VBTLX vs Muni Funds?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
powercherry5
Posts: 107
Joined: Thu Dec 12, 2019 3:46 pm

VBTLX vs Muni Funds?

Post by powercherry5 »

After selling my business, I am 20% in the process of my investment plan of deploying ~6 million into the markets over 12 months (60% VTSAX/10% VTIAX/30% VBLTX).

One of the big disadvantages of needing to invest so much money at once (other than the volatility risk of not DCA over a lifetime) is that this isn't in a retirement account and I have to pay taxes on any ongoing dividends.

I am not bullish on the bond market right now, for the same reasons everyone isn't. But I accept that I can't predict the future and I am counting on bonds to follow historic trends of not falling as drastically as stocks during the next crash, giving me the opportunity to reallocate heavily into stocks.

I saw a recommendation for municipal bonds somewhere and after looking into it , it looks like it may be a good alternative instead of VBTLX funds for a good portion of my bond funds. It looks like I can buy a state fund (FSAZX) that is exempt from both federal and state taxes, which is huge considering my income and total $$ exposure. The expense ratio is much higher (.55) but the yield is also higher, so it makes up for it.

I imagine a state fund vs a total bond fund inherently has more risk, but the state fund looks like it has had similar volatility as VBTLX since it's inception in the 90s. VBTLX seems to drop 4-7% during the crashs, while this fund seems to be at 5-10%. Beta for FSAZX: .04 seems to put it at basically the same volitilitary as VBTLX:0.00 when compared to VTSAX:1.05. So while it has crashed a little more, it looks like it should do it's job of retaining it's worth more than the drop in stocks for an effective asset allocation.

Am I missing some disadvantages or are their blindspots in risk I am not seeing?

Thanks :sharebeer
pasadena
Posts: 2337
Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: VBTLX vs Muni Funds?

Post by pasadena »

You don't say what your expected tax bracket will be from 2022 onwards?

My IPS say that in taxable, I should only hold tax-exempt bonds as long as I'm in a high tax bracket. It also says - rather arbitrarily - that state-specific munis shouldn't be more than half of that. But I wrote that when I was in California and had a lot less than $1.8M in bonds, so... (I'm also glad I limited that, because when I left CA, I had to sell it). Then again, AZ's max tax bracket is 4.50%, not too high.

Have you compared with FTABX - Fidelity Tax-Free Bond Fund (assuming you're at Fidelity) to see if the tax savings would be worth the additional risk due to lack of diversification?
sycamore
Posts: 6359
Joined: Tue May 08, 2018 12:06 pm

Re: VBTLX vs Muni Funds?

Post by sycamore »

powercherry5 wrote: Fri Jul 23, 2021 3:23 pm After selling my business, I am 20% in the process of my investment plan of deploying ~6 million into the markets over 12 months (60% VTSAX/10% VTIAX/30% VBLTX).

One of the big disadvantages of needing to invest so much money at once (other than the volatility risk of not DCA over a lifetime) is that this isn't in a retirement account and I have to pay taxes on any ongoing dividends.

I am not bullish on the bond market right now, for the same reasons everyone isn't. But I accept that I can't predict the future and I am counting on bonds to follow historic trends of not falling as drastically as stocks during the next crash, giving me the opportunity to reallocate heavily into stocks.

I saw a recommendation for municipal bonds somewhere and after looking into it , it looks like it may be a good alternative instead of VBTLX funds for a good portion of my bond funds. It looks like I can buy a state fund (FSAZX) that is exempt from both federal and state taxes, which is huge considering my income and total $$ exposure. The expense ratio is much higher (.55) but the yield is also higher, so it makes up for it.

I imagine a state fund vs a total bond fund inherently has more risk, but the state fund looks like it has had similar volatility as VBTLX since it's inception in the 90s. VBTLX seems to drop 4-7% during the crashs, while this fund seems to be at 5-10%. Beta for FSAZX: .04 seems to put it at basically the same volitilitary as VBTLX:0.00 when compared to VTSAX:1.05. So while it has crashed a little more, it looks like it should do it's job of retaining it's worth more than the drop in stocks for an effective asset allocation.

Am I missing some disadvantages or are their blindspots in risk I am not seeing?

Thanks :sharebeer
Congrats on selling your business, sounds like it was very successful :beer

Thoughts:
1) Current appeal of muni yields may not persist. Typically muni yields would be lower than yields of similar credit and duration taxable bonds (as I understand it, muni bonds are usually priced to account for the fact that buyers will be getting a tax benefit). I would expect to see the relative superiority of muni versus taxable to change over the years. Just to set expectations...

2) Do you know what your tax bracket will be once all your funds are deployed? Even though there's a lot of money invested and a lot of distributions coming your way, maybe your tax bracket won't be high enough to merit using munis? Often you'll see the 24% bracket as being the gray area where it's not clear if it helps. Below 24% bracket, use taxable bonds. Above 24%, it's more likely munis will win out.

3) I don't know much about Arizona munis. One common suggestion on Bogleheads is to split munis 50% in a broad fund (like VWIUX or VTEB) and 50% in the state specific fund. This is to limit fallout in case the state suffers risks you won't find in other states. The 50/50 numbers are sort of arbitrary.

4) According to the Fidelity page for FSAZX (https://fundresearch.fidelity.com/mutua ... /316448885), the fund does distribute not just dividends but also capital gain distributions. Not sure if those CG distributions would be treated as regular income (i.e., short-term CGs) or long-term CGs (better tax treatment). I'm not sure why they distribute CGs; my past experience was with VWIUX which didn't distribute cap gains. Just FYI; I don't think this is a reason to not buy FSAZX.
Topic Author
powercherry5
Posts: 107
Joined: Thu Dec 12, 2019 3:46 pm

Re: VBTLX vs Muni Funds?

Post by powercherry5 »

pasadena wrote: Fri Jul 23, 2021 3:50 pm You don't say what your expected tax bracket will be from 2022 onwards?

My IPS say that in taxable, I should only hold tax-exempt bonds as long as I'm in a high tax bracket. It also says - rather arbitrarily - that state-specific munis shouldn't be more than half of that. But I wrote that when I was in California and had a lot less than $1.8M in bonds, so... (I'm also glad I limited that, because when I left CA, I had to sell it). Then again, AZ's max tax bracket is 4.50%, not too high.

Have you compared with FTABX - Fidelity Tax-Free Bond Fund (assuming you're at Fidelity) to see if the tax savings would be worth the additional risk due to lack of diversification?
I am at Vanguard, but it seems like I am able to trade Fidelity stocks with no problems or fees through Vanguard. Is that incorrect?

My tax bracket this year will be maxed out. For the next 2 years after, I will at minimum be in the 15% capital gains tax and 4.5% state.
pasadena
Posts: 2337
Joined: Sat Jul 02, 2016 1:23 am
Location: PNW

Re: VBTLX vs Muni Funds?

Post by pasadena »

powercherry5 wrote: Fri Jul 23, 2021 3:59 pm I am at Vanguard, but it seems like I am able to trade Fidelity stocks with no problems or fees through Vanguard. Is that incorrect?
Oh, well, I don't know. Doesn't seem like VG has an Arizona muni fund. But in that case, the one you'd want to compare with would be VWIUX - Vanguard Intermediate-Term Tax-Exempt Fund Admiral

My tax bracket this year will be maxed out. For the next 2 years after, I will at minimum be in the 15% capital gains tax and 4.5% state.
Ah yes but we're talking dividends here, are we not? What's your income tax bracket - starting next year, because yeah, this year you're probably all topped out, and the years beyond that?
Topic Author
powercherry5
Posts: 107
Joined: Thu Dec 12, 2019 3:46 pm

Re: VBTLX vs Muni Funds?

Post by powercherry5 »

sycamore wrote: Fri Jul 23, 2021 3:56 pm Congrats on selling your business, sounds like it was very successful :beer

Thoughts:
1) Current appeal of muni yields may not persist. Typically muni yields would be lower than yields of similar credit and duration taxable bonds (as I understand it, muni bonds are usually priced to account for the fact that buyers will be getting a tax benefit). I would expect to see the relative superiority of muni versus taxable to change over the years. Just to set expectations...

2) Do you know what your tax bracket will be once all your funds are deployed? Even though there's a lot of money invested and a lot of distributions coming your way, maybe your tax bracket won't be high enough to merit using munis? Often you'll see the 24% bracket as being the gray area where it's not clear if it helps. Below 24% bracket, use taxable bonds. Above 24%, it's more likely munis will win out.

3) I don't know much about Arizona munis. One common suggestion on Bogleheads is to split munis 50% in a broad fund (like VWIUX or VTEB) and 50% in the state specific fund. This is to limit fallout in case the state suffers risks you won't find in other states. The 50/50 numbers are sort of arbitrary.

4) According to the Fidelity page for FSAZX (https://fundresearch.fidelity.com/mutua ... /316448885), the fund does distribute not just dividends but also capital gain distributions. Not sure if those CG distributions would be treated as regular income (i.e., short-term CGs) or long-term CGs (better tax treatment). I'm not sure why they distribute CGs; my past experience was with VWIUX which didn't distribute cap gains. Just FYI; I don't think this is a reason to not buy FSAZX.
Thanks!

1. Is this an issue? From my understanding, I should be able to reallocate things as long as I have a little patience on timing the NAV (minimizing tax implications).

2. This year all my tax brackets will be max... It is hard to predict future years. For the next 2 years after, I will at minimum be in the 15% capital gains tax and 4.5% state. As far as standard income .. It can be as low as whatever my dividends on 6 million are. On the other hand, I am still out there an looking at possibly starting new businesses, so if thnigs work out it could be higher.

3. If I put it into Muni's I figure it will be a small portion of my bond allocation. So it's not like all my bond allocation will go there and I have to diversify because of it. Let's say 10%.

4.Yea, I know nothing about the tax side of things and I am hoping to learn more

Honestly I'm not 100% sure what I am hoping to gain out of this. It's just a very disappointing time to be shoveling so much funds in plain bonds, so I thought maybe there are better options that don't give up much of the bonds utility in a portfolio.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: VBTLX vs Muni Funds?

Post by grabiner »

powercherry5 wrote: Fri Jul 23, 2021 3:23 pm I saw a recommendation for municipal bonds somewhere and after looking into it , it looks like it may be a good alternative instead of VBTLX funds for a good portion of my bond funds. It looks like I can buy a state fund (FSAZX) that is exempt from both federal and state taxes, which is huge considering my income and total $$ exposure. The expense ratio is much higher (.55) but the yield is also higher, so it makes up for it.
The yield is not higher than a Vanguard fund of comparable risk. The Fidelity fund has a 0.52% SEC yield, which implies that it holds bonds yielding 1.07%. Vanguard Intermediate-Term Tax-Exempt Admiral shares (VWIUX) has a 0.70% SEC yield, which would be better after tax, and with less risk because its bonds have a shorter duration; this is reflected in the 0.79% yield of the bonds themselves You could also take a bit more risk with Vanguard Long-Term Tax-Exempt Admiral (VWLUX) at a 1.09% SEC yield.
sycamore wrote: Fri Jul 23, 2021 3:56 pm 4) According to the Fidelity page for FSAZX (https://fundresearch.fidelity.com/mutua ... /316448885), the fund does distribute not just dividends but also capital gain distributions. Not sure if those CG distributions would be treated as regular income (i.e., short-term CGs) or long-term CGs (better tax treatment). I'm not sure why they distribute CGs; my past experience was with VWIUX which didn't distribute cap gains. Just FYI; I don't think this is a reason to not buy FSAZX.
.

I would expect that longer-term funds are more likely to distribute capital gains, because they will sell bonds well before maturity, and thus are more likely to have capital gains. Vanguard Intermediate-Term Tax-Exempt hasn't distributed a capital gain in years, but Long-Term did in 2020.
Wiki David Grabiner
sycamore
Posts: 6359
Joined: Tue May 08, 2018 12:06 pm

Re: VBTLX vs Muni Funds?

Post by sycamore »

powercherry5 wrote: Fri Jul 23, 2021 5:49 pm
sycamore wrote: Fri Jul 23, 2021 3:56 pm 1) Current appeal of muni yields may not persist. Typically muni yields would be lower than yields of similar credit and duration taxable bonds (as I understand it, muni bonds are usually priced to account for the fact that buyers will be getting a tax benefit). I would expect to see the relative superiority of muni versus taxable to change over the years. Just to set expectations...
...
1. Is this an issue? From my understanding, I should be able to reallocate things as long as I have a little patience on timing the NAV (minimizing tax implications).
...
I don't think it's an issue. More about knowing that the muni sub-market may sometimes be slightly out of step with the broader bond market.
Post Reply