Comparing bond funds

[WM]

Can someone help me with the advantages and disadvantages of investing in Vanguard's Total Bond Index versus their Inflation-Protected Securities Fund?

This is actually for my mother-in-law, who is putting in her Roth IRA contributions for last year and this year. I was planning on the Total Bond Index for one-stop shopping. Then the Inflation-Protected option caught my attention and I wondered whether it's better just to go that route? Expense ratios are similar (.19 vs .20).

This is part of an overall plan, so it's not that we're putting all her money in bonds. This is just where the IRA money is going. Also, from what we can tell, she won't need the money for quite a while, if ever.

Any thoughts?

 

[Spanky]

50% each.

Here is the rationale: TIPS and Total Bond Index Combo

 

[mathjak107]

total bond is a bet inflation will stay low. inflation-proof bonds are a bet inflation will stay high. they are opposites of each other to some extent

 

[Shredder]

50% each.

Here is the rationale: TIPS and Total Bond Index Combo

Thanks for the link, I have the 50-50 combo in my IRA and having thinking about changing, after reading the posts in the link, I think I'll stay the course........Shredder

 

[ziggy29]

I think TIPS are a reasonable place for perhaps half of the "safe stuff" in your asset allocation. I wouldn't go chasing recent performance for a short-term play, though -- the easy money has already been made here, IMO, and right now the yields on TIPS are showing the market is paying an *extremely* high price for inflation protection.

I've heard some people mention that they fear inflation so much that they want to put almost everything into this very richly-valued asset class. Unless you think the USA is becoming the Weimar Republic, as I've said elsewhere, I think that's a mistake.

Having said that, if "part of an overall plan" is just deciding to allocate a reasonable long-term percentage of the portfolios to TIPS, then yeah, go for it.

 

[WM]

This is great, thank you!

The 50/50 approach makes a lot of sense to me. And yes, this isn't about performance exactly, just looking for a good asset allocation amongst the bond choices.

 

[Shredder]

just looking for a good asset allocation amongst the bond choices.

My thoughts as well, I see my bond portion (40%) as port protection, with the hope of an increase in value. And the V tips fund as my protection against inflation, to me inflation, especialy during this time of war spending is my biggest threat..........Shredder

 

[jIMOh]

What are the taxes due on TIPs? I know with either with TIPs or I-bonds taxes are not due until the security is sold- if going to be a long term hold, might make more sense to hold in a taxable account.

And not sure if a bond fund changes the rule (maybe individual TIPs in taxable account make sense, but TIPs mutual fund needs to be tax deferred for other reasons.

 

[ats5g]

What are the taxes due on TIPs? I know with either with TIPs or I-bonds taxes are not due until the security is sold- if going to be a long term hold, might make more sense to hold in a taxable account.

And not sure if a bond fund changes the rule (maybe individual TIPs in taxable account make sense, but TIPs mutual fund needs to be tax deferred for other reasons.

If the TIPS are held in taxable accounts, the taxes on the coupons and inflation adjustment on TIPS are due each year they occur. No taxes can be deferred.

The taxes on I bond's earnings can either be (1) paid each year, or (2) deferred until the bond is redeemed.

TIPS funds, like Vanguard's bond fund [VIPSX], pay out the coupons + inflation adjustment to shareholders each year.

- Alec

 

[jIMOh]

How are the inflation adjustments taxed? Ordinary income? How are bond dividends taxed? Ordinary income or dividend rates?

What is the effective yield when you consider the inflation adjustment as income? If I invest 10k in a TIPs bond fund, then get around 1% interest back on the TIPS, plus an annual 2-3% inflation adjustment, that 3% yield is looking good to me (assuming I still have 10k in the bond fund).

 

[ats5g]

How are the inflation adjustments taxed? Ordinary income? How are bond dividends taxed? Ordinary income or dividend rates?

What is the effective yield when you consider the inflation adjustment as income? If I invest 10k in a TIPs bond fund, then get around 1% interest back on the TIPS, plus an annual 2-3% inflation adjustment, that 3% yield is looking good to me (assuming I still have 10k in the bond fund).

IIRC, both the coupons payments and inflation adjustments are taxed as ordinary income at the federal level, but exempt from state and local taxes. See TIPS: Tax Considerations.