I will gladly pay an expense ratio of .03% for access to a diversified set of bonds.
For now. You might have a different opinion in 3-5 years.
Trying to understand bond funds
- Thread starter digger1959
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I will gladly pay an expense ratio of .03% for access to a diversified set of bonds.
For now. You might have a different opinion in 3-5 years.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Hard to know for sure, but the blood letting of bond funds is probably mostly done but income distributions of short and intermediate term bond funds are lower than good quality bond yields which are around 5%.
That said, I would rather own individual bonds rather than bond funds. A little more work, but it is interesting and entertaining, but more importantly, I have more control. I can't avoid the fair value changes but I can hold out until maturity. Bond funds often don't hold to maturity to maintain duration metrics.
So if it were me, I would sell the bond funds and plow the proceeds in a bond ladder with a 3 or 5 or 7 year weighted average maturity depending on your personal preferences. I try to invest only in bonds rated A or better and the vast majority of my bonds (78%) are either FDIC insured brokered CDs or AA+ or better.
That said, I would rather own individual bonds rather than bond funds. A little more work, but it is interesting and entertaining, but more importantly, I have more control. I can't avoid the fair value changes but I can hold out until maturity. Bond funds often don't hold to maturity to maintain duration metrics.
So if it were me, I would sell the bond funds and plow the proceeds in a bond ladder with a 3 or 5 or 7 year weighted average maturity depending on your personal preferences. I try to invest only in bonds rated A or better and the vast majority of my bonds (78%) are either FDIC insured brokered CDs or AA+ or better.
mickeyd
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My bond funds give balance to my risky stock funds But all are index funds, so there's that. My 45/45/10 AA helps my 100/0 sleep mode
audreyh1
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Yep, still holding my bond funds and rebalancing as warranted. The last thing I want to do is build my own.
Just curious, would you sell today, even if it meant locking in a loss, to redirect those funds to a bond ladder? I ask because I've been wondering whether to sell the bond funds in my portfolio at a loss and move the $$ into either shorter-term bonds or CDs. I hate to sell at a loss, but I'm also leaving money on the table waiting for the tide to turn these bond funds into winners again--which I gather may never happen.
COcheesehead
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Bond funds will turn, the question is when. They hold low coupon debt with unrealized market losses. So they sell at a loss to replace or they continue to receive below market coupons. Most of the bigger, broad market bond funds are yielding below prime money markets. Add in that investors are leaving bond funds and you have redemption drag and less new cash for them to invest in higher coupon bonds. All that and you pay an expense charge for the privilege.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Yes. As an unrealistic example, let's say you sell your bond fund at a loss and buy the exact same bonds that the bond fund owned in the proportions that you owned. You own the exact same thing, but you're managing the bond portfolio rather than the fund manager. But the difference is that you now make the decisions of what, if any, bonds to sell, which to hold to maturity, etc. I prefer the control that I have by owning individual bonds compared to bond funds.
For example, currently BND had a weighted average YTM of 4.6% and a weighted average coupon of 3.0% and a weighted average maturity of 8.9 years. The last income distribution on July 7 was $0.184372, which would be $2.12464 annually and is 3.0% of today's $72.65 NAV.
You could use the proceeds from the sale of BND to buy a simple 10-rung 10-year brokered CD ladder yielding 4.53% and have better cash flow and more control over your bond portfolio.
A couple other reasons. Many forum member bailed out of bond funds a few years ago over concern over interest rate risk and reinvested the proceeds in either funds or individual bond portfolio with less interest rate risk and avoid the big hit that many bond fund investors experienced in 2022. We also had the flexibility to take advantage of the spike in i-bond rates in 2021-2022... a bond fund can't do that.
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Thanks for the guidance, pb4uski. Obviously I learned the lesson of bond funds vs. bonds the hard way. I don’t want to compound my mistake by either dumping them too soon or holding on too long. Sounds like the smart move is to get out of funds and get on with a bond/CD ladder.
No.
If you wanted to time the market (which is almost always a bad idea), the time to sell bond funds was 18 months ago, not today.
perez99
Recycles dryer sheets
I think it will depend to some degree on the reason to dump the fund in the first place. If its because you want more control (as explained by pb4uski), as opposed to just trying to "time the market" by going in/out based on your perception of interest rate risk, the it makes perfect sense to dump it now.
target2019
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There might be different answer(s) depending on where the bond index is located (taxable or tax-deferred).
My thinking on bond index fund(s) changed during the decline last year. I partially exited VBTLX in an IRA. Went from 10% of total portfolio to 5%.
I wonder as some others do, how I will feel when bond index funds recover completely. I'm not very good at predicting the future, so any allocation change is conservative. One small step at a time for us.
The problem is that the kind of person that is dumping their bond fund because of 2022 is likely to bail on their ladder when the total return of bond funds is good.
Midpack
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Thanks to freedom56, I sold all our bond funds and bought bonds (mostly T-Bills) more than a year ago. I avoided some, but not all the losses in bond funds thank goodness. My fixed income portfolio now yields almost 5%. 
Good points. I’ll add a bit. It may depend upon time horizon – are you accumulating at age 25 or consuming at age 75? What was the objective of the bond fund? Like equities, there are a wide variety with varying risks, advantages/disadvantages, etc. VBTLX is not really a ‘total market’ (that is, leaves out munis, junk, etc), but is certainly different than a bond ‘investment’ (be it individual bond or fund) that is aimed more narrowly. So, there are likely always sectors that will be the flavor of the day that outshine the overall market. Index investing isn’t for everyone.
I used to be unaware of how many reasons folks invested in bonds. And that plays into what it means to “recover completely”. Let’s say someone is in VBTLX for income. I did an eyeball look at the per share distribution historically. August 2011 was the last time I saw a $0.03/share distribution. By June 2012, it was $0.025/share. Sporadically, I saw a few months at $0.026 (& source obviously rounded off at a tenth of a cent). Last 2 months has been $0.024502 & $0.024639, or $0.025 rounded. Has that recovered for an income investor (back to distribution from 11 years ago)? Doesn't account for inflation, but most conversations have been in nominal terms not real. And everyone doesn’t invest for income & I suspect many don’t have a clear understanding of what they want from bonds & if it is a reasonable expectation in the market. Bonds themselves don’t know if they are in a fund or held by an individual…
I held a small amount of bond funds for many years but finally sold them because I was dissatisfied with the returns. I lucked out and happened to sell before rates rose. It was luck because I didn’t fully understand the difference between bond funds and ladders.
After a ton of research I finally decided to hold ~75% of fixed income in individual offered securities like bonds, treasuries and CD’s, and the rest in bond funds. Why?
The ladders give me the flexibility to control cash flows and returns according to my retirement needs for the next 10 years. The bond funds are funds I shouldn’t need for over 10-15 years from now so it reduces the administrative burden on me. Also, the continuous reinvestment of a bond fund at a target maturity date and duration is a nice continuous investment feature.
I feel like I’ve got the best of both worlds.
After a ton of research I finally decided to hold ~75% of fixed income in individual offered securities like bonds, treasuries and CD’s, and the rest in bond funds. Why?
The ladders give me the flexibility to control cash flows and returns according to my retirement needs for the next 10 years. The bond funds are funds I shouldn’t need for over 10-15 years from now so it reduces the administrative burden on me. Also, the continuous reinvestment of a bond fund at a target maturity date and duration is a nice continuous investment feature.
I feel like I’ve got the best of both worlds.
Montecfo
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I think bond funds are actually pretty attractive at this point in the cycle, particularly if not laddering.
Why? You can book cap gains as hike cycle ends and definitely as they decline.
Holders to maturity will not be doing this.
Not pushing funds though I do own some (low duration). 80% laddered but just providing a complete picture.
The devastation in bond portfolios last year hit both funds and individual bonds. The real villain was duration.
Why? You can book cap gains as hike cycle ends and definitely as they decline.
Holders to maturity will not be doing this.
Not pushing funds though I do own some (low duration). 80% laddered but just providing a complete picture.
The devastation in bond portfolios last year hit both funds and individual bonds. The real villain was duration.
dobig
Recycles dryer sheets
To me this makes sense. Still have a hefty position in individual bonds but last week sold a large position we had in a GSE (government agency) bond yielding 6.22% that was likely to be called in a few months. Wanted to take advantage of a possible future rebound when the rate cycle ends so bought Vanguard Wellington (60/40) and Wellesley (40/60) last week at a good discount. Got some more equity exposure we were lacking along with the potential upside of the bonds. Also liked Wellesley offers some pretty good protection in a downturn. 2008 it was down 9.8% vs 38% for the S&P. Wellington was down 23% because it has more equity exposure.
Thanks to freedom56, I sold all our bond funds and bought bonds (mostly T-Bills) more than a year ago. I avoided some, but not all the losses in bond funds thank goodness. My fixed income portfolio now yields almost 5%.
+1 Fixed income yields 4.9%. As many of these mature this year, will continue buying but longer term. Possibly 10 years. We sold about 1/2 bond funds in April 2022, then all bond funds in June 2022, and bought ST CDS and treasuries. Now that the rates are looking long, we'll buy long.
