In my last article entitled "The Best All/Intermediate-Term Non-Junk Bond Investments," I promised to "evaluate individual intermediate-term bonds, versus bond funds, in my next…article." This is that next article.
For people who may purchase or have purchased individual bonds, I created a version of the spreadsheets in my last article which assumes you buy individual bonds or CDs and hold them to maturity. This spreadsheet assumes a $200,000 investment, versus the $100,000 investment assumed in my last article. The Fund Expenses Ratio is $0 in all cases. The concept is to make adjustments to the numbers associated with each bond ETF so the basket of bonds each ETF is holding is represented, versus the ETF itself.
The ETFs and CDs included in this spreadsheet are:
- Market Vectors Intermediate-Term Municipal Bond ETF (NYSEARCA:ITM)
- Guggenheim BulletShares 2020 (Maturity) Corporate Bond ETF (NYSEARCA:BSCK)
- Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT)
- iShares Barclays 7-10 Year Treasury Bond ETF (NYSEARCA:IEF)
- A generally-available (Goldman Sachs Bank U.S.A.) non-callable 10-year CD (CD1)
- A sample limited-availability (San Antonio Federal Credit Union) non-callable 7-year CD (CD2)
- A sample limited-availability (San Antonio Federal Credit Union) non-callable 10-year CD (CD3)
Please see my last article mentioned above for more information regarding some of these ETFs and CDs and additional notes regarding the spreadsheet data associated with these ETFs and CDs. Please see my two earlier articles entitled "Determining the Best Bond Funds: True Future Total Return" and "The True Yield of Your Bond Investments" for the methodology behind the spreadsheet.
|Fund||Yield Type (YTM, YTW, or OAY)||Yield||Shares||Price||Amount||Personal Expenses||Personal Expenses %||Holding Period (Years)||Annualized Personal Expenses %||Fund Expense Ratio||Annual Default Losses||Last Distribution||Distributions Per Year||Interest Rate||Interest Tax Rate||Annual Interest Tax Loss||Current Price vs. Par Value Differences Gain or Loss||Non-Yield Capital Gain or Loss||Annualized Non-Yield Capital Gain or Loss||Annualized Non-Yield Capital Gain or Loss %||Capital Gain or Loss Tax Rate||Annual Capital Gain or Loss Tax Effect||Annual Adjusted True Yield||As of Date|
(1) Assumes there are no applicable state or local taxes.
(2) In Personal Expenses, I assumed 10 different $20,000 bonds purchased at a transaction cost of $6.95 each, with a loss of 62 basis points (i.e., 0.62% or $1,240 in total) due to (half of the) bid/ask spreads. I do not have experience trading individual bonds. If enough readers tell me these cost figures are not typical for $20,000 bond purchases, I will change the data in this spreadsheet and re-report the results. I got the 62 basis points figure from a corporate bond study using data from between January 2003 and January 2005. The study is here. Please see page 42. From what I have read, bond trading costs vary greatly, with small trades being much more expensive than large trades. Municipal bond trades seem to be a little more expensive than corporate bond trades. Treasury bond trades seem to be less expensive than corporate bond trades, but this seems to be because higher-credit-rating bond trades are less expensive. There are many other variables which affect the cost of bond trades.
(3) ITM's Holding Period of 8.69 years is an average of the average years to maturity of 10.23 years and the average years to potential call (or the like) or maturity, whichever is earlier, of 7.15 years. The average years to maturity was taken from the fund provider's (i.e., Van Eck's) website and verified to be accurate via analysis of the fund's current holdings. The average years to call (or the like) or maturity was estimated based on a sampling constituting 29% of the bonds listed in the last annual report.
(4) BSCK's Holding Period is different than it was in earlier spreadsheets because I removed the effect of the fund transitioning to cash and cash equivalents in the last six months of the funds existence.
(5) The VCIT and IEF Yields are slightly different than they were in earlier spreadsheets because I removed the effect of cash or cash equivalents in the portfolios.
Holding Period (Years)
Adjusted True Yields
U.S. Federal Income Tax Bracket
Taking holding period differences into account, in all tax brackets but the 35% tax bracket, the sample limited-availability CDs (CD2 and CD3) were best. In the 35% tax bracket, the municipal bonds were best. Ignoring the sample limited-availability CDs, in the 0%, 10%, and 15% tax brackets, the corporate bonds were better than the municipal bonds and the generally-available CD (CD1). In the 25% tax bracket and above, the municipal bonds were better than the corporate bonds and the generally-available CD. Treasuries were always the worst investment.
Please educate yourself well prior to attempting to purchase individual bonds. Retail investors are sometimes charged exorbitant markups or markdowns (i.e., basis points differences) when purchasing or selling individual bonds. These markups or markdowns may be invisible to you if you do not know fair trading prices for the bonds and/or ask your broker the right questions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.