Thinking about trading my Vanguard bond fund to MM fund...

[Kat07]

Hello! I've been retired for 5-1/2 years. Currently have about a 40/60 allocation. My bond fund VBTLX has not done well (5-year average return -0.91%, YTD 2.47%) and want to exchange it for something that is also conservative. Thinking about exchanging it for a money market fund, either VMRXX or VMFXX. Is there anybody else that has gotten rid of their bond funds, and if so, what did you exchange it for? Thanks for any help!

 

[pb4uski]

I would suggest you look into a 10-year ladder of Blackrock's iBonds target-maturity bond ETFs. They have versions that cover Treasures, corporate bonds, TIPS, municipal bonds and high-yield bonds. A 70/30 mix of 10-year ladders of the Treasuries and corporate bond versions would be broadly similiar to VBTLX.

These ETFs are like owning a participation in a pool of bonds that all mature in a stated year. In the stated year of maturity, the fund does a terminal distribution in December and then no longer exists.

While you would have 20 tickers, you would only have 2 mature in any given year and then just buy the version that matures 10 years out.

The benefit of this structure is if you need cash, you can either wait for a maturity to happen or sell the ETF with the lowest gain or loss amoungst other possibilities depending on your tax situation. With VBTLX or BND, if you need cash you need to sell and are effectively selling a smidgeon of every bond in the portfolio. You have more control and more flexibility.

 

[imjustawarrior]

Money market funds (MMF) sat close to 0% for a long time. VBTLX is currently yielding more than the two MMFs you listed. I'm sticking with my total bond market fund. Bonds and MMF are two different beasts.

Be careful with timing the market.

 

[target2019]

OP will be fine until declining interest rates result in a sinking feeling.

 

[Palmtree]

Kat07, I feel your pain. After watching our bond funds tank right along with our stock funds was no fun. Then watching them not recover near as much while the stocks did bounce back was a disappointment for sure. A lot of people bailed and transfered their bond holdings to things like CD's, T-Bills, treasury notes and even money market funds. Others hold their bond funds, not wanting to lock in a loss, thinking that eventually they will recover. Others just refuse change there asset allocation period. What's right? Who knows. A lot of people have lost faith in BND. I know I have. I've not sold all of my bond funds but I did sell enough to set up a 10 year TIPS ladder. That helped me sleep better at night.

 

[razztazz]

Except for a small account I've had for decades that is in a Short Term Government bond fund, I turned away from bonds many years ago. (In fact it might be coming up on 20 years now.) Once I found, via FireCalc, that bonds vs cash for the fixed income component made no significant difference, I went with an Equity / MMF asset allocation.

 

[Graybeard]

I dumped bond funds in 2022. I hold VMFXX in my IRA, CDs are not worth it right now though I have 2 CDs from last June maturing that are paying 5.4% each, boy will I miss those. I hold VUSXX in my taxable account along with T bills as the interest from both are not taxed by the state.

 

[TickTock]

VBTLX is currently yielding more than the two MMFs you listed.

Based on the 30-day SEC yield formula, yes (4.43% vs. 4.23% for VFMXX). Based on actual distributions, no - from 9/24 to 6/25 distributions have ranged from 3.60% to 3.93% (3.93 is for 6/25) on an upward rise.

As the 30-day SEC yield is a formula, IMO actual distribution rates are the appropriate measure.

 

[TickTock]

OP,

First figure out the goals for the FI portion of the portfolio. That points you in the right direction. VBTLX does what it's designed for pretty well - 5 year total is -0.91% and its 5 year benchmark is -0.87%. Whether what it's designed for fits your goals is something you need to figure out.

 

[Semi-Retyrd]

With bonds there are good ones and bad ones and a bond index fund like VBTLX will own them all. One way to improve bond fund performance without spending a lot of time watching is to buy a highly rated actively managed bond fund like DODIX. Active managers pick the good bonds and don't pick the bad ones (or at least they try). They also adjust duration and quality according to market conditions. Active managers charge more, so they had better be good pickers to pay for the extra expense fees. If you check Morningstar, you will see DODIX has outperformed VBTLX every year with a similar risk level. So these guys know what they are doing.
To do better than this requires you to be the active manager. Are you willing to do this? In my case for my TIRA I have chosen HOSIX as my main FI investment. I also own a baby bond ATLCZ for higher yield with more volatility. I don't own bonds or bond funds in my taxable account since tax free bond funds either pay lower yields or require higher risk. Instead I own preferred stocks offering qualified dividends which offer tax free income for my bracket.

 

[ncbill]

Yep, for moi FI is several years worth of expenses held in a short term Treasury fund.

Goal is to SWAN, not income.

 

[pb4uski]

... To do better than this requires you to be the active manager. ...

See post #2 in this thread for an easy middle ground. A 10-year ladder with a 70/30 mix of Treasury and corporate bond target maturity bond ETFs that are held to maturity. 20 tickers that takes an hour to set up and 1/2 an hour a year each December to maintain.

 

[Exchme]

OP, I think you are fighting the last war. VBTLX has returned 5.38% in the last year, which seems pretty OK to me. Since the bottom in October 2023, it's up 13.5%.

The latest data shows that inflation has been tamed for 1.5-2 years, other than the weirdly lagging way that the Fed uses to calculate inflation for housing. See the attached graphs from Scott Grannis' excellent economic blog. In the last few months, even that owner's equivalent rent calculation finally caught up, so the latest inflation numbers are essentially at the Fed target. Are the hundreds of millions of bond investors with their trillions of $ in the bond market somehow overlooking a risk that you perceive accurately?

Bond funds take an immediate NAV hit when interest rates rise as they did in 2022, then start to earn at the new, higher interest rate immediately. Ladders held to maturity are no solution, they simply spread the pain of having bought low interest bond contracts out over the duration by returning low interest for years after the market has moved on. The difference in approach between ladders held to maturity and funds has to be as close to zero as bond players can make it or someone else would jump in and arbitrage it. If you hold bonds in taxable, holding to maturity eliminates tax loss harvesting, so the government doesn't even get to pay for part of your pain.

We should recognize that the 2022-2023 bout of inflation was due to a global pandemic and the government's response. The government (both parties) tried to prevent breadlines and a depression by printing lots and lots of COVID relief money. In 2020 and part of 2021, folks held that printed money as there was nothing to spend it on and no one knew how bad things were going to get. When folks realized that it was not going to be a zombie apocalypse, they started to spend the printed money, and we got the 2022-2023 inflation. The market says that today's noise about the future is nothing compared to that.

 

[VanWinkle]

OP, I think you are fighting the last war. VBTLX has returned 5.38% in the last year, which seems pretty OK to me. Since the bottom in October 2023, it's up 13.5%.

The latest data shows that inflation has been tamed for 1.5-2 years, other than the weirdly lagging way that the Fed uses to calculate inflation for housing. See the attached graphs from Scott Grannis' excellent economic blog. In the last few months, even that owner's equivalent rent calculation finally caught up, so the latest inflation numbers are essentially at the Fed target. Are the hundreds of millions of bond investors with their trillions of $ in the bond market somehow overlooking a risk that you perceive accurately?

Bond funds take an immediate NAV hit when interest rates rise as they did in 2022, then start to earn at the new, higher interest rate immediately. Ladders held to maturity are no solution, they simply spread the pain of having bought low interest bond contracts out over the duration by returning low interest for years after the market has moved on. The difference in approach between ladders held to maturity and funds has to be as close to zero as bond players can make it or someone else would jump in and arbitrage it. If you hold bonds in taxable, holding to maturity eliminates tax loss harvesting, so the government doesn't even get to pay for part of your pain.

We should recognize that the 2022-2023 bout of inflation was due to a global pandemic and the government's response. The government (both parties) tried to prevent breadlines and a depression by printing lots and lots of COVID relief money. In 2020 and part of 2021, folks held that printed money as there was nothing to spend it on and no one knew how bad things were going to get. When folks realized that it was not going to be a zombie apocalypse, they started to spend the printed money, and we got the 2022-2023 inflation. The market says that today's noise about the future is nothing compared to that.

I'm not sure how many times this can be said and make a difference for those with recency bias. I can appreciate those that want to control every bond they own and put in the time. I am not one of them.

 

[Kat07]

Kat07, I feel your pain. After watching our bond funds tank right along with our stock funds was no fun. Then watching them not recover near as much while the stocks did bounce back was a disappointment for sure. A lot of people bailed and transfered their bond holdings to things like CD's, T-Bills, treasury notes and even money market funds. Others hold their bond funds, not wanting to lock in a loss, thinking that eventually they will recover. Others just refuse change there asset allocation period. What's right? Who knows. A lot of people have lost faith in BND. I know I have. I've not sold all of my bond funds but I did sell enough to set up a 10 year TIPS ladder. That helped me sleep better at night.

This is exactly how I feel! I will have to check out TIPS in Vanguard.

 

[Kat07]

OP,

First figure out the goals for the FI portion of the portfolio. That points you in the right direction. VBTLX does what it's designed for pretty well - 5 year total is -0.91% and its 5 year benchmark is -0.87%. Whether what it's designed for fits your goals is something you need to figure out.

Yeah, those negative signs didnt really fit my goals! Would have been better off doing laddering CDs or something else.

 

[Exchme]

A lot of people have lost faith in BND.

Surely folks would make a vote of confidence with their wallets but VBTLX has $352B AUM now vs. $318B a year ago. Go figure.

 

[Kat07]

I would suggest you look into a 10-year ladder of Blackrock's iBonds target-maturity bond ETFs. They have versions that cover Treasures, corporate bonds, TIPS, municipal bonds and high-yield bonds. A 70/30 mix of 10-year ladders of the Treasuries and corporate bond versions would be broadly similiar to VBTLX.

These ETFs are like owning a participation in a pool of bonds that all mature in a stated year. In the stated year of maturity, the fund does a terminal distribution in December and then no longer exists.

While you would have 20 tickers, you would only have 2 mature in any given year and then just buy the version that matures 10 years out.

The benefit of this structure is if you need cash, you can either wait for a maturity to happen or sell the ETF with the lowest gain or loss amoungst other possibilities depending on your tax situation. With VBTLX or BND, if you need cash you need to sell and are effectively selling a smidgeon of every bond in the portfolio. You have more control and more flexibility.

You mentioned Blackrock's I-bonds, but my IRAs are in Vanguard, so would like to exchange part of my bond funds into another conservative fund that Vanguard offers. Will have to check them out.

 

[Kat07]

This is exactly how I feel! I will have to check out TIPS in Vanguard. Any particular ones you suggest?

 

[pb4uski]

You mentioned Blackrock's I-bonds, but my IRAs are in Vanguard, so would like to exchange part of my bond funds into another conservative fund that Vanguard offers. Will have to check them out.

To be clear, you can easily buy the Blackrock iBond ETFs in your Vanguard IRA brokerage account. Not sure if there is a commission and if so what it is.

 

[Golden Mean]

Money market funds (MMF) sat close to 0% for a long time. VBTLX is currently yielding more than the two MMFs you listed. I'm sticking with my total bond market fund. Bonds and MMF are two different beasts.

Be careful with timing the market.

As mentioned by TickTock, the 30 day Sec yield is a nonsense number that doesn't reflect the actual current distribution yield. It seems to be more a guess of how the NAV will change, along with the distribution yield. If I'm going to have to deal with constant prices changes, I'd just buy a good dividend stock.

While MMF's were close to 0%, VBTLX was also close to 0% and then dropped 9% right when you might have wanted to use that money while stocks were down 30%. The MMFs didn't drop at all, of course.

OP, yes I've moved my fixed income money to VMFXX in 2022. If and when (longer) bonds pay appreciably more than the MMF, I might start a bond ladder. Never going back to a bond fund.

 

[Pointby2]

I too got tired of my bond funds. Switched to T-Bills, TIPS, CD's and a mix of VMFXX and JAAA.

 

[target2019]

Someone somewhere once said that a bond fund suffices during accumulation.

When you get to retirement you might ask the question, "When do I need this income?" and find that bond fund duration is a challenge.

 

[TickTock]

Bond funds take an immediate NAV hit when interest rates rise as they did in 2022, then start to earn at the new, higher interest rate immediately. Ladders held to maturity are no solution, they simply spread the pain of having bought low interest bond contracts out over the duration by returning low interest for years after the market has moved on.

It depends on the objective. A bond ladder held to maturity for the purpose of funding retirement spending year by year does solve the NAV hit.

As target2019 pointed out, accumulation and distribution phases have different objectives which can translate into different optimal investments.

 

[audreyh1]

Someone somewhere once said that a bond fund suffices during accumulation.

When you get to retirement you might ask the question, "When do I need this income?" and find that bond fund duration is a challenge.

Not everybody holds bond funds for yield/interest income.

And I didn’t actually own any bonds or bond funds until just before retiring. I transitioned to a retirement AA which included 40% fixed income.