In my recent post Taking Advantage of Mr. Bear, I described how this current decline offered me the opportunity to move from VTSAX (stocks) to VMMXX (cash) in my taxable account while simultaneously moving an equal amount of VBTLX (bonds) to VTSAX in my IRA.
This had the effect of maintaining my stock & bond/cash asset allocation and freeing up cash without a capital gains tax due.
Now (Friday March 27th) I’ve moved that money from VMMXX to VBTLX*.
Why I moved from VMMXX to VBTLX
Basically for a lower cost and a higher yield.
VMMXX has an ER (expense ratio) of .16% and a current yield of 1.25%. VBTLX’s ER is .05% and its yield is 1.90%.
On the other hand, VMMXX is a money market fund (think cash) and its share price is fixed at $1.00. A key advantage is that there is no volatility in the share price.
As a bond fund, the share price of VBTLX can and does move up and down with interest rates. So there is some volatility, but it is fairly minor.
But wait, some of you may be thinking, with interest rates at rock bottom levels, aren’t bonds risky these days?
For individual bonds this is true and it is called “interest rate risk.” When rates rise, the price of bonds falls. The longer the bond term, the greater this risk is. Many believe, at this point, rates have no where to go but up over time.
But VBTLX has two great advantages that mitigate this risk.
- As a total bond fund, it holds bonds of all different maturities. Those with shorter maturities are less subject to interest rate risk.
- Since it holds thousands of bonds, all bought at various times, some are always maturing. This means the fund can reinvest in new bonds at the higher rates if rates climb.
If this last part has you scratching your head, this post will explain interest rate risk and bonds in general.
Why VBTLX instead of BND?
BND is is the ETF (exchange traded fund) version of VBTLX. In a future post, I’ll talk about the differences between mutual funds and their ETF versions and the advantages of each. (If you can’t wait, you’ll find links in this post that will help.)
In this case, only one the advantages of ETFs has any value to me: The lower ER of BND, .035% vs. .05% for VBTLX. But that is only a .015% difference.
Still, .015% is .015%.
But VBLTX gets the nod because…
- At the moment I am not set up to buy ETFs through Vanguard on-line. It would require a phone call, and with this bear market their phone lines are jammed.
- I can buy VBTLX with a couple of mouse clicks and be done with it.
- After all these years of talking about VBTLX, were I to change to BND, I would be faced with an endless stream of questions as to why from new readers who didn’t read this post. 🙂
*To be clear, we moved only the money from the previous move. The money that was already in VMMXX remains the same so our allociation also remains the same.