Tag Archives: bnd

Why BND Is The Only Bond Fund I Own

Summary Bonds provide diversification away from stocks. Yields on bonds beat out a bank account. Rising rates are an obvious risk, but how much risk is there really? Finding a fund that’s “not too hot, not too cold”. The Vanguard Total Bond Market ETF (NYSEARCA: BND ) is the only bond fund I own, and that’s probably how it will stay. “Why own bonds at all?” some investors might be asking. I’d like to clarify why I personally have a small allocation to them, despite being relatively young at 28 years old. Markets look expensive, even after a correction While I like the valuations of the individual equities I already own, I’ll also acknowledge that the market as a whole looks expensive relative to historical valuations. According to Multpl.com , the S&P 500 is currently trading at a tick under 19 times earnings versus a historical multiple of around 15-16 times earnings. The Shiller Cyclically Adjusted PE Ratio is at around 24 times earnings, versus a historical average of around 16-17 times earnings. I think that the collapsing earnings of oil-related companies (as well as strong currency-related headwinds) could be weighing down earnings, making the market look more expensive than it really is, but I don’t think it hurts to be cautious, either. The most obvious reason I own bonds, therefore, is for diversification. Simply put, in terms of corrections and even bear markets, bonds traditionally hold up better than equities: SPY data by YCharts The majority of my individual investment portfolio and retirement accounts will remain in equities, but I do maintain a small position in the BND fund. I plan to continue to dollar cost average into it going forward, and I think it’s a better idea than holding cash while waiting for bargains to appear if markets continue to correct. Yield starvation and the lack of savings I have a tough time saving cash in excess of an emergency account right now, largely because there really isn’t any place to put it where it won’t be eaten up by inflation over time. The best place I can currently find (and where I keep my savings at) is Synchrony Bank’s high yield savings account . It only pays 1.05% APY, however, and CDs aren’t much better. Plus, with a CD, my money is locked up for a couple of years at less-than-attractive rates. So opting out of a savings account for yield, there’s short-term treasuries (NYSEARCA: SHY ) as well. These usually don’t come close to the above-mentioned savings account in yield, however, so I don’t see a reason to favor them over cash. I could also consider buying longer dated treasuries (NYSEARCA: TLT ), but then there’s substantial rate risk, as the Federal Reserve still might raise rates this year or even next year. The Fed, rates, and the “bond bubble” While I’ve often heard that there’s a bubble in bonds, and that they’re very risky due to rates being at zero for six years, I think that this talk is somewhat superficial. I’m not so sure that being 100% in equities at this point in time is for me. Long-dated treasuries offer decent yield, but they’re also very sensitive to rates. Usually to get any kind of decent yield out of a bond fund, you’d have to buy a fund with a long duration with lots of risk if rates rise. The alternative is to buy a fund with low credit quality, which pushes up yields. Either way, it seems most bond funds are either risky credit-wise or risky rising rate-wise. Here’s where The Vanguard Total Bond Market ETF starts to make sense. It yields 2.21% with an average duration of just 5.7 years. So with a 1% increase in rates, the fund would lose approximately 5.7% of its value. That’s pretty good for a bond fund in my opinion, because if the Fed does raise rates, I highly doubt it will be more than 0.25% or 0.5%. Even if it does, the yield on this fund should increase along with the bump in rates, as higher yielding bonds are added to the index. Credit wise, the BND also stands out, with the majority of the bonds held within the fund being high grade: (click to enlarge) Source: Vanguard I think that this is one of the best bond funds out there right now, especially considering its expense ratio is just 0.07%. The duration is also reasonable enough to largely prevent dramatic price drops in principal if the Fed does raise rates by the end of the year. Conclusion The BND is a “not too hot, not too cold” holding in my opinion. It’s not likely going to give investors much capital appreciation, or enough yield to get them excited about it. I’m personally holding it, however, largely because I think it’s a better alternative to cash, and I think it will hold up better than equities if the market continues to head south. I can then liquidate some (or even all) of my stake to go shopping for bargains. If markets don’t continue to correct, I don’t see that much downside, and at least I’m getting paid some income along the way. I’ll continue to be overweight equities at this point, but I don’t think it hurts to maintain a small position in the BND as an insurance measure, either.

Ivy Portfolio September Update

The Ivy Portfolio spreadsheet tracks the 10-month moving average signals for two portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets . Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term moving averages. The Ivy Portfolio spreadsheet tracks both the 5 and 10 ETF Portfolios listed in Faber’s book. When a security is trading below its 10-month simple moving average, the position is listed as “Cash.” When the security is trading above its 10-month simple moving average, the position is listed as “Invested.” The spreadsheet’s signals update once daily (typically in the late evening) using dividend/split adjusted closing price from Yahoo Finance. The 10-month simple moving average is based on the most recent 10 months including the current month’s most recent daily closing price. Even though the signals update daily, it is not an endorsement to check signals daily or trade based on daily updates. It simply gives the spreadsheet more versatility for users to check at his or her leisure. The page also displays the percentage each ETF within the Ivy 10 and Ivy 5 Portfolio is above or below the current 10-month simple moving average, using both adjusted and unadjusted data. If an ETF has paid a dividend or split within the past 10 months, then when comparing the adjusted/unadjusted data you will see differences in the percent an ETF is above/below the 10-month SMA. This could also potentially impact whether an ETF is above or below its 10-month SMA. Regardless of whether you prefer the adjusted or unadjusted data, it is important to remain consistent in your approach. My preference is to use adjusted data when evaluating signals. The current signals based on August 31st’s adjusted closing prices are below. It will probably come as no surprise that this month all ETFs; the Vanguard Total Bond Market ETF (NYSEARCA: BND ), the SPDR Dow Jones International Real Estate ETF (NYSEARCA: RWX ), the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ), the iShares S&P GSCI Commodity-Indexed Trust ETF (NYSEARCA: GSG ), the Vanguard REIT Index ETF (NYSEARCA: VNQ ), Vanguard Total Stock Market ETF (NYSEARCA: VTI ), Vanguard Small Cap ETF (NYSEARCA: VB ), Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ), and the iShares TIPS Bond ETF (NYSEARCA: TIP ), are below their 10-month moving average. Last month 7 of the 10 were below their respective moving average. The spreadsheet also provides quarterly, half year, and yearly return data courtesy of Finviz. The return data is useful for those interested in overlaying a momentum strategy with the 10-month SMA strategy: (click to enlarge) (click to enlarge) I also provide a “Commission-Free” Ivy Portfolio spreadsheet as an added bonus. This document tracks the 10-month moving averages for four different portfolios designed for TD Ameritrade, Fidelity, Charles Schwab, and Vanguard commission-free ETF offers. Not all ETFs in each portfolio are commission free, as each broker limits the selection of commission-free ETFs and viable ETFs may not exist in each asset class. Other restrictions and limitations may apply depending on each broker. Below are the 10-month moving average signals (using adjusted price data) for the commission-free portfolios: (click to enlarge) (click to enlarge) Disclosures: None.

Vanguard Diversified Portfolios: How To Use Vanguard’s Best Diversified ETFs

Originally published on Jan. 26, 2015 Vanguard Diversification With 4 Easy-to-Copy Portfolios Vanguard ETFs and Index Funds are the optimum vehicles for creating a globally balanced portfolio. With just a few holdings, you can have exposure to thousands of stocks and bonds from around the world. One of the primary ways to create good diversified portfolios is to use vehicles that track an index. Vanguard started the first index fund and their ability to track an index is legendary. Another advantage of tracking an index is the lower cost of not having to pay for an expensive manager who often falls behind an index even without the higher cost. Vanguard is the low cost leader and it keeps getting cheaper. The amount of money invested in Vanguard Funds is growing rapidly. The more money a fund has, the more efficient its cost structure, and because Vanguard is run like a credit union they keep passing along their savings. This creates a fee-lowering circle. A lower fee attracts more money to the funds, which then keeps the fees dropping. I have researched the Vanguard ETFs list and will present Vanguard’s best diversified ETFs for a two, three, four or five position Vanguard ETF globally balanced portfolio. Examples: Vanguard Diversified Portfolios Using the Best Diversified ETFs I will present a portfolio for each mixture that is made using the Efficient Frontier and the Black-Litterman model. I will target each portfolio at approximately 60% of the risk of the S&P 500 Index (0.60 Beta). I call this type of portfolio my Growth with Income portfolio. See “How to Make an Investment Portfolio: 6 Steps to Better Investing” for a full understanding of how to make the best index portfolio. Best Vanguard Diversified Portfolio with Two ETFs – Using Vanguard’s Best Diversified ETFs Vanguard Total World Stock Index ETF (NYSEARCA: VT ) or (MUTF: VTWSX ) – This Vanguard Total World Stock review starts with the very low expense ratio. With an expense ratio of 0.18%, this fund tracks the FTSE Global All Cap Index, a market-cap weighted index of global stocks covering 98% of the developed and emerging market capitalization with approximately 7,240 large-, mid-, small-, and micro-cap stocks located in 50 countries. This fund employs a sampling method and currently owns 5,351 of the stocks from this index. However, this Vanguard world stock ETF does not hold exposure to frontier markets. Vanguard Total Bond Market ETF (NYSEARCA: BND ) or (MUTF: VBTLX ) – This fund is at the top of the Vanguard bond ETF list, providing superior inexpensive U.S. bond coverage. With an expense ratio of 0.08%, BND tracks the Barclays U.S. Aggregate Float Adjusted Index. It covers a wide range of public, investment-grade, taxable bonds in the United States-including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities- all with maturities of more than one year. The ETF invests by sampling the Index and currently holds 6,166 bonds. BND does not provide exposure to ultra-short, high yield or TIPS bonds. (click to enlarge) Pros If we had to vote for one ETF on our Vanguard Best ETF Index Fund List, this Vanguard World ETF would be it. This extremely efficient, low cost, Vanguard all-in-one fund, world ETF covers 98% of the developed and emerging markets capitalization. Many other portfolios have considerable turnover, and trading as stocks migrate from one asset class to another. For example, a stock in your portfolio may move from your mid-cap ETF to your large-cap ETF simply because the market cap changed. You still own the company, but internal trading costs were increased with possible tax consequences when the stock moved. A global total market ETF, such as VT ETF, greatly reduces the stock migration costs because the stocks do not need to change ETFs. BND offers the same great broad coverage of U.S. bonds. With just two holdings, which you can purchase for free in a Vanguard Brokerage account, you will own 5,351 stocks and 6,166 bonds with a blended expense ratio of only 0.13%. Cons The first downside to this two-part portfolio is the lack of flexibility. The best index portfolio would have more ability to control the overall risk of your portfolio. You have no way to control the amount or types of the stocks or bonds in your portfolio. For example, you cannot add more small cap stocks or long-term bonds if you think these are needed. The main disadvantage of this portfolio is the lack of international bonds, which make up roughly 35% of the world’s capitalization of stocks and bonds. Generally, money moves unpredictably from asset class to asset class. If you have a big hole in your portfolio you will have periods of under performance. Best Vanguard Diversified Portfolio with Three ETFs – Using Vanguard’s Best Diversified ETFs Vanguard Total World Stock Index ETF ( VT ) or ( VTWSX ) – See details in previous portfolio. Vanguard Total Bond Market ETF ( BND ) or ( VBTLX ) – See details in previous portfolio. Vanguard Total International Bond ETF (NASDAQ: BNDX ) or (MUTF: VTABX ) – With an expense ratio of 0.20%, this fund tracks the investment-grade Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The Index includes government, government agency, corporate, and securitized non-U.S. investment-grade fixed income investments, all issued in currencies other than the U.S. dollar and with maturities of more than one year. To minimize the currency risk, the ETF will attempt to hedge its currency exposures. The ETF currently holds 2,246 bonds. BNDX does not include ultra-short, high-yield or TIPs international bonds. (click to enlarge) Pros Incredibly, with just three very efficient, low-cost ETFs you can hold 5,351 stocks and 8,412 bonds. Stock and bond migration costs are low to non-existent in this mixture of ETFs. You now have nearly full exposure to U.S. stocks and bonds as well as international stocks and bonds. The weighted average cost of this vastly diversified portfolio is only 0.18%, which is significantly cheaper than the average Mutual Fund at 1.27%, the average Index Fund at 0.74% and the average ETF at 0.61%. Cons These are market-cap weighted indexes, which means that mid and small cap U.S. stocks and emerging markets will not have as much impact on the portfolio as the large cap stocks. The ability to really fine-tune risk is limited with only three ETFs. In 2003, I implemented this portfolio with my 600 asset management clients. The portfolio did fantastic. The clients hated it. I had so many clients leaving that I had to abandon the concept after only one year. When they got a statement for the accounts that held their life savings and all they saw were three holdings from the same company, they got extremely nervous. We actually printed out, in book form, an entire list of all of the holdings to demonstrate the extreme diversification. We were confident that these clients had never been more diversified at any point in their lives, but they still left in droves. For some investors, three is just not enough. Best Vanguard Diversified Portfolio with Four ETFs – Using Vanguard’s Best Diversified ETFs Vanguard Total Stock Market ETF (NYSEARCA: VTI ) or (MUTF: VTSAX ) – With an extremely low expense ratio of only 0.05%, this ETF tracks the CRSP US Total market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks. This ETF invests by sampling the Index, and currently holds 3,657 stocks. See “Sample Vanguard ETF Portfolio: 4 Ways to Cover U.S. Stocks” for additional methods of covering the U.S. stock market. Vanguard Total International Stock ETF (NASDAQ: VXUS ) or (MUTF: VTIAX ) – I consider this fund the overall best international stock ETF. With an expense ratio of just 0.14%, this Vanguard International ETF tracks the market-cap weighted FTSE Global All Cap ex US Index, which covers 99% of the world’s global market capitalization outside the US. This Vanguard International Stock Index holds 5,512 large-, mid-, small- and micro-cap stocks from 46 developed and emerging markets. This ETF does not cover the frontier markets. Vanguard Total Bond Market ETF ( BND ) or ( VBTLX ) – See details in previous portfolio. Vanguard Total International Bond ETF ( BNDX ) or ( VTABX ) – See details in previous portfolio. (click to enlarge) Pros With just four low-cost ETFs you can hold 9,169 stocks and 8,214 bonds. Stock and bond migration costs are low to non-existent, and this mixture has a fairly good ability to add or subtract risk. The number of stocks is greatly increased versus the three part portfolio, and the split of U.S. and International stocks provides some opportunity to make money from rebalancing. The blended average expense ratio is a very low 0.10%. Cons Although the diversification is extreme, some investors may still shy away from investing considerable money in just four holdings. Adding ETFs for ultra-short, high yield or TIPS bonds or frontier market stocks, which is not covered in this portfolio, may make these investors more comfortable. Best Vanguard Diversified Portfolio with Five ETFs – Using Vanguard’s Best Diversified ETFs Vanguard S&P 500 ETF (NYSEARCA: VOO ) or (MUTF: VFIAX ) – With an expense ratio of 0.05%, this ETF tracks the wildly popular market-cap weighted S&P 500 Index. The ETF fully replicates the Index and is dominated by the stocks of large U.S. companies. Vanguard Extended Markets ETF (NYSEARCA: VXF ) or (MUTF: VEXAX ) – With an expense ratio of 0.10%, this ETF tracks the market-cap weighted S&P’s Completion Index. This index contains all of the U.S. common stocks regularly traded on the New York Stock Exchange and the Nasdaq over-the-counter market, except those stocks included in the S&P 500 Index. The ETF uses a sampling method to replicate the index and currently holds 3,078 stocks. Vanguard Total International Stock ETF ( VXUS ) or ( VTIAX ) – See details in previous portfolio. Vanguard Total Bond Market ETF ( BND ) or ( VBTLX ) – See details in previous portfolio. Vanguard Total International Bond ETF ( BNDX ) or ( VTABX ) – See details in previous portfolio. (click to enlarge) Pros Using this mixture of ETFs allows you to fine-tune your risk level by controlling your exposure to mid and small cap U.S. stocks, while including coverage of international stocks and bonds. These five ETFs give you exposure to 9,090 stocks and 8,214 bonds. This portfolio has a low blended expense ratio of 0.10%. I found that this was a very popular portfolio. Investors liked at least five holdings, and although the S&P 500 is included in the all of the previous portfolios, there was more comfort in seeing it directly in the portfolio. Having more parts in the portfolio increases the possibility of rebalancing gains, especially if you do not have to pay capital gains taxes by using a tax-deferred account such as an IRA. The commissions are free, which can be accomplished in a Vanguard Brokerage account. Cons Stock migration costs will be higher when you divide the market into small pieces. Disclosure: Author has holdings in BIV, BLV, BND, BNDX, BSV, IJS, IXP, JKL, RYU, RZV, SCV, VBK, VIG, VOO, VPU, VTI, VWO, VXF, VXUS, XLU.