Author Topic: Isn't VBLTX a better option than VBTLX?  (Read 660 times)

Greatoutdoors

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Isn't VBLTX a better option than VBTLX?
« on: November 17, 2018, 07:11:42 AM »
I know Vanguard Total Bond Market Index (VBTLX) is the way many people go.  Does anyone have an opinion on Vanguard Long-Term Bond index (VBLTX)?  Looking at this simply, I see that the performance over the long term has outstripped VBTLX significantly.  Looking at the total annual return % on yahoo finance, there were a couple of bad year 2015 and 2013 with -3.47% and -9.13%,  but all over year have very strong performance.  In the past 23 year only 4 down years.  The 5 year average return 4%. 

Just wondering if I'm missing something here in term of the underlying risk with this index?

2Birds1Stone

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Re: Isn't VBLTX a better option than VBTLX?
« Reply #1 on: November 17, 2018, 07:39:27 AM »
You are, interest rates went down to historical lows over the past 23 years. With rates on the rise today, long term bond NAV will get squished pretty hard.

radram

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Re: Isn't VBLTX a better option than VBTLX?
« Reply #2 on: November 17, 2018, 07:42:27 AM »
I know Vanguard Total Bond Market Index (VBTLX) is the way many people go.  Does anyone have an opinion on Vanguard Long-Term Bond index (VBLTX)?  Looking at this simply, I see that the performance over the long term has outstripped VBTLX significantly.  Looking at the total annual return % on yahoo finance, there were a couple of bad year 2015 and 2013 with -3.47% and -9.13%,  but all over year have very strong performance.  In the past 23 year only 4 down years.  The 5 year average return 4%. 

Just wondering if I'm missing something here in term of the underlying risk with this index?


The underlying risk would be an extended increase of interest rates, which lowers the value of existing bonds. If you buy long term bonds today, you are saying you do not believe the FED when they say they plan to continue to raise rates. You may be right, but I am waiting for a more historically accurate interest rate before I touch long term bonds.


Great article here:
https://www.investmentnews.com/article/20180223/BLOG09/180229959/investing-in-bond-funds-when-interest-rates-rise


In summary, few investors have lived through a rising interest rate time period. Long term bonds could get crushed if that happens. Full disclosure: I am one of those investors. I was 100% stocks until FIRE and have only recently added short term CD's to my portfolio.

MustacheAndaHalf

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Re: Isn't VBLTX a better option than VBTLX?
« Reply #3 on: November 17, 2018, 12:22:04 PM »
Would you rather lose -1.5% or -3.6% next month?

First I have to confess to a couple assumptions: the market consensus is that the Federal Reserve Bank ("the Fed") will raise interest rates +0.25% in December.  Interest rates are rather low, and the Fed wants them back at "normal" levels.  Second assumption: that all bonds will all uniformly move up +0.25%.

Returning to the two bond funds you mentioned, I looked on vanguard.com for these two bond funds, and looked at the "portfolio page".  That page has a key number call the bond fund's "duration".
VBLTX, long-term bond, duration 14.6 years
VBTLX, total bond, duration 5.9 years

The impact of changes in bond yields is duration x -1 x change.  So:
VBLTX = 14.6 x -1 x 0.25 = -3.6% drop in value when rates rise +0.25%
VBTLX = 5.9 x -1 x 0.25 = -1.5% drop in value when rates rise +0.25%

If you get a lot of increases in bond yields / interest rates, bonds lose value often.  We have very low interest rates right now, so this seems more likely.  Historical data shows the opposite trend: from the extremely high interest rates of the 1980s to now, rates have been falling and boosting bond values while doing so.

Greatoutdoors

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Re: Isn't VBLTX a better option than VBTLX?
« Reply #4 on: November 17, 2018, 12:35:50 PM »
Thanks for the all the insights, this is very helpful and makes a lot of sense.  The link to the article was also very informative.  I can now see why everyone generally stay with VBTLX.  I'm still working out whats the best stock/bond mix given my own risk tolerance and current stock market speculation.  Thanks 

MustacheAndaHalf

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Re: Isn't VBLTX a better option than VBTLX?
« Reply #5 on: November 17, 2018, 12:41:47 PM »
You might also look into a tax-exempt bond fund.  That lets you invest taxable dollars, and frees up some room in your IRA / 401(k) / other retirement account.  Right now it makes sense if your tax bracket is 22% or more.

Radagast

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Re: Isn't VBLTX a better option than VBTLX?
« Reply #6 on: November 17, 2018, 11:08:53 PM »
VBLTX is one of those funds that could make sense as up to 10% of a balanced slice and dice portfolio. It will have returns and volatility between stocks and VBTLX. If interest rate risk is reasonably independent of stock risk then it may be worth it.