Author Topic: Best Muni Bond fund?  (Read 6121 times)

starguru

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Best Muni Bond fund?
« on: September 20, 2015, 04:58:08 PM »
Seeking recommendations for a muni bond fund.  $$$ is at Fidelity in a taxable investment account.  35% marginal rate, so I believe muni is appropriate.

I was looking at FHIGX but under the composition section it seems to indicate 'extreme' sensitivity to interest rate changes.  Plus the ER is .47.

Am I over thinking this?  Should I just go MUB and call it a day?

I'm having trouble understanding the implications of rising interest rates on short, medium, and long term bond funds.  Is one of those superior in this type of environment? For example, are short term bond funds better since the constituent bonds will cycle out to higher interest assets quicker?   I need someone with more insight than I to guide.

Indexer

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Re: Best Muni Bond fund?
« Reply #1 on: September 20, 2015, 07:26:24 PM »
Easiest way to think of bonds with interest rates is to imagine yourself owning an individual bond.

If you own a 5 year bond paying 3%, and tomorrow the company/government issues an identical bond paying 4% then no one wants your bond. You have to sell it at a discount. 

If the bond matures in 6 months who gives a ^%^$?  No one, and your bond's price isn't going to change much.

If the bond matures in 30 years that is 30 years of payments that are suddenly worth less. That bond is going to take a big hit.

So when interest rates rise short term bonds take a smaller hit than long term bonds.

You measure how sensitive a bond is to interest rates by looking at its duration. It is represented in years, ex. 5.5 years. All other things being equal you want a lower duration. When you are looking at bond funds the duration basically shows you how long you have to own the bond fund to benefit from rising interest rates. If the duration is 5 years and you own it for 4 you are going to take a hit from the rising interest rates, and not really get anything in return. If the duration is 5 years, and you own it for 7 then sure you take a hit from the rising rates but as the existing bonds mature and get replaced by new bonds with higher yields you benefit and actually earn MORE than if interest rates had stayed the same the entire 7 years. 

Example: interest rates go from 3 to 4%. The existing 3% bonds drop in value in the short term, but when they mature the fund company starts buying 4% bonds. Over time earning 4% instead of 3% makes up for the drop you experienced early on, and you actually end up profiting from the change.
« Last Edit: September 20, 2015, 07:29:42 PM by Indexer »

starguru

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Re: Best Muni Bond fund?
« Reply #2 on: September 21, 2015, 08:48:35 AM »
Easiest way to think of bonds with interest rates is to imagine yourself owning an individual bond.

If you own a 5 year bond paying 3%, and tomorrow the company/government issues an identical bond paying 4% then no one wants your bond. You have to sell it at a discount. 

If the bond matures in 6 months who gives a ^%^$?  No one, and your bond's price isn't going to change much.

If the bond matures in 30 years that is 30 years of payments that are suddenly worth less. That bond is going to take a big hit.

So when interest rates rise short term bonds take a smaller hit than long term bonds.

You measure how sensitive a bond is to interest rates by looking at its duration. It is represented in years, ex. 5.5 years. All other things being equal you want a lower duration. When you are looking at bond funds the duration basically shows you how long you have to own the bond fund to benefit from rising interest rates. If the duration is 5 years and you own it for 4 you are going to take a hit from the rising interest rates, and not really get anything in return. If the duration is 5 years, and you own it for 7 then sure you take a hit from the rising rates but as the existing bonds mature and get replaced by new bonds with higher yields you benefit and actually earn MORE than if interest rates had stayed the same the entire 7 years. 

Example: interest rates go from 3 to 4%. The existing 3% bonds drop in value in the short term, but when they mature the fund company starts buying 4% bonds. Over time earning 4% instead of 3% makes up for the drop you experienced early on, and you actually end up profiting from the change.

So by this logic the best thing to get a short term fund?  Looking at various fund compositions it seems like even long term funds hold some short term securities, is this mitigation against rising interest rates?

Im a bit surprised Fidelity doesn't have any spartan series funds for municipal bonds.  Am I missing it?

CorpRaider

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Re: Best Muni Bond fund?
« Reply #3 on: September 29, 2015, 11:56:14 AM »
Expressing no opinion about the asset class, I kind of like that vanguard intermediate term one.  $50K for the admiral, I think.  Fido has a similar one but the ER is a little higher.

starguru

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Re: Best Muni Bond fund?
« Reply #4 on: September 29, 2015, 03:03:38 PM »
Expressing no opinion about the asset class, I kind of like that vanguard intermediate term one.  $50K for the admiral, I think.  Fido has a similar one but the ER is a little higher.

Please, express an opinion.  :)

I am stuck in analysis paralysis here (and I'm just busy) so I haven't moved on this.  I only have 20k to play with right now, so the admiral shares are out.  I think this is the intermediate term one.  VWITX

Edit:  I guess this is my only intermediate term Fidelity option, FLTMX .  At .37% ER, so much for "low cost".
« Last Edit: September 29, 2015, 03:08:53 PM by starguru »

starguru

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Re: Best Muni Bond fund?
« Reply #5 on: September 30, 2015, 10:24:04 AM »
I'm wondering, if the record date for a fund is 9/30, and you an order to buy is accepted on 9/30, does that mean the owner gets the distribution for that month?

RobertMa

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Re: Best Muni Bond fund?
« Reply #6 on: September 30, 2015, 12:52:23 PM »
If you look at Fidelity's fee information for FTABX (Fidelity tax-free bond), it shows a "Voluntary" fee of .25%. After a lengthy back and forth with the Fidelity rep, she reviewed the prospectus with her supervisor and confirmed that the current actual expense ratio is .25 (the same as the MUB etf). Of course, that could change at any time.

starguru

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Re: Best Muni Bond fund?
« Reply #7 on: September 30, 2015, 12:54:54 PM »
If you look at Fidelity's fee information for FTABX (Fidelity tax-free bond), it shows a "Voluntary" fee of .25%. After a lengthy back and forth with the Fidelity rep, she reviewed the prospectus with her supervisor and confirmed that the current actual expense ratio is .25 (the same as the MUB etf). Of course, that could change at any time.

The ER for that fund is .46, as seen here
https://fundresearch.fidelity.com/mutual-funds/summary/316128503

I was going to just split and buy half intermediate term and half short term vanguard funds, but fidelity charges $75 to make that trade.  I might have to move this money to vanguard. 

NorCal

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Re: Best Muni Bond fund?
« Reply #8 on: September 30, 2015, 01:26:30 PM »
What state are you in?  Depending on where you live, there may be state tax advantages to investing in bonds from your home state.

As a Californian, I hold some shares in CXA (California Muni Bonds).

Financial.Velociraptor

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Re: Best Muni Bond fund?
« Reply #9 on: September 30, 2015, 01:28:49 PM »
My munis are in a mix of IQI, NEA, and NIO closed end funds.  ER is higher on these but they are using about 30-40% leverage to boost returns.

starguru

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Re: Best Muni Bond fund?
« Reply #10 on: September 30, 2015, 01:48:39 PM »
My munis are in a mix of IQI, NEA, and NIO closed end funds.  ER is higher on these but they are using about 30-40% leverage to boost returns.

I don't understand what that mean's and there is some rule about investing and not understanding. :)

starguru

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Re: Best Muni Bond fund?
« Reply #11 on: September 30, 2015, 01:49:22 PM »
What state are you in?  Depending on where you live, there may be state tax advantages to investing in bonds from your home state.

As a Californian, I hold some shares in CXA (California Muni Bonds).

VA, so far as I know there are no state specific muni bond funds for me.  But my bigger problem is the $75 fee for buying the vanguard funds thru fidelity.

RobertMa

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Re: Best Muni Bond fund?
« Reply #12 on: September 30, 2015, 02:21:35 PM »
If you look at Fidelity's fee information for FTABX (Fidelity tax-free bond), it shows a "Voluntary" fee of .25%. After a lengthy back and forth with the Fidelity rep, she reviewed the prospectus with her supervisor and confirmed that the current actual expense ratio is .25 (the same as the MUB etf). Of course, that could change at any time.

The ER for that fund is .46, as seen here
https://fundresearch.fidelity.com/mutual-funds/summary/316128503

I was going to just split and buy half intermediate term and half short term vanguard funds, but fidelity charges $75 to make that trade.  I might have to move this money to vanguard.

The "Fees and Distributions" tab of that link to Fidelity shows a "Exp. Cap (Voluntary)" of .25. The Fidelity rep confirmed that it was still capped at that level.

GGNoob

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Re: Best Muni Bond fund?
« Reply #13 on: September 30, 2015, 02:30:03 PM »
Should I just go MUB and call it a day?

I would.

starguru

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Re: Best Muni Bond fund?
« Reply #14 on: September 30, 2015, 02:31:54 PM »
If you look at Fidelity's fee information for FTABX (Fidelity tax-free bond), it shows a "Voluntary" fee of .25%. After a lengthy back and forth with the Fidelity rep, she reviewed the prospectus with her supervisor and confirmed that the current actual expense ratio is .25 (the same as the MUB etf). Of course, that could change at any time.

The ER for that fund is .46, as seen here
https://fundresearch.fidelity.com/mutual-funds/summary/316128503

I was going to just split and buy half intermediate term and half short term vanguard funds, but fidelity charges $75 to make that trade.  I might have to move this money to vanguard.

The "Fees and Distributions" tab of that link to Fidelity shows a "Exp. Cap (Voluntary)" of .25. The Fidelity rep confirmed that it was still capped at that level.

What's the difference between ER and the Exp Cap?

RobertMa

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Re: Best Muni Bond fund?
« Reply #15 on: October 01, 2015, 03:28:31 PM »
If you look at Fidelity's fee information for FTABX (Fidelity tax-free bond), it shows a "Voluntary" fee of .25%. After a lengthy back and forth with the Fidelity rep, she reviewed the prospectus with her supervisor and confirmed that the current actual expense ratio is .25 (the same as the MUB etf). Of course, that could change at any time.

The ER for that fund is .46, as seen here
https://fundresearch.fidelity.com/mutual-funds/summary/316128503

I was going to just split and buy half intermediate term and half short term vanguard funds, but fidelity charges $75 to make that trade.  I might have to move this money to vanguard.

The "Fees and Distributions" tab of that link to Fidelity shows a "Exp. Cap (Voluntary)" of .25. The Fidelity rep confirmed that it was still capped at that level.

What's the difference between ER and the Exp Cap?

The rep explained to me that Fidelity had voluntarily limited ("capped") their expense ratio for that fund at .25. It took forever for her to figure that out and she said she was putting in a request to have that information presented more clearly. Also, Fidelity can voluntarily remove that cap any time they want. Now if they would just do something about that $25k minimum...

SwordGuy

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Re: Best Muni Bond fund?
« Reply #16 on: October 01, 2015, 06:15:14 PM »
Easiest way to think of bonds with interest rates is to imagine yourself owning an individual bond.

If you own a 5 year bond paying 3%, and tomorrow the company/government issues an identical bond paying 4% then no one wants your bond. You have to sell it at a discount. 


Um. No, you don't.  You can continue to collect 3%. :)

starguru

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Re: Best Muni Bond fund?
« Reply #17 on: October 01, 2015, 06:22:06 PM »
If you look at Fidelity's fee information for FTABX (Fidelity tax-free bond), it shows a "Voluntary" fee of .25%. After a lengthy back and forth with the Fidelity rep, she reviewed the prospectus with her supervisor and confirmed that the current actual expense ratio is .25 (the same as the MUB etf). Of course, that could change at any time.

The ER for that fund is .46, as seen here
https://fundresearch.fidelity.com/mutual-funds/summary/316128503

I was going to just split and buy half intermediate term and half short term vanguard funds, but fidelity charges $75 to make that trade.  I might have to move this money to vanguard.

The "Fees and Distributions" tab of that link to Fidelity shows a "Exp. Cap (Voluntary)" of .25. The Fidelity rep confirmed that it was still capped at that level.

What's the difference between ER and the Exp Cap?

The rep explained to me that Fidelity had voluntarily limited ("capped") their expense ratio for that fund at .25. It took forever for her to figure that out and she said she was putting in a request to have that information presented more clearly. Also, Fidelity can voluntarily remove that cap any time they want. Now if they would just do something about that $25k minimum...

Hmm that does change things.  I wonder if they have ever removed a cap like that.

Indexer

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Re: Best Muni Bond fund?
« Reply #18 on: October 01, 2015, 07:13:14 PM »
Easiest way to think of bonds with interest rates is to imagine yourself owning an individual bond.

If you own a 5 year bond paying 3%, and tomorrow the company/government issues an identical bond paying 4% then no one wants your bond. You have to sell it at a discount. 


Um. No, you don't.  You can continue to collect 3%. :)

Yes you can. :)   

Let me rephrase.... "IF you sold your bond you would have to sell it at a discount. Or if you priced your bond it would be worth less."

SwordGuy

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Re: Best Muni Bond fund?
« Reply #19 on: October 01, 2015, 08:58:23 PM »
Where do you find out the ratio between city tax income and city indebtedness (especially including underfunded pension obligations)?