Anyone using tax exempt Muni bonds for income stream? Just want some advice

[outofratrace]

We hold considerably more than that in an intermediate muni fund.(VWITX). It is yielding around 3%. No leverage.

If you have more than $50k you should be in the admiral version of this fund VWIUX

 

[audreyh1]

We hold considerably more than that in an intermediate muni fund.(VWITX). It is yielding around 3%. No leverage.

The SEC yield on that fund is 1.59%.

The distribution yield is 2.75%.

 

[Golden sunsets]

If you have more than $50k you should be in the admiral version of this fund VWIUX

Is the admiral version open to all and am I correct in that the only dif between the two funds is a lower expense ratio?

 

[Golden sunsets]

The SEC yield on that fund is 1.59%. The distribution yield is 2.75%.

I was under the impression that the SEC yield represents a 30 day yield so varies from month to month as not all holdings pay dividends equally spread amongst the 12 months of the year. YTD yield is 2.91%. YTD performance is 1.87% including market losses/gains.

 

[Golden sunsets]

If you have more than $50k you should be in the admiral version of this fund VWIUX

It looks to me like one has to have a Vanguard account in order to invest in Admiral shares. Am I mistaken? At any rate the expense ratio difference seems to be .16 vs .20. Thanks anyway for the suggestion.

 

[pb4uski]

I was under the impression that the SEC yield represents a 30 day yield so varies from month to month as not all holdings pay dividends equally spread amongst the 12 months of the year. YTD yield is 2.91%. YTD performance is 1.87% including market losses/gains.

The SEC yield is the income yield that an investor should expect over the long term if they buy the fund today. As interest rates decline the fund yield will converge towards the SEC yield.

http://bonds.about.com/od/bondfunds/a/What-Is-A-Distribution-Yield-What-Is-An-Sec-Yield.htm

 

[audreyh1]

The SEC yield is the income yield that an investor should expect over the long term if they buy the fund today. As interest rates decline the fund yield will converge towards the SEC yield.

Distribution Yield vs. SEC Yield: Which Should You Use?

Right - although I track distribution yield (most recent payout) as well.

If you watch distribution yields, you'll see they have been dropping over time. Vanguard under the "distributions" tab shows you the monthly distribution yield history.

Most of my bond funds distribution yield are closer to the SEC yield, but I notice my muni bond funds are paying out quite a bit higher. Honestly, that is why I still hold them.

I assume the SEC yield for the long-term return on any bond fund I buy.

 

[Golden sunsets]

The SEC yield is the income yield that an investor should expect over the long term if they buy the fund today. As interest rates decline the fund yield will converge towards the SEC yield.

Distribution Yield vs. SEC Yield: Which Should You Use?

Please understand that I am not questioning the truth of what you say. I've read the same definitions, but if the SEC yield is the income yield that an investor should expect over the long term, why wouldn't that yield increase during that same time horizon as interest rates increase. By that I mean if the duration of the fund is 5-6 years and a fund is held for that time during a rising interest rate environment, wouldn't the SEC yield increase as well and if so then the expected long term yield was something different(higher)? Sorry I struggle with this concept.

 

[MichaelB]

I've always looked at yield to maturity to project and compare future returns.

 

[audreyh1]

Please understand that I am not questioning the truth of what you say. I've read the same definitions, but if the SEC yield is the income yield that an investor should expect over the long term, why wouldn't that yield increase during that same time horizon as interest rates increase. By that I mean if the duration of the fund is 5-6 years and a fund is held for that time during a rising interest rate environment, wouldn't the SEC yield increase as well and if so then the expected long term yield was something different(higher)? Sorry I struggle with this concept.

No - SEC yield is NOT the yield to expect over the long term - it's the return to expect over the long term.

Yes - the SEC yield will rise with rising interest rates, but you will also take a NAV reduction in the bond fund because of the rise in interest rates.

 

[Golden sunsets]

No - SEC yield is NOT the yield to expect over the long term - it's the return to expect over the long term.

Yes - the SEC yield will rise with rising interest rates, but you will also take a NAV reduction in the bond fund because of the rise in interest rates.

Sorry Audrey if I seem too uninformed, but if one holds a fund for the number of years that is quoted as the duration, isn't it a break even situation. So if I own $100 now of a fund with a 5year duration that is currently yielding 3% and interest rates increase, my nav declines but the fund's yield increases to the point that at the end of 5 years it made no difference that the NAV declined. If I am correct, then is current yield not as meaningful to me as SEC yield? Again, as I said I struggle process this in light of making investment decisions for my fixed income portfolio.

 

[outofratrace]

It looks to me like one has to have a Vanguard account in order to invest in Admiral shares. Am I mistaken? At any rate the expense ratio difference seems to be .16 vs .20. Thanks anyway for the suggestion.

It is a .08 (.12 vs .20) difference and yes you need to have the funds with Vanguard. There is also no trading fees with a Vanguard account/Vanguard funds

 

[audreyh1]

Sorry Audrey if I seem too uninformed, but if one holds a fund for the number of years that is quoted as the duration, isn't it a break even situation. So if I own $100 now of a fund with a 5year duration that is currently yielding 3% and interest rates increase, my nav declines but the fund's yield increases to the point that at the end of 5 years it made no difference that the NAV declined. If I am correct, then is current yield not as meaningful to me as SEC yield? Again, as I said I struggle process this in light of making investment decisions for my fixed income portfolio.

Yes, it's considered that if you hold a fund with 5 year duration that in the event of an interest rate rise, you should break even after 5 years. But you have to reinvest the dividends to break even.

 

[youbet]

Yes, it's considered that if you hold a fund with 5 year duration that in the event of an interest rate rise, you should break even after 5 years. But you have to reinvest the dividends to break even.

I agree with Audrey. And I'll add that "break even" means the NAV of the fund will equal what you invested originally at (in this example) five years. You could sell and get your money back. But you may have done better with another investment category or method. Having your money tied up for five years and "breaking even" in nominal dollars isn't a success.

 

[Golden sunsets]

Yes, it's considered that if you hold a fund with 5 year duration that in the event of an interest rate rise, you should break even after 5 years. But you have to reinvest the dividends to break even.

Yes - that is the way we have this set up. I have never been a fan of bond funds, due to the affect on NAV of rising interest rates, but if the money is long term I have convinced myself that as long as my time horizon is as long as the duration, then I have limited my downside. That and individually held bonds of high quality are what we have settled on for the bulk of the FI portion of our portfolio.

 

[audreyh1]

I agree with Audrey. And I'll add that "break even" means the NAV of the fund will equal what you invested originally at (in this example) five years. You could sell and get your money back. But you may have done better with another investment category or method. Having your money tied up for five years and "breaking even" in nominal dollars isn't a success.

I don't think the NAV will get back. It would stay lower until interest rates returned to where they were before.

All theoretical of course.

 

[audreyh1]

Yes - that is the way we have this set up. I have never been a fan of bond funds, due to the affect on NAV of rising interest rates, but if the money is long term I have convinced myself that as long as my time horizon is as long as the duration, then I have limited my downside. That and individually held bonds of high quality are what we have settled on for the bulk of the FI portion of our portfolio.

I don't worry about this either, precisely because I'm holding long term, and I am rebalancing with other parts of my portfolio anyway. Bond funds when paired with equity funds lower the volatility of the portfolio which is my goal.

Just because short term interest rates rise, that doesn't guarantee intermediate rates rise either. Often intermediate bond funds have still managed to do better than break even during a period of rising interest rates.

The original discussion was whether SEC yield or distribution yield "counts". I tend to use SEC yield and duration (and credit quality) when comparing funds.

 

[David3]

I put together a muni portfolio over the past two years using Fidelity to buy new issue bonds. It took a bit over a year to assemble as I wanted to spread things across states for risk minimization. I tend to look for AA rated offerings. I also put a bit into 3 funds to juice up the yield a bit. The numbers break down as follows:
71% in individual bonds (17 positions) with maturities spread from '24 to '33; yield 3.125%
20% in FTABX; yield 3.45%
5%in NIQ; yield 4.59%
9% in NXP; yield 3.95%

The overall portfolio yields 3.36%.