I receive a summary prospectus for each of my funds every so often. I make it a habit to at least glance at them and I understand a little more every time.
I have a basic idea of the purpose of investing. I regularly research the topic, write about it, and discuss it with Andrew, my financial advisor.
In this post I would like to review my Vanguard bond fund’s summary prospectus. It’s simple and offers a summary of the fund which I invest in – VBTLX.
Bond Fund Prospectus
1. Operation Expenses
My VBTLX’s fund’s operation expenses are 0.05% per year – that’s the expense ratio, what I pay to own this fund every year. It’s quite low. Anything in this expense ratio range is generally considered a low-cost investment.
“Admiral Shares” refers to the lower cost funds which have a minimum investment amount of $10,000. Once you have at least $10k invested in the higher cost Investor Shares fund, Vanguard will automatically switch you to Admiral Shares and drop your expense ratio.
It isn’t all about expense ratios, don’t get too caught up with that. There are more important factors to consider before trying to optimize your fund’s expense ratios.
2. Investment Strategy
There is a section discussing investment strategy which goes over how the money in the fund is invested.
Since this is an index fund, the fund tracks the Bloomberg Barclays U.S. Aggregate Float Adjusted Index.
What is this index exactly? The prospectus states that it’s an aggregate of fixed-income (=bonds), investment grade (=not junk bonds) securities (=publicly traded investments) which include government and corporate and international bonds.
This includes some mortgage-backed securities and other asset-backed securities. Don’t worry, there have been some improved regulations surrounding mortgage-backed securities?.
The average duration of a bond in this fund is 8 years. This matters when you’re investing in bonds. Your financial advisor or your own investment strategy should dictate the duration of bonds you want to invest in.
Andrew and I have decided on this particular investment because it’s low-cost and it’s medium-duration bonds, not too short, not too long.
3. Risks
I won’t go over all the risks involved in investing in a bond index fund. However, the prospectus goes over this in detail. I find most of it a bit too vague and probably written by lawyers.
The main and obvious statement is that such investments are not insured or guaranteed by any entity.
I’ve discussed the decision of investing in CD’s versus bonds. CD’s have a guarantee, bonds don’t.
4. Annual Total Returns
The prospectus lists the average annual returns for the fund over the past 10 years.
Looking at the average returns isn’t enough to make a decision. There are other factors to consider in order to determine what the future potential income of a fund would be. A great place to dive down deep into understanding individual investment options is MFRU.
If you don’t like to bother with asset allocations and checking your investment performance, you can invest in a single fund.
My Bond Fund
I discussed in this previous post how to go about checking your own personal performance on the Vanguard website.
From the graph above you can see my performance of my VBTLX fund. I’m quite happy with this since the purpose of it isn’t growth but decreasing my portfolio risk.
Even though the returns are flat, you can see below that I’ve had some dividend incomes every month. It’s not very sexy but I’ll take it.
Bonds aren’t popular with all investors but it remains a good option in my personal portfolio. Some prefer to hold all of their funds in stock index funds or cash. Others prefer real estate. Whatever you decide, it’s good to aim for a diversified retirement income.
Over the past few years bonds haven’t been exactly shining. It’s painful buying a poorly performing investment. But it’s part of my investing strategy and it makes sense in the overall big picture.