Intermediate-Term Tax-Exempt Fund vs Ally Online Savings

[veremchuka]

I am curious what I am missing here. Instead of using my Ally online savings account that pays 1% and the dividends are taxable why not use the Vanguard Intermediate-Term Tax-Exempt Fund? The expense ratio for Investor shares is just 20 basis points. I am in the 15% federal tax bracket. Perhaps last year's return was so high partly if not mostly due to capital appreciation since the fund is at a 52 week high. This would be in a taxable account for parking about $4,000 in cash that I am not using vs putting it in my Ally account. I know bond funds are better held in tax deferred or tax free accounts but being a tax free account I thought holding it in a taxable account is ok re taxes. I do understand nav can change and the duration is 5.3 years and what that means. With Bernacke announcing the holding of Fed funds rates low thru 2014 this seems like a way to get a better yield and the dividends are tax free at the federal level. This would be a holding for a year or 2 not a long term holding. Heck last year the return was 9.6%.

Am I missing something that says this is a bad idea?

 

[MichaelB]

Well, you are aware that the bond fund can decline in value. The bank account has FDIC insurance, so the principle is free of risk. Once you have considered these two aspects, moving the money from a bank cash account to another riskier assets is what the Fed has in mind. I don't think you are missing anything and are acting in a rational manner.

 

[justplainbll]

Perhaps you should opt for a fund like VMLTX which appears to have a more stabile NAV?

 

[scrabbler1]

I have a blob of money in an intermediate-term tax-free acount but with its NAV so high I would hesitate to add anything to it (I take its monthly dividends in cash because I use them towards my monthly expenses) because its NAV could fall by more than any tax-free interest could offset that drop in value. And in the 18 years I have been in this fund I have found that when the NAV falls, it falls very quickly.

 

[veremchuka]

Perhaps you should opt for a fund like VMLTX which appears to have a more stabile NAV?

I'll check it out, thanks.

I have a blob of money in an intermediate-term tax-free acount but with its NAV so high I would hesitate to add anything to it (I take its monthly dividends in cash because I use them towards my monthly expenses) because its NAV could fall by more than any tax-free interest could offset that drop in value. And in the 18 years I have been in this fund I have found that when the NAV falls, it falls very quickly.

Falling very quickly is way too scary! A slow decline not good but at least I could decide to get out.

The Ally savings account and the Vanguard fund are not the same thing I fully understand that. I know Ally is stable and insured whereas the other can suffer cap loss and is not insured. The big run up last year must be due to cap appreciation being at 52 week high it is not attractive even with the tax free return cuz it's unlikely to return 9.6% again this year, presently the yield is 1.96%.

 

[Spanky]

This would be a holding for a year or 2 not a long term holding.

VWSTX, short term tax exempt has an average duration of 1 year.

 

[meierlde]

Note that if you look at the page at vanguard for the intermediate term tax exempt fund, it has varied by 8.85% over the last year. The long term tax exempt varied by 10.51 %.