Author Topic: Anemic performance of VBTLX? Better bond index fund option?  (Read 4919 times)

RedmondStash

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Anemic performance of VBTLX? Better bond index fund option?
« on: December 14, 2017, 11:11:50 AM »
I started managing our investments about 2 years ago and am still learning the ropes. But I am concerned about the anemic performance of VBTLX, both over that timeframe and over longer timeframes.

Is there a better bond index fund option? I'm looking at VBILX, VFIDX, and VICSX, and having trouble seeing a reason not to switch; they all outperformed VBTLX over 1-, 3-, 5-, and 10-year periods (except VICSX, which doesn't have a 10-year period since it started in 2010).

I get the idea that total bond index = more diversification and less overall risk, and that the ER is a bit lower for VBTLX. I also get that when the stock market is surging upward, all bond index funds tend to perform more poorly. I just hate seeing my low-risk money just sit there stagnating when it could be in a similarly safe but better investment.

Proud Foot

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #1 on: December 14, 2017, 12:14:59 PM »
How much risk are you willing to take with your low risk investments? I have been using the Vanguard High Yield Corporate Bond Fund (VWEHX) for my bond allocation.  My CAGR over my holding period so far (2 years) has been around 11% and it has annual returns of : 1 yr - 8.23%, 3 yr - 5.25%, 5 yr - 5.33%, 10 yr - 6.84%.

RedmondStash

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #2 on: December 14, 2017, 12:22:07 PM »
How much risk are you willing to take with your low risk investments? I have been using the Vanguard High Yield Corporate Bond Fund (VWEHX) for my bond allocation.  My CAGR over my holding period so far (2 years) has been around 11% and it has annual returns of : 1 yr - 8.23%, 3 yr - 5.25%, 5 yr - 5.33%, 10 yr - 6.84%.

Good question. Honestly, relatively high risk, as long as it's a different type of risk than stocks. We've got some cash, a HELOC we can draw from at a decent interest rate, and some SS income, so I don't mind being a bit more aggressive with bonds. I think I've been playing it a bit too safe, honestly.

Thanks for the info about VWEHX. It definitely looks interesting!

acroy

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #3 on: December 14, 2017, 12:40:45 PM »
I use VCLT
Long term corporate bond ETF.

Radagast

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #4 on: December 14, 2017, 08:04:34 PM »
It isn't always as straight forward as that. You should not look at bond funds in isolation, but rather how they perform as part of your larger investment strategy. The issue with high(ish) yield (VWEHX) or long-term corporate (VCLT) bonds is that they have credit risk which is highly correlated with the stock market, which means they tend to crash at the same time. That tendency makes them less useful as diversifiers. Even though they have higher yields at first glance, they may not give you better investment returns overall.

I think the best bond allocation right now is an equal split between I-bonds, 5-yr CD ladder, and EDV. It provides both safety and diversification.  It has more components though. Any two of those three is actually pretty good already. If you have 85% stock or more even any one of them is pretty good. You could just as well replace EDV with VCLT if you were using two or or all three of those.

Here is a backtest showing that lower-yielding long term treasury bonds gave better overall results than either of those two over the past 20 years or so, simply because they went up during the 2008 crash while the others turned sharply down at the wrong time.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=12%2F14%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VWESX&allocation1_1=20&symbol2=VUSUX&allocation2_2=20&symbol3=VTSAX&allocation3_1=80&allocation3_2=80&allocation3_3=80&symbol4=VWEHX&allocation4_3=20

And the other funds you mentioned:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=12%2F14%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=5&showYield=false&reinvestDividends=true&benchmark=-1&benchmarkSymbol=VBIAX&symbol1=VBILX&allocation1_1=20&symbol2=VBTLX&allocation2_2=20&symbol3=VFIUX&allocation3_3=20&symbol4=VTSAX&allocation4_1=80&allocation4_2=80&allocation4_3=80

« Last Edit: December 14, 2017, 08:26:21 PM by Radagast »

RedmondStash

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #5 on: December 14, 2017, 08:54:01 PM »
It isn't always as straight forward as that. You should not look at bond funds in isolation, but rather how they perform as part of your larger investment strategy. The issue with high(ish) yield (VWEHX) or long-term corporate (VCLT) bonds is that they have credit risk which is highly correlated with the stock market, which means they tend to crash at the same time. That tendency makes them less useful as diversifiers. Even though they have higher yields at first glance, they may not give you better investment returns overall.

I think the best bond allocation right now is an equal split between I-bonds, 5-yr CD ladder, and EDV. It provides both safety and diversification.  It has more components though. Any two of those three is actually pretty good already. If you have 85% stock or more even any one of them is pretty good. You could just as well replace EDV with VCLT if you were using two or or all three of those.

Here is a backtest showing that lower-yielding long term treasury bonds gave better overall results than either of those two over the past 20 years or so, simply because they went up during the 2008 crash while the others turned sharply down at the wrong time.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=12%2F14%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VWESX&allocation1_1=20&symbol2=VUSUX&allocation2_2=20&symbol3=VTSAX&allocation3_1=80&allocation3_2=80&allocation3_3=80&symbol4=VWEHX&allocation4_3=20

And the other funds you mentioned:
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=12%2F14%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=5&showYield=false&reinvestDividends=true&benchmark=-1&benchmarkSymbol=VBIAX&symbol1=VBILX&allocation1_1=20&symbol2=VBTLX&allocation2_2=20&symbol3=VFIUX&allocation3_3=20&symbol4=VTSAX&allocation4_1=80&allocation4_2=80&allocation4_3=80

Thanks for the post and the links. Good info to have.

moof

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #6 on: December 14, 2017, 10:51:58 PM »
PIMIX for me, though I don't have much in bonds as a percentage of my savings.

I like looking at how funds did during the 2008 downturn.  Many bond funds matched the drop in stocks, but didn't do near as well on the recovery.  All the risk, less of the reward.

RedmondStash

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #7 on: December 15, 2017, 09:33:29 AM »
PIMIX for me, though I don't have much in bonds as a percentage of my savings.

I like looking at how funds did during the 2008 downturn.  Many bond funds matched the drop in stocks, but didn't do near as well on the recovery.  All the risk, less of the reward.

That's a good idea. I started doing that with Radagast's post and portfolio visualizer stuff. Thanks.

CanuckExpat

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #8 on: December 20, 2017, 08:51:49 PM »
PIMIX for me, though I don't have much in bonds as a percentage of my savings.

I like looking at how funds did during the 2008 downturn.  Many bond funds matched the drop in stocks, but didn't do near as well on the recovery.  All the risk, less of the reward.

That sounds like the wrong bond fund (unless your asset allocation calls for risky bonds). Here's a chart of Vanguard Total Bond, Total Stock Market, and Total International over the last twenty years:



JSMustachian

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #9 on: December 20, 2017, 09:10:49 PM »
I use VWESX, admiral version is VWETX. If you look at the history of the fund it has only lost 5-6% in the worst years of the market while stocks can lose 40-50% of their value. I am a ways out from my FIRE date so I am comfortable with the risk.

In the two years Iíve owned the fund I have averaged a 9% return.

MrSpendy

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #10 on: December 20, 2017, 09:14:41 PM »
How much risk are you willing to take with your low risk investments? I have been using the Vanguard High Yield Corporate Bond Fund (VWEHX) for my bond allocation.  My CAGR over my holding period so far (2 years) has been around 11% and it has annual returns of : 1 yr - 8.23%, 3 yr - 5.25%, 5 yr - 5.33%, 10 yr - 6.84%.

You bought HY at a good time, after the stress created by defaults in the oil patch. I was buying HY at the same time in my 401k. Spreads over treasuries got to 8% which was historically high and pricing in lots of defaults.

From here, however, your returns are likely to suck, to put it plainly.

The high yield index yields about 3% more than duration matched treasuries. The historical default rate on junk bonds varies, but is typically 2-4%, spiking to 10%+ in major crises ('01-'04, '08/09). Junk bonds typically lose ~70% of value upon default. So credit losses will be default rate * loss upon default, so losses should be 1.4 - 2.8% in a typical year, and more in the event of economic turmoil. 

Furthermore spreads widen as defaults spike (and tighten in good times, which is why you've done well).

You are unlikely to make a return that is materially above treasuries and are at risk of equity like drawdowns in the event of a turn in the credit cycle. The vanguard fund is actively managed and the manager biases to the lower risk portion of the HY market so it's a little less risky, but it's still junk.

Don't be a yield pig.

Sell your junk bonds, particularly if in a taxable account.




Clean Shaven

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #11 on: December 20, 2017, 09:18:24 PM »
Interesting - posting mostly to follow the thread.

I have a lot in target date funds and have been meaning to switch from those to the underlying investments. One of the changes I intend to make is to ditch the international bonds, as I have not seen much benefit. I haven't really considered corporate bonds so this will be something to research.

MrSpendy

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #12 on: December 20, 2017, 09:27:18 PM »
I use VWESX, admiral version is VWETX. If you look at the history of the fund it has only lost 5-6% in the worst years of the market while stocks can lose 40-50% of their value. I am a ways out from my FIRE date so I am comfortable with the risk.

In the two years Iíve owned the fund I have averaged a 9% return.

It sounds like you understand that the fund has ~2x the duration risk / reward of the total bond market. Given your long time horizon and the fact that you understand that, I have no objections, just want to point out to others to not chase that sexy 9% return from IG bonds, without understanding duration risk (or credit risk in the prior post talking about HY).

« Last Edit: December 20, 2017, 09:30:57 PM by mrspendy »

Radagast

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #13 on: December 21, 2017, 12:36:43 AM »
I use VWESX, admiral version is VWETX. If you look at the history of the fund it has only lost 5-6% in the worst years of the market while stocks can lose 40-50% of their value. I am a ways out from my FIRE date so I am comfortable with the risk.

In the two years Iíve owned the fund I have averaged a 9% return.
PV shows a 16%+ loss for this fund (monthly data, daily would probably show larger). It also shows a 16% loss for long treasury bonds. The difference is the timing. VWESX lost it in 2008 when VUSUX was up and stocks crashed, while VUSUX lost it in 2013 which was a great year for stocks. VWESX also lost a bit in 2013. VWESX is not as volatile as the stock market, but it is risky in more situations: it does poorly when stocks do poorly but also when bonds do poorly. Dr. Bernstein would call this "bad returns in bad times" and suggest staying away. I'll grant that frequent crashes may mean frequent buying opportunities, so you might be ok with it if you are buying regularly. Then the question is "why this instead of more stocks?"

RedmondStash

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #14 on: December 21, 2017, 10:28:48 AM »
All of this leads to an interesting question: Which investment options do well when the stock market tanks? I've been looking at bond index funds because I'm still relatively new to all this, but now I'm wondering about annuities and laddered CDs.

Clean Shaven

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #15 on: December 21, 2017, 11:09:09 AM »
All of this leads to an interesting question: Which investment options do well when the stock market tanks? I've been looking at bond index funds because I'm still relatively new to all this, but now I'm wondering about annuities and laddered CDs.

Same general question I've been pondering, as I look at FIRE-ing in a couple months.  Currently at around an 80/20 stock/bond split, but in very broad-based funds (target date and life strategy), and looking at moving to holding the underlying components in order to (1) move to a more conservative mix of around 65/35, and follow the "rising equity glide path" concept, and (2) have the ability to control what funds get sold, for (a) manual rebalancing and (b) ability to spend down non-equity funds in the event of market crash.

I want to keep the investments that generate taxable income in the tax-advantaged accounts (IRA, 401k).  I have some in CDs, but those generate very little return (a hair over 2% for a 5-year CD) and also generate taxable income.

I just looked at Vanguard's site on CDs -- apparently if I have a brokerage account, I can hold CDs there.  I assume I can do that within the tax-advantaged accounts too.  Vanguard info on CD rates currently:
https://personal.vanguard.com/us/FixedIncomeHome

I couldn't tell what penalty is attached for breaking a CD before maturity.  The CDs I have currently are through an online bank, and breaking the CD before maturity costs 6 months of interest.

Clean Shaven

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #16 on: December 21, 2017, 11:16:18 AM »
Doing some googling -- from a bogleheads thread here:
https://www.bogleheads.org/forum/viewtopic.php?t=207963

A comment points out the problem with selling brokered CDs (breaking before maturity):  "The problem with selling brokered CDs is liquidity. There isn't much of a secondary market, so bids to buy are usually low. Holding them to maturity is fine."

So if that is accurate, that is a concern over making 5 or 7 year CDs part of the investment portfolio.  It may offset any tax advantage gained by holding CDs in a Vanguard IRA or 401k.

Maybe I'll just stick with VBTLX...   

RedmondStash

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #17 on: December 21, 2017, 04:08:47 PM »
FYI, there's a Bogleheads thread that talks about a balanced fund with a high bond percentage but a history of good performance (VWINX/VWIAX):

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=209617

It seemed to weather the 2008 crash better than many riskier bond funds.

I realize this is sort of the same as combining separate bond and stock funds, but I ran a couple of analyses in Portfolio Visualizer, and this fund has seemed to perform well compared to similar percentages of stock funds & bond funds.

Food for thought.

Radagast

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #18 on: December 22, 2017, 08:23:18 PM »
All of this leads to an interesting question: Which investment options do well when the stock market tanks?
Nothing is guaranteed. In theory the US government has no risk of default, which means government bond prices are purely set by expectations for inflation, interest rates, and demand. Government bonds are supposed to do well in a stock crash because of a "flight to safety", which means everyone tries to buy them which drives prices up. They have done this in recent crashes, but nothing is guaranteed. Gold did well in the last downturn, but again nothing is guaranteed. There are also more complicated financial things (options, VIX, etc.), but I'm not into those.

I think you should be able to express a good reason for choosing a given bond fund instead of any or a combination of:
A stock fund, if you are after greater return
VBTLX, if you are after simplicity
CDs/I-bonds, if you are after safety
EDV/TLT/VGLT etc., if you are after pure interest rate risk/reward

When I considered bonds about a year ago, I decided that if I wanted to take credit risk I'd prefer to do it with municipal bonds instead of corporate bonds.

CD's and I-bonds don't look great at first, but they are effectively subsidized by the government to benefit small investors and have returns that are much higher than the bond market would allow, considering their tiny risk. CD's take work, and I-bonds have a purchase limit of $10,000 per year per SSN + $5,000 per tax return.

Here's the bond allocation I think seems ideal. It has similar duration and yield to VBTLX, but it expands tax-advantaged space, is partly protected against inflation, and has no credit risk, which should give it a big advantage over the long run. I like EDV more than VGLT personally.
BondDurationYield
Long Term Government (VGLT)17.52.78
5-yr CD Ladder2.52.60
Series I Saving Bonds02.58
Equal Weight (1/3's)6.72.65
Total Bond Index (VBTLX)6.12.69
Of course, VBTLX and balanced funds always there and always simple.

RedmondStash

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Re: Anemic performance of VBTLX? Better bond index fund option?
« Reply #19 on: December 22, 2017, 10:14:53 PM »
All of this leads to an interesting question: Which investment options do well when the stock market tanks?
Nothing is guaranteed. In theory the US government has no risk of default, which means government bond prices are purely set by expectations for inflation, interest rates, and demand. Government bonds are supposed to do well in a stock crash because of a "flight to safety", which means everyone tries to buy them which drives prices up. They have done this in recent crashes, but nothing is guaranteed. Gold did well in the last downturn, but again nothing is guaranteed. There are also more complicated financial things (options, VIX, etc.), but I'm not into those.

I think you should be able to express a good reason for choosing a given bond fund instead of any or a combination of:
A stock fund, if you are after greater return
VBTLX, if you are after simplicity
CDs/I-bonds, if you are after safety
EDV/TLT/VGLT etc., if you are after pure interest rate risk/reward

When I considered bonds about a year ago, I decided that if I wanted to take credit risk I'd prefer to do it with municipal bonds instead of corporate bonds.

CD's and I-bonds don't look great at first, but they are effectively subsidized by the government to benefit small investors and have returns that are much higher than the bond market would allow, considering their tiny risk. CD's take work, and I-bonds have a purchase limit of $10,000 per year per SSN + $5,000 per tax return.

Here's the bond allocation I think seems ideal. It has similar duration and yield to VBTLX, but it expands tax-advantaged space, is partly protected against inflation, and has no credit risk, which should give it a big advantage over the long run. I like EDV more than VGLT personally.
BondDurationYield
Long Term Government (VGLT)17.52.78
5-yr CD Ladder2.52.60
Series I Saving Bonds02.58
Equal Weight (1/3's)6.72.65
Total Bond Index (VBTLX)6.12.69
Of course, VBTLX and balanced funds always there and always simple.

Thanks for the thoughtful analysis, Radagast. I can I see I have more research to do, like finding out what I-bonds are.