Please explain…short term bond funds/ETFs vs actual bonds and bond MM accounts

Bump for same question

Go look at the coupons in the top holdings. Don't forget even if that fund is in T-bill and notes those prices will still get marked down when rates are rising. There's an inflexion point where it becomes negatively convex as it gets closer to maturity. The real question is why are you paying fees for somebody to hold bills and notes when you can buy directly from the Treasury?

First you're comparing apples to oranges.

Money market funds have no significant duration (i.e. NAV isn't affected by interest rate changes). Short treasuries (i.e. t-bills) have a duration of less than 1 year. Those two bond funds have an average duration of 2.5 years and so are more sensitive to interest rate changes.

The other important thing to really understand is that bond funds aren't bonds; it's a collection of bonds. The NAV represents if you sold all of those individual bonds today before maturity. Also a bond fund doesn't always hold all of their individual bonds to maturity. This is especially true for bond funds that maintain a specific duration like VGIT.

The general rule of thumb for a bond fund is if interest rates rise, it would take roughly the duration of the fund for it to recover. If rates are constantly rising then it would take longer but it would eventually recover.

If you really want to understand how interest rates affect bond funds (especially for the long term investors), I highly recommend reading this thread:

https://www.bogleheads.org/forum/viewtopic.php?t=360575

Tldr; a long term bond investor wants interest rates to rise as they will eventually come out ahead.

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The real question is why are you paying fees for somebody to hold bills and notes when you can buy directly from the Treasury?

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I’m not…just looking at options to park cash. Also, it’s an issue of simplicity and liquidity for me in exchange for return….which wouldn’t be life changing money for the amount I’m looking at.

He's talking about TreasuryDirect

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I’ve never liked bond funds TBH. It seems that they undermine to whole purpose of a guaranteed return of capital plus yield (minus defaults) for stability in a portfolio.

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Bond funds are very stable compared in aggregate to the wild swings of equities. Sure last year sucked for bonds but that was also the end of the biggest bull run in history of the bond market that lasted 40 years. If you're looking for a guaranteed return in a specific timeframe, then use individual bonds not a fund.

With a bond fund to get your principal back, you'd need to hold for at least the duration of the fund after rates go up. If you read that other link I posted, I believe the worst case (constant rising rate); you'd have to hold 2X-1 where X is duration. Also don't forget, once rates start going back down the NAV of those same bond funds will rise back up. So you could get your principal back in less than the duration period.

Yeah many people that bought bond funds didn't really understand how they work and were in for a shock last year. Especially those who were in retirement and thought a general bond fund like BND with a duration of 6.6 years was safe and could not lose principal.

Lets say you don't need to spend your bond investments for 20 years till you retire. In that case, the duration of your bonds should be in the ball park of 20 years. If you don't need to use the bonds for decades, the short term performance doesn't matter.

Alot of Bogleheads use two bond funds, one that is longer duration and another that is very short. Together the blended duration matches their investment horizon of needing to use the money. As you move closer to retirement, you shift money from the longer bond fund to the shorter one to lower the duration.

You could use only shorter duration but then you have reinvestment risk if rates fall.

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So much easier to understand for the majority of clients.

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how's the Edward Jones gig going?

I'd much rather hold the actual bills/bonds so I can hold them to maturity vs forced selling by the funds to meet redemptions.