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I narrowed my list down to 2 open end funds DVHIX and NHMAX and 2 ETF's HYMB, HYD. I would use it in an IRA for a large cash position and/or Roth and taxable account. I would appreciate if any comments or questions.
Did I read you right, that you want to use muni bonds in IRAs? Some custodians won't even allow this. For example, Fidelity does, but not online:
"The security you are attempting to trade is a tax-free mutual fund. Retirement accounts are prevented from buying or exchanging into tax-free mutual funds through the electronic channels. "
That said, given your last comment ("MUB might be the way for lowest risk"), I would also ask what you are looking for in terms of risk/reward. If you're even comparing MUB with junk bond funds, then it may be that you're not comfortable enough with junk. I find that over the long term the volatility doesn't matter (to me), but each person has his own comfort levels and objectives.
Bonds (and bond funds) are at one level pretty simple vehicles. As quality goes down, risk and reward go up. (If one wants to minimize this type of risk, one can stick with investment grade funds). As duration goes up, risk and reward go up.
Quality and duration, along with cost, are the three main levers. These levers determine the vast majority of a vanilla fund's performance. You pick the risk level and source of risk you want and then go fund a low cost fund matching that. Sure issue selection matters, especially with junk, but broad diversification can paper over a lot of problems there.
To make things interesting, let me toss in another fund - one that isn't classified as high yield - BCHYX. It's a single state junk bond fund. But given that the state's California, (with an economy approaching the size of the UK's), you still get a fair amount of diversification. Also, the fund fits midway between your two other funds.
The three funds are all BB rated by M*, with the longest duration fund (NHMAX, 10 years) having a disasterous 2008 and a spectacular 2009, not surprisingly. BCHYX's duration is in the middle (7.8 years) with 1, 3, and 10 year performance in the middle. DVHIX with its shorter duration (6 years) tends to give a smoother and more muted performance. All of these are still much longer than MUB's 4.7 years, if you're focused on minimizing interest rate risk.
I have a hard time with bond funds, especially munis, that have ERs over 0.50%. High ER and long duration would be my concerns with NHMAX. For an index fund, one hopes to do better on cost, but HYMB barely beats this target with 0.45% ER. Nevertheless it gets you higher quality bonds (BBB), albeit still with a somewhat long duration (8.2 years).
HYD does better on cost (0.35%), but still at the longer end of duration (8.7 years), and appears to have the lowest quality portfolio (eyeballing its fact sheet).
If you really want junk and also want to dial down risk, look for funds with BB or better credit and shorter durations. The obvious choice if you want to have a "high yield" muni fund with training wheels (that's not a pejorative, just a colorful description) is VWAHX/VWALX.
msf, what you say is were I was in deciding where to go and came much to the same conclusions. Yes, I have used muny's at Schwab in IRAs. No to junk, but yes to MUB. Thank you for your response.
The three funds are all BB rated by M*, with the longest duration fund (NHMAX, 10 years) having a disasterous 2008 and a spectacular 2009, not surprisingly. BCHYX's duration is in the middle (7.8 years) with 1, 3, and 10 year performance in the
I have held Vanguard Hi Yield Municipal Bond Fund for about 20 years, through ups an downs, very happy, no plans to mess with it. You get the rock bottom expenses and don't have to worry about it blowing up because a manager decided to make a big bet on a security or the market and messed up. I hold funds for long periods of time, don't hold that many, have a large dollar portfolio. Time is on your side in the market and I have the returns to prove it.
@varmint &MFO Members: Varmint is correct that time is on you side, and VWAHX has a excellent long-term record. VWAHX is ranked #3 in the Muni High-Yield Bond Fund category by U.S. News & World Report. Regards, Ted http://money.usnews.com/funds/mutual-funds/muni-national-interm/vanguard-high-yield-tax-exempt-fund/vwahx
That's a ranking of investment grade bonds, not high yield bonds.
This just goes to show that over the long term, if one rides out the ups and downs, junk bonds seem to do marginally better than investment grade bonds, commensurate with their higher risk.
VWAHX, with its lower risk than typical junk, would be expected to return less over the long term than typical junk bonds. Yet it did outperform the HY average over 15 years. That is because of its 2008/2009 performance (and because of its much lower expenses). Like other investment grade bonds, it fared much better in 2008 than junk. So much so that its underperformance in 2009 (relative to junk) didn't wipe out this sizeable one-time advantage.
But some good, inexpensive junk bond funds still outperformed cumulatively, even going back past 2008. BCHYX outperformed VWAHX over every time frame (though not on an individual year basis) - YTD, 1 week, 1 mo, 3 mo, 1, 3, 5, 10, 15 years. (Go to this M* page, and input BCHYX to compare.)
VWAHX straddles junk and investment grade. That's why it makes such a good entry into junk. M* calls it "conservative, and so much so, that it places in the muni-national intermediate-term category". Comparing it with either junk or investment grade, without adjusting for its distinctive mix of quality grades, can lead to wrong inferences.
Many A shares are available load-waived at various brokerages like Fidelity. Tack on a dot and LW to the ticker at M* to see (for example, NHMAX.LW); many times the LW version is a star better in the star ratings. I own NHMAX via Fido, and like everyone else who does, paid no load on it.
Also, MMHAX (load-waived of course) and the Pimco fund (PHMIX, PYMDX, etc.) are both decent HY muni funds that are typically lower risk than NHMAX.
MMHAX and PYMDX look less risky than NHMAX because they are of shorter duration (8.6 and 7.0 years vs. 10.1 years). Neither existed in 2008 (though the institutional share class PHMIX did), which also tends to make them look better.
In the case of PHMIX, even though it existed in 2008, M* does not incorporate that data into its calcuations, because M* generally bases its combined figures on 3, 5, and 10 year figures. PHMIX has not existed for 10 years, so only its 3 and 5 year data are included (conveniently skipping 2008 for now).
The best one can do with these funds is look at 2013, the next worst year, to get some sense of risk. Again, I suggest looking at BCHYX. You'll see that these other funds fell over 5% (just a shade less than the category average), while BCHYX fell 3.17% and VWAHX was nearly a perfect match falling 3.22% for that year.
For completeness, NHMAX fell 4.69%, an impressive one year performance for a fund that on paper has more risk.
Much of the outperformance of the high yield munis, especially PYMDX, can be attributed to their exposure to tobacco bonds. Morningstar had an informative article (which I can't link) to the dangers lurking there.
MMHAX and PYMDX look less risky than NHMAX because they are of shorter duration (8.6 and 7.0 years vs. 10.1 years).
PYMDX is also somewhat higher up the credit quality chain, according to the literature and from the percentages by rating I got from Pimco a few months ago. Pimco doesn't publish credit quality figures for oef's, but the CSRs will give them out over the phone if you call.
NHMAX uses inverse floaters, sometimes pretty significantly, apparently selectively. See for example p. 4 of the Q1 commentary (PDF available here).
VWAHX is an excellent fund with a great long term record. But compared to investment grade bond funds, it has been a somewhat erratic performer, with three bottom quintile performances in the past decade (bottoming out at 97th percentile in 2008), and another in the middle quintile.
Figures like this are to be expected, because junk swooned in 2007-2008, while investment grade held up better (especially Treasuries soaring in 2008).
Much of the outperformance of the high yield munis, especially PYMDX, can be attributed to their exposure to tobacco bonds. Morningstar had an informative article (which I can't link) to the dangers lurking there.
Trying to make @msf 's point. Muni's can provide tax exempt and possible attractive after-tax returns.Regular I R A 's and 401k type plan withdrawals will be taxed @ your tax rate without any exemption provisions. From About PTIMX Investment Objective The Fund's objective is to provide a high level of current interest income that is substantially exempt from regular federal income taxes and is consistent with preservation of capital. Performance Trust Municipal Bond Fund can be a highly effective solution for investors seeking attractive levels of tax-free income and long-term after-tax total return potential. Investment Approach This provision is probably the norm for most open-end funds. The Fund invests in, but is not limited to, at least 80% of its net assets in investment-grade municipal securities. The Fund may invest up to 20% of its net assets in below investment-grade municipal securitiesI do not own http://www.ptiafunds.com/about-ptimx Presently very low % in below BBB rated securities. http://www.ptiafunds.com/images/website/documents/fund-documents/ptimx_factsheet.pdf General Ratings Explanation Linked from https://www.invesco.com/portal/site/us/investors/closed-end/product-detail?productId=30303&ticker=OIA&title=invesco-municipal-income-opportunities-trust
In the past week I bought some OIA. Not too "junky" or highly leveraged but a little pricey for a C E F .Premise: Taxes are going to rise.Income inequality ,high student debt the "unfairness of it all" have resonated with enough voters to keep the country leaning to the left of center.There will be a demand for tax advantaged investments and plenty of politicians with ideas to use the money to enhance a state's or city's "livability rating".
Fun with numbers. NCHRX, another misclassified California muni junk bond fund, shows numbers just like VWAHX, and for the same reason - it's been tossed in with investment grade funds for comparison.
Also like VWAHX, it has had some lousy years (relative to its "peer" funds, not junk funds), bottoming out at 95th percentile in both 2007 and 2008, with a third bottom quintile performance in 2013, same as VWAHX.
PYMDX is also somewhat higher up the credit quality chain, according to the literature and from the percentages by rating I got from Pimco a few months ago. Pimco doesn't publish credit quality figures for oef's, but the CSRs will give them out over the phone if you call.
I'd be interested in that breakdown, because the average credit quality computed by M* is not a straight (unweighted) average of the ratings of bonds in a fund's portfolio. Rather it is weighted by the likelihood of a default, so that what you come up with is a rating for the whole portfolio that reflects the likelihood of defaults.
For example, according to M*'s methodology paper, a B rated bond is nearly three times as likely to default as a BB bond.
So there can be a huge difference between the average (unweighted) credit quality of a portfolio, and the actual default risk of that portfolio. Case in point: OPITX.
58% A or better, 21% BBB. So nearly 4/5 investment grade. Unweighted average grade above A (somewhat less than half way to AA, depending on how one scores its 5.5% unrated bonds).
But overall, its credit risk is like a BB bond. Just because it's got 1/8 of its portfolio in below B-rated bonds.
To see the same effect with a very different distribution, there's TSHTX. No unrated bonds, just 3.88% below B, nearly 3/5 (59.5%) investment grade, yet still a BB portfolio as calculated by M*.
So a slug of higher quality bonds in and of itself doesn't make the fund a better quality risk. That's why I'm curious about PYMDX's portfolio breakdown.
We look at bonds as a place to have relatively low volatility and to take risk if needed with equities. Thus we have never used HY Muni funds. The current prices on most of these are in the outer limits.
Wondering as to how the conversation ever got this far? 1. Placing Muni's in an IRA is an unusual approach. 2. MUB (benchmark) is making all time highs right now. IOW's I believe a better approach to investing for total return in any form of bond funds is thru well managed junk CEF's timed during big selloff's. Yields can go 10-13% (I have seen over 20%) plus cap gains in the 10-15% range on average. My experience has been outperformance compared to other approaches with bond funds. Hard to beat but requires patience. The question was about Muni's but money is money and there are other options.
Comments
Regards,
Ted
Open-End Fund:
http://money.usnews.com/funds/mutual-funds/rankings/high-yield-muni
ETFs:
http://money.usnews.com/funds/etfs/rankings/high-yield-bond
"The security you are attempting to trade is a tax-free mutual fund. Retirement accounts are prevented from buying or exchanging into tax-free mutual funds through the electronic channels. "
That said, given your last comment ("MUB might be the way for lowest risk"), I would also ask what you are looking for in terms of risk/reward. If you're even comparing MUB with junk bond funds, then it may be that you're not comfortable enough with junk. I find that over the long term the volatility doesn't matter (to me), but each person has his own comfort levels and objectives.
Bonds (and bond funds) are at one level pretty simple vehicles. As quality goes down, risk and reward go up. (If one wants to minimize this type of risk, one can stick with investment grade funds). As duration goes up, risk and reward go up.
Quality and duration, along with cost, are the three main levers. These levers determine the vast majority of a vanilla fund's performance. You pick the risk level and source of risk you want and then go fund a low cost fund matching that. Sure issue selection matters, especially with junk, but broad diversification can paper over a lot of problems there.
To make things interesting, let me toss in another fund - one that isn't classified as high yield - BCHYX. It's a single state junk bond fund. But given that the state's California, (with an economy approaching the size of the UK's), you still get a fair amount of diversification. Also, the fund fits midway between your two other funds.
The three funds are all BB rated by M*, with the longest duration fund (NHMAX, 10 years) having a disasterous 2008 and a spectacular 2009, not surprisingly. BCHYX's duration is in the middle (7.8 years) with 1, 3, and 10 year performance in the middle. DVHIX with its shorter duration (6 years) tends to give a smoother and more muted performance. All of these are still much longer than MUB's 4.7 years, if you're focused on minimizing interest rate risk.
I have a hard time with bond funds, especially munis, that have ERs over 0.50%. High ER and long duration would be my concerns with NHMAX. For an index fund, one hopes to do better on cost, but HYMB barely beats this target with 0.45% ER. Nevertheless it gets you higher quality bonds (BBB), albeit still with a somewhat long duration (8.2 years).
HYD does better on cost (0.35%), but still at the longer end of duration (8.7 years), and appears to have the lowest quality portfolio (eyeballing its fact sheet).
If you really want junk and also want to dial down risk, look for funds with BB or better credit and shorter durations. The obvious choice if you want to have a "high yield" muni fund with training wheels (that's not a pejorative, just a colorful description) is VWAHX/VWALX.
Munibonds weekly report
Regards,
Ted
http://money.usnews.com/funds/mutual-funds/muni-national-interm/vanguard-high-yield-tax-exempt-fund/vwahx
This just goes to show that over the long term, if one rides out the ups and downs, junk bonds seem to do marginally better than investment grade bonds, commensurate with their higher risk.
VWAHX, with its lower risk than typical junk, would be expected to return less over the long term than typical junk bonds. Yet it did outperform the HY average over 15 years. That is because of its 2008/2009 performance (and because of its much lower expenses). Like other investment grade bonds, it fared much better in 2008 than junk. So much so that its underperformance in 2009 (relative to junk) didn't wipe out this sizeable one-time advantage.
But some good, inexpensive junk bond funds still outperformed cumulatively, even going back past 2008. BCHYX outperformed VWAHX over every time frame (though not on an individual year basis) - YTD, 1 week, 1 mo, 3 mo, 1, 3, 5, 10, 15 years. (Go to this M* page, and input BCHYX to compare.)
VWAHX straddles junk and investment grade. That's why it makes such a good entry into junk. M* calls it "conservative, and so much so, that it places in the muni-national intermediate-term category". Comparing it with either junk or investment grade, without adjusting for its distinctive mix of quality grades, can lead to wrong inferences.
Also, MMHAX (load-waived of course) and the Pimco fund (PHMIX, PYMDX, etc.) are both decent HY muni funds that are typically lower risk than NHMAX.
In the case of PHMIX, even though it existed in 2008, M* does not incorporate that data into its calcuations, because M* generally bases its combined figures on 3, 5, and 10 year figures. PHMIX has not existed for 10 years, so only its 3 and 5 year data are included (conveniently skipping 2008 for now).
The best one can do with these funds is look at 2013, the next worst year, to get some sense of risk. Again, I suggest looking at BCHYX. You'll see that these other funds fell over 5% (just a shade less than the category average), while BCHYX fell 3.17% and VWAHX was nearly a perfect match falling 3.22% for that year.
For completeness, NHMAX fell 4.69%, an impressive one year performance for a fund that on paper has more risk.
Regards,
Ted
1Mo.: 1 percentile
3Mo.: 1 precentile
YTD: 2 percentile
1 Yr.: 3 percentile
3Yr.: 5 percentile
5Yr.: 4 percentile
10Yr.:1 percentile
15Yr.:1 percentile
Regards,
Ted
VWAHX Performance:
http://performance.morningstar.com/fund/performance-return.action?t=VWAHX®ion=usa&culture=en_US
http://quotes.morningstar.com/chart/etf/chart.action?t=XMPT®ion=usa&culture=en_US
http://quotes.morningstar.com/chart/etf/chart.action?t=HYD®ion=usa&culture=en_US
NHMAX uses inverse floaters, sometimes pretty significantly, apparently selectively. See for example p. 4 of the Q1 commentary (PDF available here).
Figures like this are to be expected, because junk swooned in 2007-2008, while investment grade held up better (especially Treasuries soaring in 2008).
This may be the M* column you're talking about; I can access it without even logging in to M*:
Reading the Smoke Signals in the Municipal Markets
From
About PTIMX
Investment Objective
The Fund's objective is to provide a high level of current interest income that is substantially exempt from regular federal income taxes and is consistent with preservation of capital. Performance Trust Municipal Bond Fund can be a highly effective solution for investors seeking attractive levels of tax-free income and long-term after-tax total return potential.
Investment Approach
This provision is probably the norm for most open-end funds.
The Fund invests in, but is not limited to, at least 80% of its net assets in investment-grade municipal securities. The Fund may invest up to 20% of its net assets in below investment-grade municipal securitiesI do not own
http://www.ptiafunds.com/about-ptimx
Presently very low % in below BBB rated securities.
http://www.ptiafunds.com/images/website/documents/fund-documents/ptimx_factsheet.pdf
General Ratings Explanation Linked from https://www.invesco.com/portal/site/us/investors/closed-end/product-detail?productId=30303&ticker=OIA&title=invesco-municipal-income-opportunities-trust
Ratings spelled out from "AAA to Venezuela ? "
http://www.spratings.com/en_US/understanding-ratings#firstPage
In the past week I bought some OIA. Not too "junky" or highly leveraged but a little pricey for a C E F .Premise: Taxes are going to rise.Income inequality ,high student debt the "unfairness of it all" have resonated with enough voters to keep the country leaning to the left of center.There will be a demand for tax advantaged investments and plenty of politicians with ideas to use the money to enhance a state's or city's "livability rating".
VWAHX NCHRX
1Mo.: 1 percentile 1 percentile
3Mo.: 1 percentile 1 percentile
YTD: 2 percentile 1 percentile
1 Yr.: 3 percentile 1 percentile
3Yr.: 5 percentile 1 percentile
5Yr.: 4 percentile 1 percentile
10Yr.: 1 percentile 5 percentile
15Yr.: 1 percentile
Also like VWAHX, it has had some lousy years (relative to its "peer" funds, not junk funds), bottoming out at 95th percentile in both 2007 and 2008, with a third bottom quintile performance in 2013, same as VWAHX.
For example, according to M*'s methodology paper, a B rated bond is nearly three times as likely to default as a BB bond.
So there can be a huge difference between the average (unweighted) credit quality of a portfolio, and the actual default risk of that portfolio. Case in point: OPITX.
58% A or better, 21% BBB. So nearly 4/5 investment grade. Unweighted average grade above A (somewhat less than half way to AA, depending on how one scores its 5.5% unrated bonds).
But overall, its credit risk is like a BB bond. Just because it's got 1/8 of its portfolio in below B-rated bonds.
To see the same effect with a very different distribution, there's TSHTX. No unrated bonds, just 3.88% below B, nearly 3/5 (59.5%) investment grade, yet still a BB portfolio as calculated by M*.
So a slug of higher quality bonds in and of itself doesn't make the fund a better quality risk. That's why I'm curious about PYMDX's portfolio breakdown.