PM   #13
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+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...)
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Vanguard Total Bond Market (VBMFX)
Old 01-10-2016, 09:09 PM   #14
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Vanguard Total Bond Market (VBMFX)

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Originally Posted by krotoole View Post
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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Old 01-11-2016, 05:08 AM   #15
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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.
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Old 01-11-2016, 08:44 AM   #16
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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
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Old 01-11-2016, 08:45 AM   #17
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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 .
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Old 01-11-2016, 10:19 AM   #18
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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.
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Old 01-11-2016, 11:25 AM   #19
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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.
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Old 01-11-2016, 12:06 PM   #20
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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 ..
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