Let's talk short term bond funds

[COguy]

I am looking at finding a short term bond fund to store my house down payment money in.

I really don't want complicate this with an online savings account which gives an easy 0.9% with no downside.  I want to do this in my brokerage account at Vanguard.

So, I plan on using a short term bond fund at vanguard.

The choices are

short term index: vbisx
short term tax exempt: vbirx
limited term tax exempt: vfstx
short term corporate: vwstx

I am in the 25% bracket

Anyone familiar with what the downsides are of short-term municipals like the tax exempt fund.  Those look more appealing than the short term index, but the downside appears bigger to me in times when there is "blood on the streets."  At least that is looking at the charts and thinking about what is in these funds.  I imagine the corporate index tends to drop in bad situations as well. 

The function of this money is a place to build up cash for some house purchase down the road if/when I decide to buy.  But, if the world goes to shit I would also like it to be my buy low money in stocks, real estate, or whatever.  I understand that past data indicate that a cash position tends to be a drag over time.  But, having this money is a kind of psychological insurance.  If the bulk of my portfolio goes down 50%, but I can drop this money into a great deal I believe it will go a long way in my handling of a huge drop in asset prices.

In the end it this is more of a learning exercise than anything to see what everyone else thinks.  We are talking a yield difference of <0.5% and downside risks on the order of 5% (probably a lot less).

[tooqk4u22]

You really won't gain much going to a bond fund vs. a 0.9% savings account.  I ouched on this in another thread but the yield you see on the various quotes is not the yield you will get going forward - go to vanguard site and look at the yield to maturity and you will see this.

BTW - only the last one is tax exempt

[yolfer]

Did you see this thread on the near-future risk of bonds? https://forum.mrmoneymustache.com/investor-alley/the-great-bond-bubble/

I put my down-payment $ in bonds but I'm about to withdraw it to buy a home. If I was starting today, I'd probably think twice.

[Honest Abe]

only reason to invest in short term is to protect your portfolio from volatility, not to generate any sort of meaningful return

[COguy]

I understand the mechanics of bonds and that there is a bond bubble.  That is why I was only asking about short term bond funds.  I also understand that short bonds protect a portfolio from volatility. 

Basically I am looking for a place to inventory my cash while I save it and I was curious if anyone was familiar with the mechanics of corporate issues or municipal issues over a total short term bond fund.

It sounds the consensus is that it doesn't really matter which one I pick.  I just wanted to query this group to see if someone knows anything I haven't read everywhere else.

[Another Reader]

If I were going to buy a house in the next two years, I would put the money in a high yield bank account.  If I was sure I was not going to buy in the next 12 months, I would put the money in a 1 year CD at Pentagon Federal Credit Union at 1.25 percent.  Otherwise, Sallie Mae or Ally, whoever is paying the most now.

No way would I take on bond risk to juice the yield an extra 1/4 percent for 12 to 24 months.

[arebelspy]

No way would I take on bond risk to juice the yield an extra 1/4 percent for 12 to 24 months.

If he's holding to maturity for a year, it probably won't matter to much.  (An argument I usually don't care for, but will accept on a very short duration.)

But in general I agree, bonds aren't great right now.

[KingCoin]

These are the relevant variables for each fund (I think you mixed up the labels):

   Taxable Yield  Duration   Credit Risk   Expense
VBISX    1.42%   2.69       Extremely Low   0.22
VBIRX    1.52%   2.69       Extremely Low   0.11
VFSTX    2.15%   2.31       Low                    0.2
VWSTX   1.39%  1.21       Very Low            0.2

The duration is so low on these funds, that the "bond bubble" argument doesn't really apply. Yeah, it's possible that we could see a big rise in short term rates in the near future, but it's seriously unlikely, and your downside isn't that big even if it does happen.

Honestly, I think it's a coin flip with respect to which one you choose. I'd mildly favor the admiral short term or the corporate short term.