Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

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hudson
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Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by hudson »

Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) = 5.2 Years
Average Stated Maturity = 16.6 Years

https://investor.vanguard.com/mutual-fu ... olio/vwlux

Vanguard's state muni funds (NY, PA, CA and NJ) also show short durations.

If I was duration matching, I should probably use Average Stated Maturity instead of Average Duration?
sycamore
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by sycamore »

hudson wrote: Sat Sep 25, 2021 5:22 am Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) = 5.2 Years
Average Stated Maturity = 16.6 Years

https://investor.vanguard.com/mutual-fu ... olio/vwlux

Vanguard's state muni funds (NY, PA, CA and NJ) also show short durations.

If I was duration matching, I should probably use Average Stated Maturity instead of Average Duration?
FWIW, another long-term muni fund MLN VanEck Long Muni has a similar large difference in duration and maturity (6.2 and 12.2).

An old thread from 2010 asked a related question "Why Match Assets and Liabilities Using Duration?
FinanceGeek wrote: Sat Nov 06, 2010 5:44 pm The process you are speaking of is called immunizing a liability with an asset derived cash flow.

Immunization looks at duration matching (rather than maturity matching) because the duration measure is the percentage change in value (e.g. the first derivative in the DCF value) of a fixed cash flow with respect to a change in prevailing interest rates. So to keep two cash flows immunized against each other you match their durations, not their maturities.
and
bobcat2 wrote: Sat Nov 06, 2010 10:19 pm You use duration of the bonds to match liabilities because if you use maturity you may not match assets to liabilities that well. That's because when you reinvest the bond coupons in more bonds you don't know if those reinvestments are going to have the same return as the original bonds, a lesser return than the original bonds, or a greater return than the original bonds.
It appears duration is the way to go.
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hudson
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by hudson »

Thanks Sycamore! That's very useful!
Does that mean that VWLUX is an intermediate muni fund?
sycamore
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by sycamore »

hudson wrote: Sat Sep 25, 2021 8:26 am Thanks Sycamore! That's very useful!
Does that mean that VWLUX is an intermediate muni fund?
I don't think so. Rather, at times it can be like an intermediate-term fund and other times like a long-term fund.
According to VWLUX's investment strategy and policy:
The fund has no limitations on the maturity of individual securities, but is expected to maintain a dollar-weighted average maturity of 10 to 25 years.
So depending on how close they get to the lower end, the duration might drop from typical long-term range to intermediate-term range.

I was going to suggest checking with Morningstar. Their fixed income style box has two dimensions: credit quality and interest-rate sensitivity. For the latter, the boxes are limited, moderate and extensive. So at least for the style box they don't even use the terms short, intermediate, or long. Worth noting because it makes one question whether how useful the term "intermediate" is for a bond fund.
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hudson
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by hudson »

Thanks again sycamore! Your answer is right on target! I'd never read the investment strategy and policy until now.
I currently own a little VWIUX...Vanguard Intermediate muni.
VWLUX would probably fit my investment horizon better than VWIUX.
afan
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by afan »

As this illustrates, the duration of an active fund can vary. If you know you want a reliably long term bond investment, you might not find it in an active fund. Not unless the fund promises to keep the duration as long as you want.

Here, note that the duration is far below the bottom of the range they stated to be "expected". The joys of active management.

Vanguard has a long term treasury index fund. Duration is just over 18 years.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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hudson
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by hudson »

FWIW, another long-term muni fund MLN VanEck Long Muni has a similar large difference in duration and maturity (6.2 and 12.2). by sycamore
I looked at that fund. The AAA/AA/A percentages seem to mirror VWIUX...Vanguard's intermediate muni. The ER is not too high at .24. The holdings are in millions....241M.
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hudson
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by hudson »

I've read through all of the links to old discussions and to wikipedia.
I'm now convinced that I should use average duration rather than average maturity.

Bottom Line: Average duration is king.

But...if someone asked me to explain why, I could not give the an answer. I would have to reference this discussion.
I still need the 6th grade level explanation. I read Vanguard's explanations of average duration and average stated maturity over and over and think, "What?"
Average Duration
A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of 2 years, its price would fall about 2% when interest rates rose 1 percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by 1 percentage point.

Average Stated Maturity (municipal bond funds and tax-managed balanced)
Average Stated Maturity represents the average of the stated maturity dates for all fixed income securities held by the fund.
The longer the average maturity, the more a fund's share price will move up or down in response to changes in interest rates.
theorist
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by theorist »

hudson wrote: Sun Sep 26, 2021 5:36 am I've read through all of the links to old discussions and to wikipedia.
I'm now convinced that I should use average duration rather than average maturity.

Bottom Line: Average duration is king.

But...if someone asked me to explain why, I could not give the an answer. I would have to reference this discussion.
I still need the 6th grade level explanation. I read Vanguard's explanations of average duration and average stated maturity over and over and think, "What?"
Average Duration
A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of 2 years, its price would fall about 2% when interest rates rose 1 percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by 1 percentage point.

Average Stated Maturity (municipal bond funds and tax-managed balanced)
Average Stated Maturity represents the average of the stated maturity dates for all fixed income securities held by the fund.
The longer the average maturity, the more a fund's share price will move up or down in response to changes in interest rates.
Well, these aren’t contradictory as long as maturity is a monotonically increasing (or, given how they stated it, decreasing) function of duration. :-)
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by grabiner »

The reason for the short duration is that most munis are callable. A muni which matures in 2045 but is callable in 2025 has a 24-year "stated maturity". But since interest rates are much lower now than they were when the bond was issued, the muni is likely to be called, so its price is more similar to that of a bond maturing in 2025. If the muni were certain to be called, it would have a 4-year duration; if the call is likely but not certain, it might have a 6-year duration.

This also means that long-term muni funds have much more interest-rate risk than the duration indicates. If rates rise, bonds are less likely to be called, and thus the duration of callable bonds or funds holding them will increase. If the fund's duration increases from 5 years to 9 years when rates rise by 2%, it will lose 14%, not 10%, as a result of the rise. This concept is called negative negative convexity.
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Re: Average Duration of Vanguard Long-Term Tax-Exempt Fund Admiral Shares (VWLUX) is 5.2 Years

Post by grabiner »

hudson wrote: Sun Sep 26, 2021 5:36 am But...if someone asked me to explain why, I could not give the an answer. I would have to reference this discussion.
I still need the 6th grade level explanation. I read Vanguard's explanations of average duration and average stated maturity over and over and think, "What?"
Average Duration
A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of 2 years, its price would fall about 2% when interest rates rose 1 percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by 1 percentage point.

Average Stated Maturity (municipal bond funds and tax-managed balanced)
Average Stated Maturity represents the average of the stated maturity dates for all fixed income securities held by the fund.
The longer the average maturity, the more a fund's share price will move up or down in response to changes in interest rates.
Duration is the reaction of a bond or fund to a small change in rates. If a bond or fund has a 5-year duration and rates rise by 0.2%, the fund will lose very close to 1% of its value. (The formal mathematical definition uses calculus, but this is the main point.)

Maturity is a characteristic of the bond or fund itself, which is independent of market conditions. Interest-rate risk depends on maturity, but it also depends on other characteristics. All bonds maturing in 2045 have the same stated maturity of 24 years. The bonds with the most interest-rate risk are the zero-coupon bonds, which pay a fixed amount in 2045. Other bonds have less interest-rate risk because they are callable, and still others have less interest-rate risk because they have high coupon payments.
Wiki David Grabiner
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