Bond vs Bond Fund

[Freedom56]

As a reference, the Vanguard Total Bond Index Fund SEC yield is currently 3.37%.

Once again, the SEC yield is a hypothetical calculation based on the assumption that all bonds/notes in the fund will be held to maturity. This just won't happen. They are holding a lot of low coupon debt while the price of that debt has fallen to compensate for the rise in yields, the coupon payments will not increase for the fund. You should look at distribution yields which these funds are going out of their way to hide but they show SEC yields prominently to lure unsuspecting investors. Distribution yields need to be at least 1 to 1.5 percentage points higher than the comparable treasury of the same duration to compensate for market risk. While the Fed raises rates, these funds will be in buy high/sell low mode. More specifically, they bought low coupon debt at or above par in 2021, now they are selling them well below par.

 

[Freedom56]

Hi,


I am considering
VUSB Ultra-Short Bond ETF

after the fed raises rates the end of this month.


duration is less than 2 years


Thoughts?


Money not needed for 4 years...


Thx

I would stay away from it. Many bond ETFs like HYG already have a 57% short interest and are vulnerable to a short squeeze.

 

[wallygator69]

I would stay away from it. Many bond ETFs like HYG already have a 57% short interest and are vulnerable to a short squeeze.

Wow! didn't know that. Where do you find that info.


THANKS!

 

[Freedom56]

Wow! didn't know that. Where do you find that info.


THANKS!

You can find it on Fidelity site (see attached) but I received an alert from another site on potential short squeezes and HYG was ranked at the top.

 

[gayl]

I would stay away from it. Many bond ETFs like HYG already have a 57% short interest and are vulnerable to a short squeeze.

I didn't know bonds could be shorted. Can treasuries & CDs? These $$s are just until I need to take RMDs in 1-2 yrs depending on Secure 2.0

 

[DJRR]

I would stay away from it. Many bond ETFs like HYG already have a 57% short interest and are vulnerable to a short squeeze.

Doesn't a short squeeze help those that are long the asset? The shorts are betting that the share price of the ETF will fall, but it rises and they have to buy more and more to cover and the price rises? Guess for a bond fund this lowers the yield for new buyers, but should not hurt existing holders who get a cap gain. Or am I confusing it?

 

[Freedom56]

Doesn't a short squeeze help those that are long the asset? The shorts are betting that the share price of the ETF will fall, but it rises and they have to buy more and more to cover and the price rises? Guess for a bond fund this lowers the yield for new buyers, but should not hurt existing holders who get a cap gain. Or am I confusing it?

Yes temporarily but not much. There are 182 million shares outstanding. Today 71 million shares traded or 39% of the float. It would only take 2 days cover all short positions.

 

[Graybeard]

I'm confused.

You say you will or may have to take an RMD in 1 or 2 years. You say your "bond" allocation is just 4% of your investments? 4% is such a small percentage that I don't see how it matters, virtually everything is not in fixed income so your AA is almost 100% equities. Also, your 1st RMD may use up a good sized piece of the 4%.

Look at what the equity market has done this year. Now the bond market is down a lot too but only about half as much, wouldn't you prefer to sell from the fixed income to satisfy an RMD in the future when there is a year like this? My point is you have a very low fixed income allocation. Don't you need more than 4% in your "bonds" otherwise RMDs in the future may have to be taken from only equities.

I always held bond funds but in a rising rate environment bond funds are guaranteed losers due to decreasing nav so bonds or CDs are better. Treasuries are easy to buy, better coupons now than CDs, T bills can be 1, 2, 3, 6 or 12 months. I exchanged all my bond funds in my IRA into the Vg Settlement fund and have been buying T bills and if the market takes another big leg down more Total Stock Market Index.

I think you need to get your AA more balanced and stay away from bond funds. YMMV.

 

[Markola]

Once again, the SEC yield is a hypothetical calculation based on the assumption that all bonds/notes in the fund will be held to maturity. This just won't happen. They are holding a lot of low coupon debt while the price of that debt has fallen to compensate for the rise in yields, the coupon payments will not increase for the fund. You should look at distribution yields which these funds are going out of their way to hide but they show SEC yields prominently to lure unsuspecting investors. Distribution yields need to be at least 1 to 1.5 percentage points higher than the comparable treasury of the same duration to compensate for market risk. While the Fed raises rates, these funds will be in buy high/sell low mode. More specifically, they bought low coupon debt at or above par in 2021, now they are selling them well below par.

Well that stinks, Vanguard Website. Thanks for explaining SEC Yield, Freedom56. Morningstar says that fund has just a 2.18% “TTM Yield” but doesn’t define it. What is TTM Yield?

 

[gayl]

I'm confused.



You say you will or may have to take an RMD in 1 or 2 years. You say your "bond" allocation is just 4% of your investments? 4% is such a small percentage that I don't see how it matters, virtually everything is not in fixed income so your AA is almost 100% equities. Also, your 1st RMD may use up a good sized piece of the 4%.



Look at what the equity market has done this year. Now the bond market is down a lot too but only about half as much, wouldn't you prefer to sell from the fixed income to satisfy an RMD in the future when there is a year like this? My point is you have a very low fixed income allocation. Don't you need more than 4% in your "bonds" otherwise RMDs in the future may have to be taken from only equities.



I always held bond funds but in a rising rate environment bond funds are guaranteed losers due to decreasing nav so bonds or CDs are better. Treasuries are easy to buy, better coupons now than CDs, T bills can be 1, 2, 3, 6 or 12 months. I exchanged all my bond funds in my IRA into the Vg Settlement fund and have been buying T bills and if the market takes another big leg down more Total Stock Market Index.



I think you need to get your AA more balanced and stay away from bond funds. YMMV.

Everyone always says I need fixed income. I'm not sure why. Thats why I asked about bonds vs bond funds. My pension covers everything and I just save my SSA. But I really appreciate input bc I think I could do better.

(1) so no to bond funds (2) I have to take RMD at 72 or don't I get assessed a tax penalty equivalent to what I'd transfer from IRA to Brokerage? (3) what's wrong with 90% stock? I'm in it for the long haul (except what IRS wants)

Speaking of RMDs: tried to find out from Schwab chat how I will know how much I'm supposed to take each year. Apparently she didn't understand bc she said the amount is unknown at this time bc of my age. Anyway its not this year or next year. But do I do the math or do they

 

[Freedom56]

Well that stinks, Vanguard Website. Thanks for explaining SEC Yield, Freedom56. Morningstar says that fund has just a 2.18% “TTM Yield” but doesn’t define it. What is TTM Yield?

Trailing twelve month (TTM) yield which is a measure of how much was returned in distributions over the past 12 months.

 

[mrfeh]

Well that stinks, Vanguard Website. Thanks for explaining SEC Yield, Freedom56. Morningstar says that fund has just a 2.18% “TTM Yield” but doesn’t define it. What is TTM Yield?

I suggest you read this:

https://seekingalpha.com/article/4520862-yield-to-maturity-how-estimate-bond-fund-expected-returns

 

[Graybeard]

Everyone always says I need fixed income. I'm not sure why. Thats why I asked about bonds vs bond funds. My pension covers everything and I just save my SSA. But I really appreciate input bc I think I could do better.

(1) so no to bond funds (2) I have to take RMD at 72 or don't I get assessed a tax penalty equivalent to what I'd transfer from IRA to Brokerage? (3) what's wrong with 90% stock? I'm in it for the long haul (except what IRS wants)

Speaking of RMDs: tried to find out from Schwab chat how I will know how much I'm supposed to take each year. Apparently she didn't understand bc she said the amount is unknown at this time bc of my age. Anyway its not this year or next year. But do I do the math or do they

Answers -
1. Fixed income is for ballast, when your AA gets out of wack and the equities are down you can exchange fixed income to buy more equities.
2. Yes if you fail to take your RMD the penalty is 50% of the amount you failed to take PLUS you still need to take the full RMD. The only exception is the 1st year your RMD is required, that year you can take it the following year but you also need to take the RMD for that year too so your taxes may be huge.
3. Nothing is wrong with 90% equities if you can stomach a year where equities drop 40% or 50% or say 75%! Most people would not be OK with that. Like you my pension and SS cover everything plus I bank on average $1200 per month, we are an exception. Despite that, I want a more balanced AA, losing hundreds of thousands of dollars makes me unhappy (if I was 90% equities now I'd be really upset for being so careless) plus once you won the game you can stop playing. Even a 20-25% equity AA will cover inflation.

Not a Schwab client but Vanguard is all over RMDs sending PO mail, emails, when you login you can see the amount you took and what is remaining and IIRC on the taxable account statement you see it there too. It seems pretty hard to not know you have to take the RMD and how much it is. So yes, your brokerage house will tell you and I'd take a few hundred more just to be safe.

 

[aja8888]

Speaking of RMDs: tried to find out from Schwab chat how I will know how much I'm supposed to take each year. Apparently she didn't understand bc she said the amount is unknown at this time bc of my age. Anyway its not this year or next year. But do I do the math or do they

You will get a letter from Schwab right after the first of the year telling you what amount your required RMD is for that year. Easy. You can have it set up to be pulled automatically and sent to the account of your choice.

 

[Markola]

I suggest you read this:



https://seekingalpha.com/article/4520862-yield-to-maturity-how-estimate-bond-fund-expected-returns

Thank you. The article uses neither the acronym SEC or TTM but I followed it.

 

[intent]

I don't know, I'm pretty much a set and forget type of guy - and I'll readily admit that deciphering the math to predict future outcomes is way out of my league.

But when I read threads like this where everyone seems to despise bond funds, it makes the contrarian in me want to hold more bond funds . I suppose I subscribe to the Buffet "be greedy when others are fearful" theory.

 

[gayl]

It seems pretty hard to not know you have to take the RMD and how much it is.

I was being sarcastic bc I know I must take it but I do not have a crystal ball on whether or not Secure 2.0 will be passed this year so nope ... not sure if it will be pushed out a year

FWIW I don't have to take cash. I can just transfer stocks and then pay taxes. Or I can transfer out stocks & cash having cash split between IRS / FTB

You will get a letter from Schwab right after the first of the year telling you what amount your required RMD is for that year. Easy. You can have it set up to be pulled automatically and sent to the account of your choice.

[emoji106] can it be set to automatically draft over every year??

I don't know, I'm pretty much a set and forget type of guy - and I'll readily admit that deciphering the math to predict future outcomes is way out of my league.

But when I read threads like this where everyone seems to despise bond funds, it makes the contrarian in me want to hold more bond funds . I suppose I subscribe to the Buffet "be greedy when others are fearful" theory.

And that's why I'm confused!! Must admit I retreat to what I know which is why I reached out.

 

[OldShooter]

... Speaking of RMDs: tried to find out from Schwab chat how I will know how much I'm supposed to take each year. ...

The amount is calculated from an IRS table based on your age in the RMD year. We are taking RMDs based on the old rule of 70 1/2. There will be a newer table for RMDs based on the new rule. Search Google for RMDs with "site:irs.gov" to find more than you ever wanted to know.

Basically you take the table number and your previous year-ending tIRA balance $ to calculate this year's RMD. The brokers will give you a number for this year; you can compare it with what you calculate to verify that you are working with the right table. There are lots of tables and it can get confusing. Brokers can't give you future RMD amounts because those will depend on unknown future year-end balances. But you can estimate.

A couple of weeks ago I got an email from Schwab announcing their "RMD Center." It's not impressive but they are trying. Fido and VG almost certainly have or will have similar features.

 

[aja8888]

[emoji106] can it be set to automatically draft over every year??

Yes, DW and I have been having it done that way for over ten years now. Her's goes into our local Chase bank account and mine goes into my Schwab brokerage account.

 

[youbet]

Not a Schwab client but Vanguard is all over RMDs sending PO mail, emails, when you login you can see the amount you took and what is remaining and IIRC on the taxable account statement you see it there too. It seems pretty hard to not know you have to take the RMD and how much it is. So yes, your brokerage house will tell you and I'd take a few hundred more just to be safe.

Actually Vanguard does NOT do what gayl requested. No broker does. It's not possible.

As far as the things you mention Vanguard doing, Schwab does those too. I think it's pretty universal among the various brokerage houses.

 

[youbet]

Speaking of RMDs: she said the amount is unknown at this time bc of my age.

Correct. You would have to be able to accurately predict the value of your IRA on Dec 31st of the year prior to your first RMD. They can't do that.

Anyway its not this year or next year. But do I do the math or do they

They do the math and tell you exactly what you need to withdraw. If you do the withdrawals in chunks over the year, they keep track of the balance you still have to go. If you click on the "balances" tab, it's all right there (if you've reached RMD age). Easy, even for a retired factory worker like me.

One thing you would have to calculate yourself is withholding taxes. It's up to you to figure that amount. Instead of doing estimated tax payments each quarter, I withhold from my RMD at the end of the year. Your broker can't tell you that number because they don't know what your entire tax situation looks like. You or your CPA tell them what, if anything, you want withheld.

RMD's are really a no-brainer, except for knowing exactly what the amount will be some future year from now. Can't do that.

 

[aja8888]

As far as RMDs, in the past, I have waited until after Jan 1 and calculated my amount using IRS tables. I also have pulled out a monthly amount to cover the required pull each year. Now I go the automatic route with Schwab.

I also do not pay the taxes in advance, I estimate quarterly.

Lots of ways to skin the RMD cat.

 

[Freedom56]

I suggest you read this:

https://seekingalpha.com/article/4520862-yield-to-maturity-how-estimate-bond-fund-expected-returns

I suggest you read it more carefully. From the article:

"The reason for the above is simple. Investors can receive a 3.25% interest rate on newly issued 7Y treasuries. Investors only receive 0.63% in interest from older issues. Investors will sell these unprofitable older issues until their prices drop by enough that their expected returns, including interest and capital gains, roughly equals 3.25%. Once the expected returns of newer and older treasury issues are equal, prices will stabilize. This process has already played out for these bonds, which is why the yield to maturity of the older issues, of 3.21%, is very similar to the interest rate on the newer ones, of 3.25%."

In example above, from the article, they are saying that you will receive 0.63% coupon payments for 7 years versus the current 3.25% for the next 7 years. He is therefore conceding that distributions will not increase to the level of a new treasury. The article complete ignores that reality that the investor who buys the new 7 year can re-invest the full 3.25% coupon and compound returns over the next 7 years versus 0.63% for the one held in the bond fund. The article assumes that the fund will hold that 0.63% coupon to maturity which is highly unlikely. The more likely case is that the fund will sell it at a loss. The article also ignores the reality that if rates continue to climb, the fund with the 0.63% 7 year treasury will suffer even more losses. The impact of the "buy high sell low" mode of passive funds is apparent in the poor performance of bond funds like BND. It is trading well below the March 2020 lows. The 10 year return is only 1.47% including coupon payments and 3.13% since inception in 2007. Whereas someone who bought 10 year treasuries in 2007 could have done so at yields between 4.63% and 5.26% and then rolled it over in 2017 between 2.33% and 2.66%. The total return with treasuries is superior to BND and there is zero risk to capital. So with a bond fund, you are receiving lower coupons than buying treasuries alone. If we compared BND with a portfolio of treasuries and corporate bonds, the difference in performance would be even more apparent. For income investors, distributions do matter. Looking at the big picture, why would an investor today invest new money in a fund with no capital protection versus a CD or treasury with higher fixed coupon payments and zero risk to capital? This may explain why Vanguard and others are going out of their way to hide their distribution yields and promoting their SEC or YTM which have no guarantees. This article better explains what is going on and why bond investors would never buy bond funds.

https://www.forbes.com/sites/raulel...s-and-buy-some-bonds-instead/?sh=56b654df628a

"Investors should understand that bond funds and individual bonds are fundamentally different instruments, unlike equity funds and individual stocks which share many investment characteristics. With rising rates, individual bonds held to maturity are poised to deliver a much better performance than bond funds held for similar periods."

 

[Markola]

Thanks for the Forbes article. We have an assigned CFP at Vanguard, so I’ll ask him.

 

[Freedom56]

Here is another article from Forbes on bonds.

https://www.forbes.com/sites/raulel...-bond-selloff-in-forty-years/?sh=3e851e826423

"Part of the reason why the bond slump has been so brutal has to do with the way bonds respond to rate changes. Low interest rates in the past few years spawned bonds with low coupons, which are more sensitive to rate increases than high-coupon bonds. Also, a bond’s price falls less in percentage terms when its rate goes from 6% to 8% (as in 1993, for example) than when it goes from 1% to 3% (as now). When rates are low, the same increase in yield causes a larger decrease in price."