Total Bond Index v. Intermediate-Bond Index
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Total Bond Index v. Intermediate-Bond Index
For a tax-advantaged account, what are the advantages and disadvantages of one over the other? I realize Total Bond incorporates long, intermediate and short-term, which averages out to mainly intermediate. Is this fund comprised of Treasuries, corporate, junk bonds, GNMAs? And, does the Intermediate own just intermediate versions of those as well? I ask because it seems over time (1, 3, 5 and 10 year periods) the Intermediate Fund has a yield about a percentage point or more than the Total Bond. Since percentages make a difference when we Diehards are talking about expenses, I would think a percentage more would help when we're trying to diversify into bonds, yet still try to yield as much as we can within that asset class. I remember also reading that one can get most of the yield of long-term bonds while giving up some of the risk by going intermediate term. Thanks for your responses.
Total Bond Index does not contain any junk bonds. None of the bond index funds do. According to the prospectus, here is what they do contain:
Total Bond Index and the Intermediate-Term Bond Index are not exact in their "intermediate-ness", in that Total Bond Index actually has a duration of only 4.7 years, as compared to Intermediate-Term Index having a duration of 5.9 years (25% higher). Therefore, Intermediate-Term, with it's higher duration, benefited more from interest rates going down. Of course, the opposite is true as well in that it should suffer more of a decline during a big upswing in rates.
Bob
Total Bond Index and the Intermediate-Term Bond Index are not exact in their "intermediate-ness", in that Total Bond Index actually has a duration of only 4.7 years, as compared to Intermediate-Term Index having a duration of 5.9 years (25% higher). Therefore, Intermediate-Term, with it's higher duration, benefited more from interest rates going down. Of course, the opposite is true as well in that it should suffer more of a decline during a big upswing in rates.
Bob
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Thanks for that. Well, I currently have STAR fund which has both short- and long-term corporates as well as GNMA and short-term reserves, plus I have positions in Vanguard High-Yield, TIPS and Short-Term Treasury, plus Fidelity New Markets (which is an emerging market bonds fund). So I'm thinking when I shift away from stocks as I get older, perhaps I'll go into Intermediate Index at that point. Does that sound like I've covered most of my bases bond-wise?
Vanguard's fund comparison
I find Vanguard's fund comparison data to be useful.
https://flagship.vanguard.com/VGApp/hnw ... ndId2=0314
Bob
https://flagship.vanguard.com/VGApp/hnw ... ndId2=0314
Bob
Intermed. Bond Index vs. TBM Index
As far as total return is concerned, for the years 1995 thru 2006, IT Bond Index returned approximately 7.46% annually while TBM Index returned about 6.83% annually. Even though TBM Index goes back to 1986, the first full year for IT Bond Index is 1995, so to get a reasonable comparison of results I started with the year 1995. So, for the period 1995 thru 2006, IT Bond Index' total return was about .6% more per year than TBM Index.
Interesting to note: In 2002, both these funds underperformed their respective benchmark indexes by approximately 2%. Perhaps because there is a degree of active management here, even though these funds are index funds. Read the prospectus, management is allowed to overweight to an extent. However, according to Morningstar, policy has tightened up to help prevent another such underperformance. Morningstar gives both these funds very high marks.
As for advantages and disadvantages, here are some that come to mind. With TBM, you get the greatest diversification in the bond market. Also, the average credit quality of TBM is AAA (or near AAA I think), higher than IT Bond Index. A significant portion (approx 1/3) of TBM is made up of mortgage-backed securities which you don't get in the other bond index funds at Vanguard. Mortgage-backed securities can bring about some great debate, they have advantages and disadvantages. However, Larry Swedroe of this forum doesn't recommend them, and I believe he has many reasonably valid arguments against owning them. Perhaps most importantly, he states that most investors don't fully understand the risks of investing in mortgage-backed securities. Personally, I have TBM Index in my portfolio as my only bond fund, but the more I learn about how mortgage-backed securities work, it causes me some concern. To be remembered, these mortgage-backed securities make up about 1/3 of the TBM Index Fund, indeed a significant portion! Perhaps my concerns are ill-founded (there are so many good aspects of TBM), but I can't ignore the good arguments against mortgage-backed securities either.
All in all, do some research and you'll find that both these funds are very well regarded. Over a long period of time, I believe that IT Bond Index will have a total return greater than TBM Index. But that is only an opinion.
Interesting to note: In 2002, both these funds underperformed their respective benchmark indexes by approximately 2%. Perhaps because there is a degree of active management here, even though these funds are index funds. Read the prospectus, management is allowed to overweight to an extent. However, according to Morningstar, policy has tightened up to help prevent another such underperformance. Morningstar gives both these funds very high marks.
As for advantages and disadvantages, here are some that come to mind. With TBM, you get the greatest diversification in the bond market. Also, the average credit quality of TBM is AAA (or near AAA I think), higher than IT Bond Index. A significant portion (approx 1/3) of TBM is made up of mortgage-backed securities which you don't get in the other bond index funds at Vanguard. Mortgage-backed securities can bring about some great debate, they have advantages and disadvantages. However, Larry Swedroe of this forum doesn't recommend them, and I believe he has many reasonably valid arguments against owning them. Perhaps most importantly, he states that most investors don't fully understand the risks of investing in mortgage-backed securities. Personally, I have TBM Index in my portfolio as my only bond fund, but the more I learn about how mortgage-backed securities work, it causes me some concern. To be remembered, these mortgage-backed securities make up about 1/3 of the TBM Index Fund, indeed a significant portion! Perhaps my concerns are ill-founded (there are so many good aspects of TBM), but I can't ignore the good arguments against mortgage-backed securities either.
All in all, do some research and you'll find that both these funds are very well regarded. Over a long period of time, I believe that IT Bond Index will have a total return greater than TBM Index. But that is only an opinion.
Re: Intermed. Bond Index vs. TBM Index
Larry Swedroe, in his book on page 39, when describing Agency Risk commented that:g koz wrote:Interesting to note: In 2002, both these funds underperformed their respective benchmark indexes by approximately 2%. Perhaps because there is a degree of active management here, even though these funds are index funds.
in 2002 Vanguard Total Bond Index Fund (VBMFX) made a large bet by overweighting bonds in issuers from the telecommunications sector. When those bonds performed poorly, the fund underperformed its benchmark index by 2 percent. This is a particulary good example, because of Vanguard's reputation as a conservative and well-run mutual fund company.
mostly true, but its muddier than that. No one really knows the the true duration of the GNMA /mortgaged securities. If interest rates rise, Total bond Index may actually even be more interest rate sensitive than stated.CyberBob wrote: Total Bond Index and the Intermediate-Term Bond Index are not exact in their "intermediate-ness", in that Total Bond Index actually has a duration of only 4.7 years, as compared to Intermediate-Term Index having a duration of 5.9 years (25% higher).
Bob
as crazy at it seems, i see no reason to exclude mortgages from my portfolio. why exclude a good diversifier?
mbs as good diversifier
good points preserve..
Do you know how mortgage-backed securities correlate with other securities such as Treasuries and corporate bonds?
Do you know how mortgage-backed securities correlate with other securities such as Treasuries and corporate bonds?
Considering MBS are instantly callable long bonds I'd look at correlations for longer term bonds during rising interest rates and short term bonds when interest rates go down.Do you know how mortgage-backed securities correlate with other securities such as Treasuries and corporate bonds?
All the worst aspects of long term bonds without the benefits. Nice yield if the rates stay flat.
Paul
- Taylor Larimore
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Correlations and Mortgage Backed Securities
A recent study of Commercial Mortgage Backed Securities by Eleanor Xu contains correlation data with other securites."Do you know how mortgage-backed securities correlate with other securities such as Treasuries and corporate bonds?
She reports that MBS have negative correlation with the S&P 500 (correlations change). Here is a link to the study, titled "What Drives the Return on Commercial Mortgage=backed Securities?":
http://www.cmbs.org/research/data/RERI-Return07.pdf
Best wishes.
Taylor
Taylor wrote:
I think that Vg TBM has mostly agency mortgage instruments and thus they are homes not Commercial Mortgage Backed. I have no idea whether this study is meaningful to TBM.A recent study of Commercial Mortgage Backed Securities by Eleanor Xu contains correlation data with other securites.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Vanguard's intermediate term treasury bond fund has slightly outperformed the total bond market index over the most recent ten year period. So you wouldn't have lost any return by going with the super-safe credit risk choice. I suspect there are some "Black Swan" type events that boost the treasury bond fund over other bond funds, (and maybe stock funds, too) from time to time. (Russian debt crisis in 1998; Sept 11 attacks; runup to Iraq War)
If I can get extreme safety from default with about the same performance as riskier bond choices, I'm picking the safe one.
John
If I can get extreme safety from default with about the same performance as riskier bond choices, I'm picking the safe one.
John
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And we are in the middle of such a 'black swan event'-- the flight to safety in bond markets at the moment is palpable.Quasimodo wrote:Vanguard's intermediate term treasury bond fund has slightly outperformed the total bond market index over the most recent ten year period. So you wouldn't have lost any return by going with the super-safe credit risk choice. I suspect there are some "Black Swan" type events that boost the treasury bond fund over other bond funds, (and maybe stock funds, too) from time to time. (Russian debt crisis in 1998; Sept 11 attacks; runup to Iraq War)
If I can get extreme safety from default with about the same performance as riskier bond choices, I'm picking the safe one.
John
I think Larry Swedroe has put it well:
- in risky bond classes, when you most want the safety of owning bonds, they don't deliver that
- if you hold bonds for safety and certainty of return, US government backed securities *do* deliver that
Eleanor Xu study on CMBS
Taylor, thanks for the link, the study seems to be quite advanced for my present level of understanding. Also, is Doc correct when he says TBM Index Fund contains no commercial MBS, only residential MBS? To my understanding, TBM Index Fund's MBS are Fed. Home Loan Bank, Fannie Mae, Freddie Mac, and Ginnie Mae, which are all residential mortgages, I think.
- Taylor Larimore
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g koz -- Mortgage Backed Securities (MBS)
Doc actually said "TBM has mostly agency mortgage instruments."Taylor,-- is Doc correct when he says TBM Index Fund contains no commercial MBS, only residential MBS?
According to Morningstar, this is Total Bond Market's sector breakdown:
US Government 34.79
US Treasuries 24.44
TIPS 0.00
US Agency 10.35
Mortgage 36.04
Mortgage Pass-Thru 34.41
Mortgage CMO 1.63
Mortgage ARM 0.00
Credit 24.37
US Corporate 18.47
Asset-Backed 5.67
Convertible 0.00
Municipal 0.24
Corporate Inflation-Protected 0.00
Foreign 2.36
Foreign Corp 1.45
Foreign Govt 0.91
Cash 2.45
Best wishes.
Taylor
Re: g koz -- Mortgage Backed Securities (MBS)
What are mortgage pass-thru and mortgage cmo bonds?Taylor Larimore wrote:
According to Morningstar, this is Total Bond Market's sector breakdown:
Mortgage 36.04
Mortgage Pass-Thru 34.41
Mortgage CMO 1.63
Mortgage ARM 0.00
Best wishes.
Taylor
Morningstar breakdown of TBM Index Fund
Taylor, thanks for clarifying Doc's statement, and also for the Morningstar info re TBM Index Fund. Upon reading your post, I looked in the Annual Report (12-31-06) for Vanguard's Bond Index Funds. The Morningstar percentages are in line with TBM "Statement of Net Assets - Investments Summary". In the Corporate Bonds heading, there's a subcategory titled "Asset-Backed/Commercial Mortgage-Backed Securities". So, in addition to conventional MBS (which I assume are all residential), TBM Index Fund does contain a small percentage of commercial MBS.
ualdriver, mortgage pass-throughs is another name for mortgage-backed securities. A homeowner pays interest and principal on a mortgage, and this interest and principal "passes through" to the bondholder.
CMO's are collateralized mortgage obligations. It is a rather complex security made up of mortgage-backed securities. That's all I can tell you about them. I'm still learning too.
CMO's are collateralized mortgage obligations. It is a rather complex security made up of mortgage-backed securities. That's all I can tell you about them. I'm still learning too.
Thanks!g koz wrote:ualdriver, mortgage pass-throughs is another name for mortgage-backed securities. A homeowner pays interest and principal on a mortgage, and this interest and principal "passes through" to the bondholder.
CMO's are collateralized mortgage obligations. It is a rather complex security made up of mortgage-backed securities. That's all I can tell you about them. I'm still learning too.
I am unsure if the TBM does not in fact contain some junk type debt.
The question is the ratings of some junk debt was raised in a CDO process to non junk by using the investment grade rating of a company that insured the junk debt against default, giving the junk debt the investment grade rating of the insuring company. Thats all well and fine in theory.
The problem being, is that the "insuring" company, per report, has completely inadequete captital to actually insure against large scale defaults, ie, there is little/no insurance present against large default levels, and the rating should therefore still be junk.........
This is behind some of the downgrades in ratings that have happened or are projected to happen, as I understand it.
Now, this rating schenanigans has actually happened from what I have read, whether or not any of it has ended up in TBM I do not know, but it seems possible. But when ones looks at what is in TBM, even if some is in there, it would have to be a very small portion of the index.
This is all a very rough gestalt type deal of the issue. I could certainly be off here somewhere.
Thanks for topic,
LH