VTEB question - when to buy?

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mdub83
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VTEB question - when to buy?

Post by mdub83 »

Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
exodusNH
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Re: VTEB question - when to buy?

Post by exodusNH »

mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
Do you have a 401k or IRA where you can purchase bonds? It's generally more tax efficient to hold them in a tax-advantaged account.

As to when you should buy it: as long as you intend to hold it for it's duration, you will be roughly whole. Municipal bonds behave a bit differently than other types, though, since they're generally callable. (The issuer can choose to repay them earlier than the stated maturity. They do this when the interest rates are dropping -- basically like we do when we refi a mortgage. If interest rates are rising, the duration increases because municipalities are getting a better rate than the market is currently offering.)
single2019
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Re: VTEB question - when to buy?

Post by single2019 »

exodusNH wrote: Fri Sep 17, 2021 11:52 am
mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
Do you have a 401k or IRA where you can purchase bonds? It's generally more tax efficient to hold them in a tax-advantaged account.

As to when you should buy it: as long as you intend to hold it for it's duration, you will be roughly whole. Municipal bonds behave a bit differently than other types, though, since they're generally callable. (The issuer can choose to repay them earlier than the stated maturity. They do this when the interest rates are dropping -- basically like we do when we refi a mortgage. If interest rates are rising, the duration increases because municipalities are getting a better rate than the market is currently offering.)
Don't buy VTEB in tax advantaged account.
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Re: VTEB question - when to buy?

Post by UpperNwGuy »

single2019 wrote: Fri Sep 17, 2021 12:15 pm
exodusNH wrote: Fri Sep 17, 2021 11:52 am
mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
Do you have a 401k or IRA where you can purchase bonds? It's generally more tax efficient to hold them in a tax-advantaged account.

As to when you should buy it: as long as you intend to hold it for it's duration, you will be roughly whole. Municipal bonds behave a bit differently than other types, though, since they're generally callable. (The issuer can choose to repay them earlier than the stated maturity. They do this when the interest rates are dropping -- basically like we do when we refi a mortgage. If interest rates are rising, the duration increases because municipalities are getting a better rate than the market is currently offering.)
Don't buy VTEB in tax advantaged account.
Correct. There is no reason to ever hold VTEB in a tax advantaged account. The whole point of owning municipal bond funds is to avoid Federal taxes, and the yields assume that. In a tax advantaged account like a 401K or IRA you would want higher yield bond funds such as BND or BIV. VTEB works well in a taxable brokerage account provided your tax bracket is high enough.
exodusNH
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Re: VTEB question - when to buy?

Post by exodusNH »

single2019 wrote: Fri Sep 17, 2021 12:15 pm
exodusNH wrote: Fri Sep 17, 2021 11:52 am
mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
Do you have a 401k or IRA where you can purchase bonds? It's generally more tax efficient to hold them in a tax-advantaged account.

As to when you should buy it: as long as you intend to hold it for it's duration, you will be roughly whole. Municipal bonds behave a bit differently than other types, though, since they're generally callable. (The issuer can choose to repay them earlier than the stated maturity. They do this when the interest rates are dropping -- basically like we do when we refi a mortgage. If interest rates are rising, the duration increases because municipalities are getting a better rate than the market is currently offering.)
Don't buy VTEB in tax advantaged account.
Absolutely. That certainly wasn't my intended suggestion!
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Re: VTEB question - when to buy?

Post by hudson »

mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy
VTEB. I'm young, in a higher tax bracket.. is
there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
I disregard all predictions on interest rates; I do shop around for the best payout.

Yes VTEB is perfect for a taxable account.
ER= .06
SEC = .86
Percent AAA/AA/A holdings = about 90%
Payout last year was 1.74% (TTM)
You'll get higher than the SEC Yield for the next year or so.

Would I wait to buy it? No
Why? The payout is OK.
What beats it? Other quality muni funds like VWIUX or MUB might be close...worth a look. There are others. BMBIX is 2 notches safer than any mentioned....ER stinks.

How long will it be until you need to withdraw this money?

Vanguard has state specific funds for some states...might be worth a look.

ER = Expense Ratio
SEC = SEC Yield
TTM = Trailing Twelve Months Yield
VTEB, VWIUX, MUB, and BMBIX = Intemediate Muni funds/ETFs
Last edited by hudson on Sun Sep 19, 2021 7:27 am, edited 2 times in total.
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retiredjg
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Re: VTEB question - when to buy?

Post by retiredjg »

For most people, holding your bonds (or at least a good part of them) in a tax-deferred account like a 401k is preferable.

If you need to buy bonds in taxable, buy now. Don't try to time the market.
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Re: VTEB question - when to buy?

Post by muffins14 »

Thursdays at 1:11pm EST
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etfan
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Re: VTEB question - when to buy?

Post by etfan »

muffins14 wrote: Fri Sep 17, 2021 3:49 pm Thursdays at 1:11pm EST
Even in taxable?
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Re: VTEB question - when to buy?

Post by tj »

When you are 65 years old.
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Re: VTEB question - when to buy?

Post by muffins14 »

etfan wrote: Fri Sep 17, 2021 8:49 pm
muffins14 wrote: Fri Sep 17, 2021 3:49 pm Thursdays at 1:11pm EST
Even in taxable?
Oh sorry, in taxable you should invest ASAP because the expected value of lump sum is higher. Thursdays are only better for inherited IRA
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Re: VTEB question - when to buy?

Post by etfan »

mdub83 wrote: Fri Sep 17, 2021 11:40 am Would it be best to wait to buy VTEB until interest rates rise which drops bond prices?
I think this would be called "market timing".

https://www.bogleheads.org/wiki/Taylor_ ... ing_quotes
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Re: VTEB question - when to buy?

Post by ivgrivchuck »

mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
Consider maxing out I-bonds and EE-bonds first. Also make sure that you have maxed out your 401k, IRAs. Consider placing at least some of your bond holdings into tax-deferred accounts.
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Re: VTEB question - when to buy?

Post by grabiner »

The optimal time to buy a municipal-bond fund is the time that municipal bonds make sense as investments; that is, the time that you have money which is not intended for a short-term need, which you do not want in the stock market because of your risk tolerance, and which must be invested in a taxable account in a high tax bracket.

Yes, if rates rise, muni prices will fall, but bond traders are aware of that risk, and thus they trade bonds at prices which give a yield that compensates for the risk. This is why VTEB has a 0.86% yield, while Vanguard Long-Term Tax-Exempt Admiral, with even more interest-rate risk, has a 1.12% yield, and Short-Term Tax-Exempt Admiral, with almost no interest-rate risk (1-year duration), has a 0.13% yield.
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Re: VTEB question - when to buy?

Post by hudson »

single2019 wrote: Fri Sep 17, 2021 12:15 pm Don't buy VTEB in tax advantaged account.
I agree that the optimal placement for VTEB is in a taxable account.

How big a mistake would it be to hold a muni like VTEB in an IRA?
What if you didn't have a taxable account and your choices were:

Vanguard Tax-Exempt Bond ETF (VTEB), SEC Yield = .86%
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX), SEC Yield = .80%
Vanguard Total Bond Market ETF (BND), SEC Yield = 1.30%
Last edited by hudson on Sun Sep 19, 2021 9:14 am, edited 1 time in total.
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retiredjg
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Re: VTEB question - when to buy?

Post by retiredjg »

Why would those funds have those high expense ratios in an IRA?
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Re: VTEB question - when to buy?

Post by hudson »

retiredjg wrote: Sun Sep 19, 2021 9:11 am Why would those funds have those high expense ratios in an IRA?
Those are SEC Yields not expense ratios. I reworded the post.
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Re: VTEB question - when to buy?

Post by retiredjg »

Sorry, maybe I just looked too quickly. :?
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Re: VTEB question - when to buy?

Post by grabiner »

hudson wrote: Sun Sep 19, 2021 9:05 am
single2019 wrote: Fri Sep 17, 2021 12:15 pm Don't buy VTEB in tax advantaged account.
I agree that the optimal placement for VTEB is in a taxable account.

How big a mistake would it be to hold a muni like VTEB in an IRA?
What if you didn't have a taxable account and your choices were:

Vanguard Tax-Exempt Bond ETF (VTEB), SEC Yield = .86%
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX), SEC Yield = .80%
Vanguard Total Bond Market ETF (BND), SEC Yield = 1.30%
This illustrates why it is a clear decision. VTEB and VFIUX have about the same yield, but VFIUX has less risk; Treasuries have no credit risk, and also no call risk. BND has similar risk to VTEB (probably a bit more because of a longer duration, although call risk means that VTEB has more interest-rate risk than its duration indicates) but a significantly higher yield.
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Re: VTEB question - when to buy?

Post by ruralavalon »

mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
It's not primarily a question of time, it's more about tax rates and about what may be available in your employer's 401k plan.

What is your tax bracket, both federal and state?

What bond funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios.

Unless in a very high tax bracket it is generally better to hold your fixed income allocation in a bond fund in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k. That assumes that a good low cost bond fund is offered there.

Of course there is no reason to use any muni bond fund in your 401k account.
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Re: VTEB question - when to buy?

Post by eshkidd »

grabiner wrote: Sun Sep 19, 2021 9:50 am
hudson wrote: Sun Sep 19, 2021 9:05 am
single2019 wrote: Fri Sep 17, 2021 12:15 pm Don't buy VTEB in tax advantaged account.
I agree that the optimal placement for VTEB is in a taxable account.

How big a mistake would it be to hold a muni like VTEB in an IRA?
What if you didn't have a taxable account and your choices were:

Vanguard Tax-Exempt Bond ETF (VTEB), SEC Yield = .86%
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX), SEC Yield = .80%
Vanguard Total Bond Market ETF (BND), SEC Yield = 1.30%
This illustrates why it is a clear decision. VTEB and VFIUX have about the same yield, but VFIUX has less risk; Treasuries have no credit risk, and also no call risk. BND has similar risk to VTEB (probably a bit more because of a longer duration, although call risk means that VTEB has more interest-rate risk than its duration indicates) but a significantly higher yield.
It's not a clear decision because you're completely ignoring taxes, the whole point of muni's.

For me, VTEB is an .86% yield with (0 fed + 9.3 state) 9.3% taxes, so 0.78% after-tax yield.

While VFIUX is (32 fed + 0 state) 32% taxes, so 0.54% after-tax yield.

Not so clear now, hmm...
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Re: VTEB question - when to buy?

Post by grabiner »

eshkidd wrote: Sun Sep 19, 2021 7:03 pm
grabiner wrote: Sun Sep 19, 2021 9:50 am
hudson wrote: Sun Sep 19, 2021 9:05 am
single2019 wrote: Fri Sep 17, 2021 12:15 pm Don't buy VTEB in tax advantaged account.
I agree that the optimal placement for VTEB is in a taxable account.

How big a mistake would it be to hold a muni like VTEB in an IRA?
What if you didn't have a taxable account and your choices were:

Vanguard Tax-Exempt Bond ETF (VTEB), SEC Yield = .86%
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX), SEC Yield = .80%
Vanguard Total Bond Market ETF (BND), SEC Yield = 1.30%
This illustrates why it is a clear decision. VTEB and VFIUX have about the same yield, but VFIUX has less risk; Treasuries have no credit risk, and also no call risk. BND has similar risk to VTEB (probably a bit more because of a longer duration, although call risk means that VTEB has more interest-rate risk than its duration indicates) but a significantly higher yield.
It's not a clear decision because you're completely ignoring taxes, the whole point of muni's.

For me, VTEB is an .86% yield with (0 fed + 9.3 state) 9.3% taxes, so 0.78% after-tax yield.

While VFIUX is (32 fed + 0 state) 32% taxes, so 0.54% after-tax yield.
The previous question said, "What if you didn't have a taxable account?" If you hold the fund in an IRA, you get the full yield of either fund, so the Treasury fund is better than the muni fund.

In a taxable account in CA, I agree that this is close. My preference in CA is a 50/50 split of Vanguard CA Long-Term Tax-Exempt and Vanguard Limited-Term Tax-Exempt, so that you get a duration similar to that of the index, with more than half the interest exempt from CA tax.
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Re: VTEB question - when to buy?

Post by birdog »

mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
Is there an optimal time? Probably but I wouldn't recommend trying to time interest rates in the bond market. The time to buy would be when it makes sense according to your tax rate situation. https://www.bankrate.com/calculators/re ... -tool.aspx

Would it be best to wait until rates rise? In a perfect world, yes, but again I wouldn't recommend trying to time bond market interest rates. The average duration for VTEB is 4.6 years so it would work for a 5-10 year investment.

Some recommend buying tax-free bonds in taxable if it makes sense from a tax perspective AND if there is no tax-advantaged space left for taxable bonds. https://www.bogleheads.org/wiki/Municipal_bonds
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Re: VTEB question - when to buy?

Post by hudson »

grabiner wrote: Sun Sep 19, 2021 9:50 am
hudson wrote: Sun Sep 19, 2021 9:05 am
single2019 wrote: Fri Sep 17, 2021 12:15 pm Don't buy VTEB in tax advantaged account.
I agree that the optimal placement for VTEB is in a taxable account.

How big a mistake would it be to hold a muni like VTEB in an IRA?
What if you didn't have a taxable account and your choices were:

Vanguard Tax-Exempt Bond ETF (VTEB), SEC Yield = .86%
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX), SEC Yield = .80%
Vanguard Total Bond Market ETF (BND), SEC Yield = 1.30%
This illustrates why it is a clear decision. VTEB and VFIUX have about the same yield, but VFIUX has less risk; Treasuries have no credit risk, and also no call risk. BND has similar risk to VTEB (probably a bit more because of a longer duration, although call risk means that VTEB has more interest-rate risk than its duration indicates) but a significantly higher yield.
Thanks grabiner!

In an IRA/Tax Advantaged account if I was going to make a substantial purchase, I would likely go with VFIUX, the treasury fund. I would want to go with BND, total bond, but it's not safe enough.

Is it automatically suboptimal to buy a muni fund/ETF in an IRA/tax advantaged account? What if the muni fund or etf was paying out more than other choices?
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Re: VTEB question - when to buy?

Post by grabiner »

hudson wrote: Mon Sep 20, 2021 8:15 am
grabiner wrote: Sun Sep 19, 2021 9:50 am
hudson wrote: Sun Sep 19, 2021 9:05 am Vanguard Tax-Exempt Bond ETF (VTEB), SEC Yield = .86%
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX), SEC Yield = .80%
Vanguard Total Bond Market ETF (BND), SEC Yield = 1.30%
This illustrates why it is a clear decision. VTEB and VFIUX have about the same yield, but VFIUX has less risk; Treasuries have no credit risk, and also no call risk. BND has similar risk to VTEB (probably a bit more because of a longer duration, although call risk means that VTEB has more interest-rate risk than its duration indicates) but a significantly higher yield.
Thanks grabiner!

In an IRA/Tax Advantaged account if I was going to make a substantial purchase, I would likely go with VFIUX, the treasury fund. I would want to go with BND, total bond, but it's not safe enough?
Investing is a trade-off between risk and reward, whether you are choosing between bonds and stocks, or between medium-risk and low-risk bonds. BND has a bit more risk than VFIUX, but you are rewarded for taking that risk, so it is a reasonable choice. In contrast, VTEB has more risk than VFIUX, and in an IRA, you are not rewarded for taking that risk.
Is automatically suboptimal to buy a muni fund/ETF in an IRA/tax advantaged account? What if the muni fund or etf was paying out more than other choices?
If a muni bond has a higher yield than a taxable bond of comparable risk, then bond traders would buy the muni bond and sell the taxable bond, driving muni prices up and yields down. Thus, if a muni bond or fund has a higher yield than a taxable bond, the muni is probably significantly riskier (as in the VTEB versus VFIUX example above). Even if the yields are close, the muni is probably riskier. My rule of thumb is that the break-even is a 25% tax rate, so that BND with its 1.30% yield has about the same risk as a muni fund yielding 0.98%, and thus very slightly more risk than VFIUX.

Also, be careful with the term "pays out"; you want to use SEC yield, not distributions, for comparisons. See SEC Yield on the wiki. If a muni fund has a distribution yield higher than its SEC yield, this does not make it a better or worse investment, just a fund which holds bonds that are trading at a premium (because interest rates have fallen since the fund bought the bonds.)
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mdub83
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Re: VTEB question - when to buy?

Post by mdub83 »

ruralavalon wrote: Sun Sep 19, 2021 10:09 am
mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
It's not primarily a question of time, it's more about tax rates and about what may be available in your employer's 401k plan.

What is your tax bracket, both federal and state? I'm in the 35% bracket, single in Texas

What bond funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios. Schwab Institutional Fixed Income Core Plus Trust Class III I'm unsure what the ticker is. The expense ratio is .35% which seems high.

Unless in a very high tax bracket it is generally better to hold your fixed income allocation in a bond fund in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k. That assumes that a good low cost bond fund is offered there.

Of course there is no reason to use any muni bond fund in your 401k account.
. I have been told given the bracket i'm in that the muni bond is the best.

Thank you for the quotes above.
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Re: VTEB question - when to buy?

Post by exodusNH »

mdub83 wrote: Tue Sep 21, 2021 2:20 pm
ruralavalon wrote: Sun Sep 19, 2021 10:09 am
mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
It's not primarily a question of time, it's more about tax rates and about what may be available in your employer's 401k plan.

What is your tax bracket, both federal and state? I'm in the 35% bracket, single in Texas

What bond funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios. Schwab Institutional Fixed Income Core Plus Trust Class III I'm unsure what the ticker is. The expense ratio is .35% which seems high.

Unless in a very high tax bracket it is generally better to hold your fixed income allocation in a bond fund in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k. That assumes that a good low cost bond fund is offered there.

Of course there is no reason to use any muni bond fund in your 401k account.
. I have been told given the bracket i'm in that the muni bond is the best.

Thank you for the quotes above.
Munis are only useful in a taxable account.

In an IRA, by definition, taxes are deferred (or not paid in the case of a Roth). Withdrawals from a tax-deferred account will count as ordinary income.

However, in a taxable account, if you want to hold bonds, munis are usually a better option over 24% because you're not paying federal income taxes. Because of this tax advantage, munis pay a lower interest than otherwise equivalent bonds.
hudson
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Re: VTEB question - when to buy?

Post by hudson »

exodusNH wrote: Tue Sep 21, 2021 3:07 pm
mdub83 wrote: Tue Sep 21, 2021 2:20 pm
ruralavalon wrote: Sun Sep 19, 2021 10:09 am
mdub83 wrote: Fri Sep 17, 2021 11:40 am Hello,

I am considering adding bonds to my taxable brokerage account. Im relatively new, just started investing this year and am not sure how to ask this question correctly. I would like to buy VTEB. I'm young, in a higher tax bracket.. is there a "optimal time" to purchase this etf when considering the current interest rate environment? Currently interest rates are low which means bond prices are higher... Would it be best to wait to buy VTEB until interest rates rise which drops bond prices? Am I looking too far into this or is this not important since we should assume that the rates will be changing throughout the time I hold onto VTEB (5-10 years) meaning you should can essentially buy VTEB anytime?

Thanks in advance
It's not primarily a question of time, it's more about tax rates and about what may be available in your employer's 401k plan.

What is your tax bracket, both federal and state? I'm in the 35% bracket, single in Texas

What bond funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios. Schwab Institutional Fixed Income Core Plus Trust Class III I'm unsure what the ticker is. The expense ratio is .35% which seems high.

Unless in a very high tax bracket it is generally better to hold your fixed income allocation in a bond fund in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k. That assumes that a good low cost bond fund is offered there.

Of course there is no reason to use any muni bond fund in your 401k account.
. I have been told given the bracket i'm in that the muni bond is the best.

Thank you for the quotes above.
Munis are only useful in a taxable account.

In an IRA, by definition, taxes are deferred (or not paid in the case of a Roth). Withdrawals from a tax-deferred account will count as ordinary income.

However, in a taxable account, if you want to hold bonds, munis are usually a better option over 24% because you're not paying federal income taxes. Because of this tax advantage, munis pay a lower interest than otherwise equivalent bonds.
I agree that munis are usually optimal in a taxable account. What if the payout or SEC Yield of the muni was higher than a non-muni fund?

Munis only for those in 24% tax bracket or higher? What about the 22% bracket. Does that mean that those in the 22% bracket should automatically go with non-munis? Or should they do the math?

Bottom Line: Beware of rules of thumb: do the math.
hudson
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Re: VTEB question - when to buy?

Post by hudson »

grabiner wrote: Mon Sep 20, 2021 8:29 am
hudson wrote: Mon Sep 20, 2021 8:15 am
grabiner wrote: Sun Sep 19, 2021 9:50 am
hudson wrote: Sun Sep 19, 2021 9:05 am Vanguard Tax-Exempt Bond ETF (VTEB), SEC Yield = .86%
Vanguard Intermediate-Term Treasury Fund Admiral Shares (VFIUX), SEC Yield = .80%
Vanguard Total Bond Market ETF (BND), SEC Yield = 1.30%
This illustrates why it is a clear decision. VTEB and VFIUX have about the same yield, but VFIUX has less risk; Treasuries have no credit risk, and also no call risk. BND has similar risk to VTEB (probably a bit more because of a longer duration, although call risk means that VTEB has more interest-rate risk than its duration indicates) but a significantly higher yield.
Thanks grabiner!

In an IRA/Tax Advantaged account if I was going to make a substantial purchase, I would likely go with VFIUX, the treasury fund. I would want to go with BND, total bond, but it's not safe enough?
Investing is a trade-off between risk and reward, whether you are choosing between bonds and stocks, or between medium-risk and low-risk bonds. BND has a bit more risk than VFIUX, but you are rewarded for taking that risk, so it is a reasonable choice. In contrast, VTEB has more risk than VFIUX, and in an IRA, you are not rewarded for taking that risk.
Is automatically suboptimal to buy a muni fund/ETF in an IRA/tax advantaged account? What if the muni fund or etf was paying out more than other choices?
If a muni bond has a higher yield than a taxable bond of comparable risk, then bond traders would buy the muni bond and sell the taxable bond, driving muni prices up and yields down. Thus, if a muni bond or fund has a higher yield than a taxable bond, the muni is probably significantly riskier (as in the VTEB versus VFIUX example above). Even if the yields are close, the muni is probably riskier. My rule of thumb is that the break-even is a 25% tax rate, so that BND with its 1.30% yield has about the same risk as a muni fund yielding 0.98%, and thus very slightly more risk than VFIUX.

Also, be careful with the term "pays out"; you want to use SEC yield, not distributions, for comparisons. See SEC Yield on the wiki. If a muni fund has a distribution yield higher than its SEC yield, this does not make it a better or worse investment, just a fund which holds bonds that are trading at a premium (because interest rates have fallen since the fund bought the bonds.)
Thanks Grabiner! Your contributions are right on target as usual.
As you know, I like the SEC Yield and the short term payout yield. The SEC yield is hypothetical and tells the current story about the predicted payout over the average duration of the fund. I like to know the actual payout of a fund or ETF, especially over the next 12 to 24 months. I'm primarily a certificate of deposit investor that holds some munis. I look at munis like CDs; I want to know what it's paying now and in the near future. I'll be happy to hold the fund in the short term and look for a better deal after a year or two. Some quality muni funds are paying out 2% in the short term; those funds are attractive to me.

Bottom Line: If I was buying a muni fund, I'd want to know the SEC Yield and the actual short term payout.
Short term investors = actual current payout
Long term investors = SEC Yield
Watch the payout and the SEC Yield because both are moving targets.
Last edited by hudson on Wed Sep 22, 2021 9:32 am, edited 1 time in total.
exodusNH
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Re: VTEB question - when to buy?

Post by exodusNH »

hudson wrote: Wed Sep 22, 2021 8:20 am
I agree that munis are usually optimal in a taxable account. What if the payout or SEC Yield of the muni was higher than a non-muni fund?

Munis only for those in 24% tax bracket or higher? What about the 22% bracket. Does that mean that those in the 22% bracket should automatically go with non-munis? Or should they do the math?

Bottom Line: Beware of rules of thumb: do the math.
22% can generally go either way. Under 22%, almost always taxable. 24% and above, almost always muni.

As you note, the math will tell you what to do.
UpperNwGuy
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Re: VTEB question - when to buy?

Post by UpperNwGuy »

exodusNH wrote: Wed Sep 22, 2021 9:22 am 22% can generally go either way. Under 22%, almost always taxable. 24% and above, almost always muni.

As you note, the math will tell you what to do.
The math has told me that taxable bonds are better in the 24% bracket, and that munis are better only at brackets higher than 24%. (Note: I use SEC yield, not distribution yield, when I do the math.)
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retiredjg
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Re: VTEB question - when to buy?

Post by retiredjg »

exodusNH wrote: Wed Sep 22, 2021 9:22 am As you note, the math will tell you what to do.
The math will tell you what to do for the immediate few weeks. However, the math is not constant. It goes back and forth. So you either need to just pick one or check every few months and maybe switch back and forth. Or use half and half. :happy
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Re: VTEB question - when to buy?

Post by ruralavalon »

hudson wrote: Wed Sep 22, 2021 8:20 amBottom Line: Beware of rules of thumb: do the math.
In the end the correct answer is often "it depends on the details of your individual situation".

Sometimes the correct answer is "close call, it probably doesn't matter a lot". If there is no clear right answer, that necessarily means that there is no clear wrong answer either.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
exodusNH
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Re: VTEB question - when to buy?

Post by exodusNH »

retiredjg wrote: Wed Sep 22, 2021 9:33 am
exodusNH wrote: Wed Sep 22, 2021 9:22 am As you note, the math will tell you what to do.
The math will tell you what to do for the immediate few weeks. However, the math is not constant. It goes back and forth. So you either need to just pick one or check every few months and maybe switch back and forth. Or use half and half. :happy
Fortunately, all of my bonds are in my 401K. I don't even bother to think about it. :)
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grabiner
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Re: VTEB question - when to buy?

Post by grabiner »

retiredjg wrote: Wed Sep 22, 2021 9:33 am
exodusNH wrote: Wed Sep 22, 2021 9:22 am As you note, the math will tell you what to do.
The math will tell you what to do for the immediate few weeks. However, the math is not constant. It goes back and forth. So you either need to just pick one or check every few months and maybe switch back and forth. Or use half and half. :happy
The math may not necessarily change. Suppose that Bond A yields 2% taxable and Bond B yields 1.5% tax-free. If they are equally risky, you would prefer Bond B if your marginal tax rate is 25% or higher. Then, a week later, Bond A still yields 2% but Bond B now yields 1.6%. This doesn't necessarily mean that you should sell Bond A to buy Bond B if your tax rate is between 20% and 25%; it may be that the default risk of Bond B has increased.
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Re: VTEB question - when to buy?

Post by tomsense76 »

Um never? This has more to do with my dislike of VTEB and preference for VWITX/VWIUX or other similar Vanguard tax-exempt mutual funds.

In particular VTEB declares dividends monthly whereas VWITX/VWIUX declare dividends daily. Why does this matter? Because it can complicate tax-loss harvesting. Details in the wiki. Recommend reading the statutory prospectus for the mutual funds you are interested in with a particular eye for when dividends are declared.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
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