Tried to buy VWIUX in tIRA at Fidelity online and got denied

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buyMyBogle
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Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by buyMyBogle »

I just tried to buy VWIUX in a tIRA at Fidelity online and got denied with this message:

Error:(010386) The security you are attempting to trade is a tax-free mutual fund. Retirement accounts are prevented from buying or exchanging into tax-free mutual funds through the electronic channels. For more information, contact a Fidelity representative...

I'm assuming I can still buy if I talk to a person?

Why would that be so?
fabdog
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by fabdog »

Why would you want to buy a tax free bond fund in an IRA? It's already tax protected.

They likely have this in so people don't come back later and ask "why did you let me buy a tax free fund in a tax free account?"

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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by retired@50 »

buyMyBogle wrote: Thu Jul 29, 2021 9:18 am I just tried to buy VWIUX in a tIRA at Fidelity online and got denied with this message:

Error:(010386) The security you are attempting to trade is a tax-free mutual fund. Retirement accounts are prevented from buying or exchanging into tax-free mutual funds through the electronic channels. For more information, contact a Fidelity representative...

I'm assuming I can still buy if I talk to a person?

Why would that be so?
You're trying to buy a municipal bond fund inside a retirement account. That doesn't make sense. The income from the fund won't be tax-free because when you withdraw the money, it will be taxed as ordinary income.

Consider VBILX the Vanguard Intermediate Term Bond Index Fund instead.
https://investor.vanguard.com/mutual-fu ... file/VBILX

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retiredjg
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by retiredjg »

They are trying to prevent you from picking an investment that is probably inappropriate for an IRA account.

Ordinarily, there is no reason to put a tax-exempt bond fund in an IRA. Tax-exempt bond funds are designed for high earners to use in a taxable account (not an IRA).

If you have a reason you want to hold that fund in an IRA, I suspect you can do it by the phone call.

Secondly, I do not suggest buying a Vanguard mutual fund at Fidelity. There is a significant transaction fee each time you do that ($50 or $75?). Fidelity has some good bond mutual funds. Or I think you can buy Vanguard ETFs without the transaction fee.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

retired@50 wrote: Thu Jul 29, 2021 9:23 am
buyMyBogle wrote: Thu Jul 29, 2021 9:18 am I just tried to buy VWIUX in a tIRA at Fidelity online and got denied with this message:

Error:(010386) The security you are attempting to trade is a tax-free mutual fund. Retirement accounts are prevented from buying or exchanging into tax-free mutual funds through the electronic channels. For more information, contact a Fidelity representative...

I'm assuming I can still buy if I talk to a person?

Why would that be so?
You're trying to buy a municipal bond fund inside a retirement account. That doesn't make sense. The income from the fund won't be tax-free because when you withdraw the money, it will be taxed as ordinary income.

Consider VBILX the Vanguard Intermediate Term Bond Index Fund instead.
https://investor.vanguard.com/mutual-fu ... file/VBILX

Regards,
I agree that historically munis didn't fit in tax advantage accounts. I think that came from the days when munis paid out less than total bond type funds.

But, what if the muni fund was paying out more than VBILX?
VWIUX, the muni has been paying out more than VBILX....not by much.
I also speculate that VWIUX's holdings are safer than VBILX. VBILX has more BBB bonds than VWIUX.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by grabiner »

hudson wrote: Thu Jul 29, 2021 7:14 pm I agree that historically munis didn't fit in tax advantage accounts. I think that came from the days when munis paid out less than total bond type funds.

But, what if the muni fund was paying out more than VBILX?
VWIUX, the muni has been paying out more than VBILX....not by much.
I also speculate that VWIUX's holdings are safer than VBILX. VBILX has more BBB bonds than VWIUX.
Distributions are not returns. If a bond's price rises after it was bought, the bond continues to pay the same distributions, but your total return will be less than the distributions over time because the bond price will decline back towards par. If a fund sells this bond (for a capital gain) and buys a new bond, the fund's distributions will decline because the new bond has a lower coupon, even though the new bond should be just as good an investment.

The muni fund does have better recent returns, because it happens that Treasury yields rose in the last year, while muni and corporate yields fell slightly. However, there is no particular reason to expect that to continue in the future.

The way to compare future expected returns is the SEC yield. Currently, Intermediate-Term Bond Index has a 1.40% yield, and Intermediate-Term Tax-Exempt has a 0.60% yield (0.68% on Admiral shares). This is more than the normal ratio between funds of comparable risk, because Intermediate-Term Tax-Exempt is a bit riskier, with a longer duration.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

grabiner wrote: Thu Jul 29, 2021 9:25 pm
hudson wrote: Thu Jul 29, 2021 7:14 pm I agree that historically munis didn't fit in tax advantage accounts. I think that came from the days when munis paid out less than total bond type funds.

But, what if the muni fund was paying out more than VBILX?
VWIUX, the muni has been paying out more than VBILX....not by much.
I also speculate that VWIUX's holdings are safer than VBILX. VBILX has more BBB bonds than VWIUX.
Distributions are not returns. If a bond's price rises after it was bought, the bond continues to pay the same distributions, but your total return will be less than the distributions over time because the bond price will decline back towards par. If a fund sells this bond (for a capital gain) and buys a new bond, the fund's distributions will decline because the new bond has a lower coupon, even though the new bond should be just as good an investment.

The muni fund does have better recent returns, because it happens that Treasury yields rose in the last year, while muni and corporate yields fell slightly. However, there is no particular reason to expect that to continue in the future.

The way to compare future expected returns is the SEC yield. Currently, Intermediate-Term Bond Index has a 1.40% yield, and Intermediate-Term Tax-Exempt has a 0.60% yield (0.68% on Admiral shares). This is more than the normal ratio between funds of comparable risk, because Intermediate-Term Tax-Exempt is a bit riskier, with a longer duration.
Thanks Grabiner! Useful information!
I think that if you plan to hold a fund for the duration of the fund, that the SEC Yield is king. If one is a buy and hold investor, SEC Yield is the number.
I look at funds like VBILX and VWIUX over a one or two year period in the future and use a fund's distribution yield table to try and predict the payout. Since I can't predict changes in the fund's price, I look at a fund like a CD and think, "What is this fund going to pay me over the next year or two?" If I'm lucky and the NAV rises and I can't find a better deal on the payout, I'll stay. If I find a better deal, I'll move.

Bottom Line: I like to watch the payout and the NAV; I'm always looking for a better deal.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by grabiner »

hudson wrote: Fri Jul 30, 2021 5:24 am I think that if you plan to hold a fund for the duration of the fund, that the SEC Yield is king. If one is a buy and hold investor, SEC Yield is the number.
I look at funds like VBILX and VWIUX over a one or two year period in the future and use a fund's distribution yield table to try and predict the payout. Since I can't predict changes in the fund's price, I look at a fund like a CD and think, "What is this fund going to pay me over the next year or two?"
While it is possible for a muni fund to outperform a taxable bond fund with a higher SEC yield, this will only happen if taxable bond yields rise more than muni yields over your holding period. Bond traders do not expect this to happen, given the current yields of bonds of different types and durations.

See SEC Yield on the wiki to understand why the SEC yield is a better predictor of total return than the distribution yield. It is not a perfect predictor because rates change, but it is a relatively unbiased predictor because rates are equally likely to rise or fall relative to current expectations. (The article also gives some exceptions.)

In the example in that article, Bond A and Bond B have the same SEC yield and the same maturity, but Bond B has higher distributions. Regardless of what happens to interest rates, the two bonds will have about the same total return. If rates don't change, Bond A will keep the same value and Bond B will lose value to get equal returns. If rates rise, both bonds will lose value but Bond A will lose less. If rates fall, both bonds will gain value but Bond A will gain more.

Now, return isn't the only goal of investing; you should also be concerned about risk. Intermediate-Term Bond Index has slightly more risk than Intermediate-Term Tax-Exempt, as it has a longer duration and about the same quality (more BBB's, but also a lot of risk-free Treasuries). Therefore, in a taxable account in a high tax bracket, you might prefer Intermediate-Term Tax-Exempt even if its yield is slightly lower than the after-tax yield of Intermediate-Term Bond Index. Alternatively, you might prefer to take a bit more risk and hold Long-Term Tax-Exempt, which has a higher after-tax yield on Admiral shares in most tax brackets.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by Oregano »

hudson wrote: Fri Jul 30, 2021 5:24 am
grabiner wrote: Thu Jul 29, 2021 9:25 pm
hudson wrote: Thu Jul 29, 2021 7:14 pm I agree that historically munis didn't fit in tax advantage accounts. I think that came from the days when munis paid out less than total bond type funds.

But, what if the muni fund was paying out more than VBILX?
VWIUX, the muni has been paying out more than VBILX....not by much.
I also speculate that VWIUX's holdings are safer than VBILX. VBILX has more BBB bonds than VWIUX.
Distributions are not returns. If a bond's price rises after it was bought, the bond continues to pay the same distributions, but your total return will be less than the distributions over time because the bond price will decline back towards par. If a fund sells this bond (for a capital gain) and buys a new bond, the fund's distributions will decline because the new bond has a lower coupon, even though the new bond should be just as good an investment.

The muni fund does have better recent returns, because it happens that Treasury yields rose in the last year, while muni and corporate yields fell slightly. However, there is no particular reason to expect that to continue in the future.

The way to compare future expected returns is the SEC yield. Currently, Intermediate-Term Bond Index has a 1.40% yield, and Intermediate-Term Tax-Exempt has a 0.60% yield (0.68% on Admiral shares). This is more than the normal ratio between funds of comparable risk, because Intermediate-Term Tax-Exempt is a bit riskier, with a longer duration.
Thanks Grabiner! Useful information!
I think that if you plan to hold a fund for the duration of the fund, that the SEC Yield is king. If one is a buy and hold investor, SEC Yield is the number.
I look at funds like VBILX and VWIUX over a one or two year period in the future and use a fund's distribution yield table to try and predict the payout. Since I can't predict changes in the fund's price, I look at a fund like a CD and think, "What is this fund going to pay me over the next year or two?" If I'm lucky and the NAV rises and I can't find a better deal on the payout, I'll stay. If I find a better deal, I'll move.

Bottom Line: I like to watch the payout and the NAV; I'm always looking for a better deal.
As others have mentioned, looking at the payout is the wrong way to do it, so I recommend you not do that. But if you want to do it anyway, you should have no problem buying a muni bond ETF in an IRA.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by arcticpineapplecorp. »

since you're trying to buy a tax free investment in a tax free account I thought it would be worth mentioning:

don't buy a tax deferred annuity in a tax deferred account. (happens all the time to older/uninitiated people)
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

grabiner wrote: Fri Jul 30, 2021 7:45 am
hudson wrote: Fri Jul 30, 2021 5:24 am I think that if you plan to hold a fund for the duration of the fund, that the SEC Yield is king. If one is a buy and hold investor, SEC Yield is the number.
I look at funds like VBILX and VWIUX over a one or two year period in the future and use a fund's distribution yield table to try and predict the payout. Since I can't predict changes in the fund's price, I look at a fund like a CD and think, "What is this fund going to pay me over the next year or two?"
While it is possible for a muni fund to outperform a taxable bond fund with a higher SEC yield, this will only happen if taxable bond yields rise more than muni yields over your holding period. Bond traders do not expect this to happen, given the current yields of bonds of different types and durations.

See SEC Yield on the wiki to understand why the SEC yield is a better predictor of total return than the distribution yield. It is not a perfect predictor because rates change, but it is a relatively unbiased predictor because rates are equally likely to rise or fall relative to current expectations. (The article also gives some exceptions.)

In the example in that article, Bond A and Bond B have the same SEC yield and the same maturity, but Bond B has higher distributions. Regardless of what happens to interest rates, the two bonds will have about the same total return. If rates don't change, Bond A will keep the same value and Bond B will lose value to get equal returns. If rates rise, both bonds will lose value but Bond A will lose less. If rates fall, both bonds will gain value but Bond A will gain more.

Now, return isn't the only goal of investing; you should also be concerned about risk. Intermediate-Term Bond Index has slightly more risk than Intermediate-Term Tax-Exempt, as it has a longer duration and about the same quality (more BBB's, but also a lot of risk-free Treasuries). Therefore, in a taxable account in a high tax bracket, you might prefer Intermediate-Term Tax-Exempt even if its yield is slightly lower than the after-tax yield of Intermediate-Term Bond Index. Alternatively, you might prefer to take a bit more risk and hold Long-Term Tax-Exempt, which has a higher after-tax yield on Admiral shares in most tax brackets.
Thanks again David! Your advice is excellent! In my taxable account, I'm looking to go from intermediate or VWIUX to the slightly longer VWLUX. I'm not going anywhere now because I don't want to pay capital gains.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by bondsr4me »

if you want bonds in an tIRA account, buy taxable bonds.
most likely the yields will be higher than the tax-free bonds.
they will all be taxable when you make your RMD, so get the higher yield.
just don't go after hi-yield (hi-risk) bonds.

save the tax-free bonds for your taxable brokerage account.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

Oregano wrote: Fri Jul 30, 2021 11:04 am
hudson wrote: Fri Jul 30, 2021 5:24 am
grabiner wrote: Thu Jul 29, 2021 9:25 pm
hudson wrote: Thu Jul 29, 2021 7:14 pm I agree that historically munis didn't fit in tax advantage accounts. I think that came from the days when munis paid out less than total bond type funds.

But, what if the muni fund was paying out more than VBILX?
VWIUX, the muni has been paying out more than VBILX....not by much.
I also speculate that VWIUX's holdings are safer than VBILX. VBILX has more BBB bonds than VWIUX.
Distributions are not returns. If a bond's price rises after it was bought, the bond continues to pay the same distributions, but your total return will be less than the distributions over time because the bond price will decline back towards par. If a fund sells this bond (for a capital gain) and buys a new bond, the fund's distributions will decline because the new bond has a lower coupon, even though the new bond should be just as good an investment.

The muni fund does have better recent returns, because it happens that Treasury yields rose in the last year, while muni and corporate yields fell slightly. However, there is no particular reason to expect that to continue in the future.

The way to compare future expected returns is the SEC yield. Currently, Intermediate-Term Bond Index has a 1.40% yield, and Intermediate-Term Tax-Exempt has a 0.60% yield (0.68% on Admiral shares). This is more than the normal ratio between funds of comparable risk, because Intermediate-Term Tax-Exempt is a bit riskier, with a longer duration.
Thanks Grabiner! Useful information!
I think that if you plan to hold a fund for the duration of the fund, that the SEC Yield is king. If one is a buy and hold investor, SEC Yield is the number.
I look at funds like VBILX and VWIUX over a one or two year period in the future and use a fund's distribution yield table to try and predict the payout. Since I can't predict changes in the fund's price, I look at a fund like a CD and think, "What is this fund going to pay me over the next year or two?" If I'm lucky and the NAV rises and I can't find a better deal on the payout, I'll stay. If I find a better deal, I'll move.

Bottom Line: I like to watch the payout and the NAV; I'm always looking for a better deal.
As others have mentioned, looking at the payout is the wrong way to do it, so I recommend you not do that. But if you want to do it anyway, you should have no problem buying a muni bond ETF in an IRA.
You are probably right that looking at payout is wrong in general. I would say that that is a good rule of thumb.

I look very hard at the quality of holdings, the expense ratio, and the duration. I use the SEC Yield to compare funds.
If I check off all of the above, I estimate the payout from the fund's distribution yield table. I would speculate that an educated buyer knows exactly what the payout is and considers it.

We can't predict interest rates; we can't predict changes in the fund's price. I speculate that I can loosely predict the payout over the next year or two. If the NAV drops far enough, I'll tax loss harvest and reboot. If the NAV stays at or above my purchase price, I'll stay unless, I can find a better deal.

VBILX, the intermediate taxable fund and VWIUX the intermediate muni are both great funds. The OP would be OK with either. I don't see how VWIUX would be that bad even in a tax advantaged account.

What would I do if I was the OP? I would duration match with TIPS.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by Leesbro63 »

Regardless of the problem of putting tax-free muni funds in an IRA, I think the reason why the OP couldn't do what he wanted to do was this: This is an Admiral Shares fund that can’t be bought through Fidelity.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by Oregano »

hudson wrote: Fri Jul 30, 2021 12:13 pm
Oregano wrote: Fri Jul 30, 2021 11:04 am As others have mentioned, looking at the payout is the wrong way to do it, so I recommend you not do that. But if you want to do it anyway, you should have no problem buying a muni bond ETF in an IRA.
You are probably right that looking at payout is wrong in general. I would say that that is a good rule of thumb.
No, it is not "in general". It is very specifically wrong to look at payout rate instead of SEC yield.

Simple example. A bond with a 5% coupon has one year to maturity. It is trading at 104, so the payout rate is 4.81% (5/104) but the expected return is only 0.96% (1/104). The payout rate is completely useless as a guide to future returns. Stop using it.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

Oregano wrote: Fri Jul 30, 2021 2:04 pm
hudson wrote: Fri Jul 30, 2021 12:13 pm
Oregano wrote: Fri Jul 30, 2021 11:04 am As others have mentioned, looking at the payout is the wrong way to do it, so I recommend you not do that. But if you want to do it anyway, you should have no problem buying a muni bond ETF in an IRA.
You are probably right that looking at payout is wrong in general. I would say that that is a good rule of thumb.
No, it is not "in general". It is very specifically wrong to look at payout rate instead of SEC yield.

Simple example. A bond with a 5% coupon has one year to maturity. It is trading at 104, so the payout rate is 4.81% (5/104) but the expected return is only 0.96% (1/104). The payout rate is completely useless as a guide to future returns. Stop using it.
Oregano,
I agree with what you are saying about the workings of an individual bond but VWIUX, as you know is a fund of many bonds. I've found that the internal working of bonds is only one factor in the overall price of the fund. Since at least October, 2018, that internal working of bonds hasn't visibly changed the NAV.

The SEC Yield of VWIUX is .68%. Does that mean that VWIUX will pay out .68% over the next 12 months? I speculate that VWIUX will payout at least 1.5% or more from now until August 1, 2022. (As you know, I'm getting that from VWIUX's distribution table.) Of course, a drop in the NAV will impact my total return. I think that it's easier to predict the payout over the next 12 months than to predict changes in the NAV.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by Leesbro63 »

I'm not sure if anyone noted by comment, above. That the problem isn't wrong investments, which continues to be discussed. It's that Fidelity doesn't sell Vanguard Admiral Funds.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by Oregano »

hudson wrote: Fri Jul 30, 2021 3:33 pm
Oregano wrote: Fri Jul 30, 2021 2:04 pm
hudson wrote: Fri Jul 30, 2021 12:13 pm
Oregano wrote: Fri Jul 30, 2021 11:04 am As others have mentioned, looking at the payout is the wrong way to do it, so I recommend you not do that. But if you want to do it anyway, you should have no problem buying a muni bond ETF in an IRA.
You are probably right that looking at payout is wrong in general. I would say that that is a good rule of thumb.
No, it is not "in general". It is very specifically wrong to look at payout rate instead of SEC yield.

Simple example. A bond with a 5% coupon has one year to maturity. It is trading at 104, so the payout rate is 4.81% (5/104) but the expected return is only 0.96% (1/104). The payout rate is completely useless as a guide to future returns. Stop using it.
Oregano,
I agree with what you are saying about the workings of an individual bond but VWIUX, as you know is a fund of many bonds. I've found that the internal working of bonds is only one factor in the overall price of the fund. Since at least October, 2018, that internal working of bonds hasn't visibly changed the NAV.

The SEC Yield of VWIUX is .68%. Does that mean that VWIUX will pay out .68% over the next 12 months? I speculate that VWIUX will payout at least 1.5% or more from now until August 1, 2022. (As you know, I'm getting that from VWIUX's distribution table.) Of course, a drop in the NAV will impact my total return. I think that it's easier to predict the payout over the next 12 months than to predict changes in the NAV.
The logic of the individual bond applies to a mutual fund, which is just a group of individual bonds. No, I can't predict the NAV, but that's not the point. The point is that payout doesn't matter, total return does. Your best guess at total return is the SEC yield. I recommend you find some good resources about bond basics and read up.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by placeholder »

Leesbro63 wrote: Fri Jul 30, 2021 4:33 pm I'm not sure if anyone noted by comment, above. That the problem isn't wrong investments, which continues to be discussed. It's that Fidelity doesn't sell Vanguard Admiral Funds.
I thought admiral shares were pretty available these days.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by grabiner »

hudson wrote: Fri Jul 30, 2021 12:13 pm I look very hard at the quality of holdings, the expense ratio, and the duration. I use the SEC Yield to compare funds.
If I check off all of the above, I estimate the payout from the fund's distribution yield table. I would speculate that an educated buyer knows exactly what the payout is and considers it.
Yes, but the educated buyer considers the payout only as part of the calculation of value. The following example is based on the wiki, but rescaling the price of Bond B so that the bonds have the same value.

Bond A is currently worth $1000, and pays $10.00 every six months.
Bond B is currently worth $1000, pays $13.75 every six months, and is guaranteed to be worth $X less than Bond A six months from now.

For which value of X would you prefer Bond B?

Bond traders will answer $3.75, as they will have the same value (combined bond price and payout) in six months with either bond. (And the tax laws agree with this; the holder of Bond B will report only $10.00 as a dividend, and reduce the basis by $3.75, so that if rates don't change, both Bond A and Bond B can be sold for no capital gain or loss.)
We can't predict interest rates; we can't predict changes in the fund's price.
This confuses not knowing everything with knowing nothing. I don't know what Bond A or Bond B will be worth in six months, but I do know that Bond B is more likely to decline in value.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by sycamore »

placeholder wrote: Fri Jul 30, 2021 6:46 pm
Leesbro63 wrote: Fri Jul 30, 2021 4:33 pm I'm not sure if anyone noted by comment, above. That the problem isn't wrong investments, which continues to be discussed. It's that Fidelity doesn't sell Vanguard Admiral Funds.
I thought admiral shares were pretty available these days.
I think Admiral shares for index funds are available because Vanguard deprecated the Investor shares for them. Admiral shares for active funds like VWIUX seem to be less available.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by placeholder »

sycamore wrote: Fri Jul 30, 2021 7:30 pm I think Admiral shares for index funds are available because Vanguard deprecated the Investor shares for them. Admiral shares for active funds like VWIUX seem to be less available.
Looks like it as I didn't find that one on their list of vanguard funds.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by exigent »

Leesbro63 wrote: Fri Jul 30, 2021 4:33 pm I'm not sure if anyone noted by comment, above. That the problem isn't wrong investments, which continues to be discussed. It's that Fidelity doesn't sell Vanguard Admiral Funds.
Not sure about buying them, but you can most definitely hold them at Fidelity. Source: Have transferred shares of this exact fund to Fidelity.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by TropikThunder »

Leesbro63 wrote: Fri Jul 30, 2021 4:33 pm I'm not sure if anyone noted by comment, above. That the problem isn't wrong investments, which continues to be discussed. It's that Fidelity doesn't sell Vanguard Admiral Funds.
In this case, it has nothing to do with VWIUX being an Admiral fund.
Error:(010386) The security you are attempting to trade is a tax-free mutual fund. Retirement accounts are prevented from buying or exchanging into tax-free mutual funds through the electronic channels. For more information, contact a Fidelity representative...
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

grabiner wrote: Fri Jul 30, 2021 7:12 pm
hudson wrote: Fri Jul 30, 2021 12:13 pm I look very hard at the quality of holdings, the expense ratio, and the duration. I use the SEC Yield to compare funds.
If I check off all of the above, I estimate the payout from the fund's distribution yield table. I would speculate that an educated buyer knows exactly what the payout is and considers it.
Yes, but the educated buyer considers the payout only as part of the calculation of value. The following example is based on the wiki, but rescaling the price of Bond B so that the bonds have the same value.

Bond A is currently worth $1000, and pays $10.00 every six months.
Bond B is currently worth $1000, pays $13.75 every six months, and is guaranteed to be worth $X less than Bond A six months from now.

For which value of X would you prefer Bond B?

Bond traders will answer $3.75, as they will have the same value (combined bond price and payout) in six months with either bond. (And the tax laws agree with this; the holder of Bond B will report only $10.00 as a dividend, and reduce the basis by $3.75, so that if rates don't change, both Bond A and Bond B can be sold for no capital gain or loss.)
We can't predict interest rates; we can't predict changes in the fund's price.
This confuses not knowing everything with knowing nothing. I don't know what Bond A or Bond B will be worth in six months, but I do know that Bond B is more likely to decline in value.
Grabiner,
Many thanks!
Your examples are on individual bonds. As you know, mutual funds like VWIUX have other factors that are currently stronger than the internal workings of bonds that you describe.
Your points are correct theory for the long haul. I'm talking about the short haul...say one year or two.
For example VWIUX's SEC is .67%; the payout on July 1 was 2.18% (annualized).
I'll be paying state taxes on VWIUX's payout at about 2% for 2021. That's real, current, and actual.
The NAV of VWIUX has gone from 13.67 in 2018 to around 14.90 now. I didn't know that the NAV would rise like that when I bought, but I knew the payout was good.

Bottom Line: I'm basically a CD/treasury type investor; I own a little VWIUX. VWIUX has more risk, but it's paid out more than CDs in 2018 and in 2021. If VWIUX was paying out the SEC projected .67%, I'd bail and move to high yield savings.
Last edited by hudson on Sun Aug 01, 2021 10:53 am, edited 1 time in total.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

Oregano wrote: Fri Jul 30, 2021 4:43 pm
hudson wrote: Fri Jul 30, 2021 3:33 pm
Oregano wrote: Fri Jul 30, 2021 2:04 pm
hudson wrote: Fri Jul 30, 2021 12:13 pm
Oregano wrote: Fri Jul 30, 2021 11:04 am As others have mentioned, looking at the payout is the wrong way to do it, so I recommend you not do that. But if you want to do it anyway, you should have no problem buying a muni bond ETF in an IRA.
You are probably right that looking at payout is wrong in general. I would say that that is a good rule of thumb.
No, it is not "in general". It is very specifically wrong to look at payout rate instead of SEC yield.

Simple example. A bond with a 5% coupon has one year to maturity. It is trading at 104, so the payout rate is 4.81% (5/104) but the expected return is only 0.96% (1/104). The payout rate is completely useless as a guide to future returns. Stop using it.
Oregano,
I agree with what you are saying about the workings of an individual bond but VWIUX, as you know is a fund of many bonds. I've found that the internal working of bonds is only one factor in the overall price of the fund. Since at least October, 2018, that internal working of bonds hasn't visibly changed the NAV.

The SEC Yield of VWIUX is .68%. Does that mean that VWIUX will pay out .68% over the next 12 months? I speculate that VWIUX will payout at least 1.5% or more from now until August 1, 2022. (As you know, I'm getting that from VWIUX's distribution table.) Of course, a drop in the NAV will impact my total return. I think that it's easier to predict the payout over the next 12 months than to predict changes in the NAV.
The logic of the individual bond applies to a mutual fund, which is just a group of individual bonds. No, I can't predict the NAV, but that's not the point. The point is that payout doesn't matter, total return does. Your best guess at total return is the SEC yield. I recommend you find some good resources about bond basics and read up.
Oregano,
Thanks for your reply!
Everything that you say is correct. Total return does matter, but we have no control over that. We only have control of what we decide to buy.
My plan was to buy a mutual fund with very high quality holdings like VWIUX. It's the largest muni fund; it's low expense; it's mostly AAA/AA/A; and it's well managed. It's been paying out 2-3% for years.

The Payout: The distribution yield table ten years ago showed good numbers as it does today. Those numbers are declining, but I speculate that the payout is predictable. For me the SEC Yield is something far off in the future. The distribution yield table is today; and I speculate that it can point to the payout over the next 12-24 months.

Bottom Line:
SEC Yield = Long haul
Distribution Yield Table = Short haul
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by grabiner »

hudson wrote: Sun Aug 01, 2021 10:51 am Everything that you say is correct. Total return does matter, but we have no control over that. We only have control of what we decide to buy.
You are still missing the main point. The fact that you do not have control does not mean that you know absolutely nothing.

I cannot control the weather, but I can predict that it is likely the temperature in Washington will be higher one year from today than it is today, because it is unusually cool today for August. My estimate for the August 1, 2022 temperature has a significant error, but the expected value is 89, not today's 81.

Similarly, you cannot control the bond market, but you can get a better estimate of the value of a bond next year than assuming it will be equal to this year's value.

And bond traders know this; you can confirm this with historical quotes. Find out what the 2000 30-year Treasury bond and the 2020 10-year Treasury bond were worth one year ago, and their coupon rates; the 2000 bond has a much higher coupon (distribution yield). Now compare the total return for holding the two bonds for one year, both coupon and price appreciation; they should be almost equal, because the higher-coupon bond loses more of its value if rates rise, and gains less if rates fall.

You can do the same with the year-Y 30-year and the year-Y+20 10-year, in any year between Y+20 and Y+29. (In year Y+29, both bonds have a known one-year return.) If this didn't work out. bond traders could buy the higher-coupon bond, sell short an equal amount of the lower-coupon bond, close both positions in one year, and make a very-low-risk profit.

(There are several reasons that the returns won't be exactly equal. The higher-coupon bond has a slightly shorter duration, while the most recent 10-year bond may have a slight premium because it is on-the-run. But the difference in returns will be much less than the difference in coupons.)
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

grabiner wrote: Sun Aug 01, 2021 1:00 pm
hudson wrote: Sun Aug 01, 2021 10:51 am Everything that you say is correct. Total return does matter, but we have no control over that. We only have control of what we decide to buy.
You are still missing the main point. The fact that you do not have control does not mean that you know absolutely nothing.

I cannot control the weather, but I can predict that it is likely the temperature in Washington will be higher one year from today than it is today, because it is unusually cool today for August. My estimate for the August 1, 2022 temperature has a significant error, but the expected value is 89, not today's 81.

Similarly, you cannot control the bond market, but you can get a better estimate of the value of a bond next year than assuming it will be equal to this year's value.

And bond traders know this; you can confirm this with historical quotes. Find out what the 2000 30-year Treasury bond and the 2020 10-year Treasury bond were worth one year ago, and their coupon rates; the 2000 bond has a much higher coupon (distribution yield). Now compare the total return for holding the two bonds for one year, both coupon and price appreciation; they should be almost equal, because the higher-coupon bond loses more of its value if rates rise, and gains less if rates fall.

You can do the same with the year-Y 30-year and the year-Y+20 10-year, in any year between Y+20 and Y+29. (In year Y+29, both bonds have a known one-year return.) If this didn't work out. bond traders could buy the higher-coupon bond, sell short an equal amount of the lower-coupon bond, close both positions in one year, and make a very-low-risk profit.

(There are several reasons that the returns won't be exactly equal. The higher-coupon bond has a slightly shorter duration, while the most recent 10-year bond may have a slight premium because it is on-the-run. But the difference in returns will be much less than the difference in coupons.)
Thanks David!
I understand what you are saying about individual bonds.
Are you saying that you can predict the NAV of a bond fund like VWIUX?
I speculate that I can predict the payout of VWIUX over the next 12 months.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by grabiner »

hudson wrote: Sun Aug 01, 2021 1:20 pm
grabiner wrote: Sun Aug 01, 2021 1:00 pm You are still missing the main point. The fact that you do not have control does not mean that you know absolutely nothing.

I cannot control the weather, but I can predict that it is likely the temperature in Washington will be higher one year from today than it is today, because it is unusually cool today for August. My estimate for the August 1, 2022 temperature has a significant error, but the expected value is 89, not today's 81.

Similarly, you cannot control the bond market, but you can get a better estimate of the value of a bond next year than assuming it will be equal to this year's value.
Thanks David!
I understand what you are saying about individual bonds.
Are you saying that you can predict the NAV of a bond fund like VWIUX?
I speculate that I can predict the payout of VWIUX over the next 12 months.
I can make a prediction, with some error, but (as in the weather example), it is better than predicting no change. And in this case, the relative error of predictions is very small.

I'll use the example from SEC Yield on the wiki because the math is already worked out. Bond A and Bond B are both ten years from maturity, and both have a $1000 par and 2% SEC yield, but Bond A is currently worth $1000 because its distribution yield is 2% ($10 every six months), while Bond B is currently worth $1090.23 because its distribution yield is 2.75% ($15 every six months).

In ten years, the value of both bonds is perfectly predictable; they will be worth the $1000 par. Over shorter times, predictions have errors, depending on what happens to interest rates. You might predict that the value of Bond A will be $1000 at all future times; this is what would happen if the yield on Bond A remains 2% all the way to maturity. If so, you will predict that the value of Bond B will be $1086.13 in six months, so that its SEC yield remains 2%, and you also get a 1% return over those six months on Bond B.

Now, there might be an error in this prediction because bond yields might rise or fall, or you might adjust the prediction itself because the current bond market predicts that yields will rise or fall. But the error or adjustment affects both bonds almost equally. If the SEC yield on Bond A is 1.9% in six months, its value will be $1008.65, and your total return will be 1.87%. But then the SEC yield on Bond B should also be 1.9% in six months, so its value will be $1095.20, and your total return will be 1.83%. (The 0.04% difference is because Bond B has a slightly shorter duration; it returns 0.04% more if rates rise by 0.1% instead.)

Therefore, except for tax consequences, you should be indifferent between holding Bond A and Bond B; they will have almost the same total return over any holding period.

A fund such as VWIUX with a distribution yield higher than its SEC yield holds lots of bonds like Bond B, so its NAV will decline more than that of a fund with a distribution yield equal to its SEC yield.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

grabiner wrote: Sun Aug 01, 2021 3:45 pm
hudson wrote: Sun Aug 01, 2021 1:20 pm
grabiner wrote: Sun Aug 01, 2021 1:00 pm You are still missing the main point. The fact that you do not have control does not mean that you know absolutely nothing.

I cannot control the weather, but I can predict that it is likely the temperature in Washington will be higher one year from today than it is today, because it is unusually cool today for August. My estimate for the August 1, 2022 temperature has a significant error, but the expected value is 89, not today's 81.

Similarly, you cannot control the bond market, but you can get a better estimate of the value of a bond next year than assuming it will be equal to this year's value.
Thanks David!
I understand what you are saying about individual bonds.
Are you saying that you can predict the NAV of a bond fund like VWIUX?
I speculate that I can predict the payout of VWIUX over the next 12 months.
I can make a prediction, with some error, but (as in the weather example), it is better than predicting no change. And in this case, the relative error of predictions is very small.

I'll use the example from SEC Yield on the wiki because the math is already worked out. Bond A and Bond B are both ten years from maturity, and both have a $1000 par and 2% SEC yield, but Bond A is currently worth $1000 because its distribution yield is 2% ($10 every six months), while Bond B is currently worth $1090.23 because its distribution yield is 2.75% ($15 every six months).

In ten years, the value of both bonds is perfectly predictable; they will be worth the $1000 par. Over shorter times, predictions have errors, depending on what happens to interest rates. You might predict that the value of Bond A will be $1000 at all future times; this is what would happen if the yield on Bond A remains 2% all the way to maturity. If so, you will predict that the value of Bond B will be $1086.13 in six months, so that its SEC yield remains 2%, and you also get a 1% return over those six months on Bond B.

Now, there might be an error in this prediction because bond yields might rise or fall, or you might adjust the prediction itself because the current bond market predicts that yields will rise or fall. But the error or adjustment affects both bonds almost equally. If the SEC yield on Bond A is 1.9% in six months, its value will be $1008.65, and your total return will be 1.87%. But then the SEC yield on Bond B should also be 1.9% in six months, so its value will be $1095.20, and your total return will be 1.83%. (The 0.04% difference is because Bond B has a slightly shorter duration; it returns 0.04% more if rates rise by 0.1% instead.)

Therefore, except for tax consequences, you should be indifferent between holding Bond A and Bond B; they will have almost the same total return over any holding period.

A fund such as VWIUX with a distribution yield higher than its SEC yield holds lots of bonds like Bond B, so its NAV will decline more than that of a fund with a distribution yield equal to its SEC yield.
Many thanks for the reply!
I agree with mostly everything above, not that I could explain it like you did.
With VWIUX, I think that the NAV might tend to decline; would that actually happen? I've seen times when VWIUX bounced up and down like a Yo-Yo for reasons other than the internals of the bond holdings. As you know when stocks or interest rates drop, the NAV can overrule the the internal workings of a bond fund.
I believe that the payout/distribution yield/TTM will slowly decline until it meets the SEC Yield. I don't think that will happen in 2022 or 2023.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by grabiner »

hudson wrote: Sun Aug 01, 2021 4:03 pm
grabiner wrote: Sun Aug 01, 2021 3:45 pm I can make a prediction, with some error, but (as in the weather example), it is better than predicting no change. And in this case, the relative error of predictions is very small.

I'll use the example from SEC Yield on the wiki because the math is already worked out. Bond A and Bond B are both ten years from maturity, and both have a $1000 par and 2% SEC yield, but Bond A is currently worth $1000 because its distribution yield is 2% ($10 every six months), while Bond B is currently worth $1090.23 because its distribution yield is 2.75% ($15 every six months).

In ten years, the value of both bonds is perfectly predictable; they will be worth the $1000 par. Over shorter times, predictions have errors, depending on what happens to interest rates. You might predict that the value of Bond A will be $1000 at all future times; this is what would happen if the yield on Bond A remains 2% all the way to maturity. If so, you will predict that the value of Bond B will be $1086.13 in six months, so that its SEC yield remains 2%, and you also get a 1% return over those six months on Bond B.

Now, there might be an error in this prediction because bond yields might rise or fall, or you might adjust the prediction itself because the current bond market predicts that yields will rise or fall. But the error or adjustment affects both bonds almost equally. If the SEC yield on Bond A is 1.9% in six months, its value will be $1008.65, and your total return will be 1.87%. But then the SEC yield on Bond B should also be 1.9% in six months, so its value will be $1095.20, and your total return will be 1.83%. (The 0.04% difference is because Bond B has a slightly shorter duration; it returns 0.04% more if rates rise by 0.1% instead.)

Therefore, except for tax consequences, you should be indifferent between holding Bond A and Bond B; they will have almost the same total return over any holding period.

A fund such as VWIUX with a distribution yield higher than its SEC yield holds lots of bonds like Bond B, so its NAV will decline more than that of a fund with a distribution yield equal to its SEC yield.
Many thanks for the reply!
I agree with mostly everything above, not that I could explain it like you did.
With VWIUX, I think that the NAV might tend to decline; would that actually happen? I've seen times when VWIUX bounced up and down like a Yo-Yo for reasons other than the internals of the bond holdings. As you know when stocks or interest rates drop, the NAV can overrule the the internal workings of a bond fund.[/q]
I don't know whether this will happen. However, what should matter to you is not whether VWIUX will rise or fall in value, but whether your total return will be higher or lower in VWIUX than in an alternative investment. This is the mistake Fidelity is trying to save you from making.

If you buy a fund (or combination of funds) with a higher SEC yield but the same duration in your IRA, and rates change the same way for both funds, you will have a higher total return with the higher-yielding fund. (As was mentioned earlier in the thread, the intermediate-term taxable index is a bit riskier because of a longer duration. You can get a more fair comparison by looking at a combination of funds with a matched duration, although you might choose to take the additional risk for a higher return.)
I believe that the payout/distribution yield/TTM will slowly decline until it meets the SEC Yield. I don't think that will happen in 2022 or 2023.
I believe this as well; SEC and distribution yields won't be equal in 2022-2023 unless rates rise somewhat. The reason is that VWIUX has turnover: bonds mature, are called, or become too short in duration for the intermediate-term fund. When a fund purchases a bond, the distribution yield and yield to maturity are equal, so if it replaces a premium bond, the distribution yield declines. Thus, if rates don't change, the fund's SEC yield will only equal the distribution yield once all of its premium bonds are gone. If rates rise, the SEC yield will rise but the distribution yield will not.

But the flip side of this is that if rates don't change, the NAV of the premium bonds will decline, so the total return will be less than the distribution yield. If a fund has SEC yield equal to its distribution yield, and the yields on its bonds don't change, the total return will be equal to the distribution yield.
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Re: Tried to buy VWIUX in tIRA at Fidelity online and got denied

Post by hudson »

grabiner wrote: Sun Aug 01, 2021 4:48 pm
hudson wrote: Sun Aug 01, 2021 4:03 pm
grabiner wrote: Sun Aug 01, 2021 3:45 pm I can make a prediction, with some error, but (as in the weather example), it is better than predicting no change. And in this case, the relative error of predictions is very small.

I'll use the example from SEC Yield on the wiki because the math is already worked out. Bond A and Bond B are both ten years from maturity, and both have a $1000 par and 2% SEC yield, but Bond A is currently worth $1000 because its distribution yield is 2% ($10 every six months), while Bond B is currently worth $1090.23 because its distribution yield is 2.75% ($15 every six months).

In ten years, the value of both bonds is perfectly predictable; they will be worth the $1000 par. Over shorter times, predictions have errors, depending on what happens to interest rates. You might predict that the value of Bond A will be $1000 at all future times; this is what would happen if the yield on Bond A remains 2% all the way to maturity. If so, you will predict that the value of Bond B will be $1086.13 in six months, so that its SEC yield remains 2%, and you also get a 1% return over those six months on Bond B.

Now, there might be an error in this prediction because bond yields might rise or fall, or you might adjust the prediction itself because the current bond market predicts that yields will rise or fall. But the error or adjustment affects both bonds almost equally. If the SEC yield on Bond A is 1.9% in six months, its value will be $1008.65, and your total return will be 1.87%. But then the SEC yield on Bond B should also be 1.9% in six months, so its value will be $1095.20, and your total return will be 1.83%. (The 0.04% difference is because Bond B has a slightly shorter duration; it returns 0.04% more if rates rise by 0.1% instead.)

Therefore, except for tax consequences, you should be indifferent between holding Bond A and Bond B; they will have almost the same total return over any holding period.

A fund such as VWIUX with a distribution yield higher than its SEC yield holds lots of bonds like Bond B, so its NAV will decline more than that of a fund with a distribution yield equal to its SEC yield.
Many thanks for the reply!
I agree with mostly everything above, not that I could explain it like you did.
With VWIUX, I think that the NAV might tend to decline; would that actually happen? I've seen times when VWIUX bounced up and down like a Yo-Yo for reasons other than the internals of the bond holdings. As you know when stocks or interest rates drop, the NAV can overrule the the internal workings of a bond fund.[/q]
I don't know whether this will happen. However, what should matter to you is not whether VWIUX will rise or fall in value, but whether your total return will be higher or lower in VWIUX than in an alternative investment. This is the mistake Fidelity is trying to save you from making.

If you buy a fund (or combination of funds) with a higher SEC yield but the same duration in your IRA, and rates change the same way for both funds, you will have a higher total return with the higher-yielding fund. (As was mentioned earlier in the thread, the intermediate-term taxable index is a bit riskier because of a longer duration. You can get a more fair comparison by looking at a combination of funds with a matched duration, although you might choose to take the additional risk for a higher return.)
I believe that the payout/distribution yield/TTM will slowly decline until it meets the SEC Yield. I don't think that will happen in 2022 or 2023.
I believe this as well; SEC and distribution yields won't be equal in 2022-2023 unless rates rise somewhat. The reason is that VWIUX has turnover: bonds mature, are called, or become too short in duration for the intermediate-term fund. When a fund purchases a bond, the distribution yield and yield to maturity are equal, so if it replaces a premium bond, the distribution yield declines. Thus, if rates don't change, the fund's SEC yield will only equal the distribution yield once all of its premium bonds are gone. If rates rise, the SEC yield will rise but the distribution yield will not.

But the flip side of this is that if rates don't change, the NAV of the premium bonds will decline, so the total return will be less than the distribution yield. If a fund has SEC yield equal to its distribution yield, and the yields on its bonds don't change, the total return will be equal to the distribution yield.
What matters is total return: I agree.

I've never made the advanced analysis that you described above before buying. Going forward, I will try.

Before buying a mutual fund or ETF, I look at

expense ratio

SEC Yield

payout, TTM, the distribution yield table over say the previous 2 years... Then I'll look at the yield table and try to roughly predict the future payout. I believe that is possible. I don't do any math; I just eyeball it.

duration (I'm not sure which is the most appropriate measure for duration matching?)

credit quality (hopefully all AAA/AA (like the muni BMBIX), but I'll settle for mostly AAA/AA/A (like the muni VWIUX)

Vanguard Risk Potential (2 or better....I start with a Vanguard fund or ETF and then look outside for a fund/ETF that can tie or beat Vanguard)

Many newer investors assume that the SEC Yield is the payout/distribution yield. They are surprised when they do the math on their first full month's distribution and think there's been some mistake.
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