This is a pretty nice visualization:
http://stockcharts.com/freecharts/yieldcurve.phpWhen you buy VBTLX, basically you own the entire yield curve. (But also corporate bons, MBS, etc, adding a range of risk as well.) If you turn on animation, you can see the curve go up and down. Of course, if yields go up, bond values fall, but time makes up for this through higher coupon rate. (And vice versa). You'll notice that it's common for the entire yield curve to go up or down together, but it's definitely possible and normal for different parts of the curve to move differently.
When a mutual fund focuses on short, medium or long term, it means the fund is focused on that part of the yield curve, rather than a mix of everything. But you also must take into account that the longer the term, the more your bond's secondary value changes with the change in interest rate, because maturity is much farther away. (You can use a bond calculator to see how a bond's value is affected by change in rates.)
By switching VBTLX for VFIRX in your portfolio, you're probably saying a few things:
- I don't need corp bonds (probably because 90% of your portfolio is exposed to corp upside and risk already)
- I don't want interest rate risk
- Short term bonds are normally close enough to cover inflation
- I don't care if I miss out on bond upside
- Diversification is not relevant because the government cannot default (*in any meaningful way that can be protected against though an alternative)
I think the points are valid and interesting to discuss. I am also not smart enough to know that one is better than another. Given the scenario where you're talking about a 10% allocation and few basis points of real return, it probably doesn't matter too much. As a retail investor, it is as easy to buy VBTLX as it is to buy VFIRX.
I wouldn't say VBTLX is bad just because it carries some additional risk. I plan to hold some over my entire lifetime (which hopefully is a long time) and I will essentially see every bond issue mature and be replaced in that time. And some minority of corp bonds will probably default. On average, I'll probably see a real return of about 1% or so. As I withdraw, most of the time I'll be selling stocks anyway because they should have a higher rate of return anyway. The bonds are there as ballast (as JL Collins puts it) and usually have strong returns when stocks aren't.
http://jlcollinsnh.com/2017/12/20/the-bond-experiment-return-to-vbtlx/Personally, I think the discussion is interesting and I enjoy learning more, but in the end this is relatively small portion of your portfolio. It is probably more important to be comfortable with your selection than deciphering what is optimal.