[twblalock]

VFITX is down ~2% since January. If I had bought shares of it in January, I would have less money than I started with. If I had bought individual treasury bonds in January, I would have more money than I started with. That seems like a significant difference between bonds and bond funds.

[mvilim]

I looked up VFITX. It looks like they pay distributions (i.e. dividends) that are roughly proportional to the expectation of the interest rate over the average maturity of their holdings, so you need to take this into account when considering "what-if". They have paid approximately 1.4% in dividends during 2018. That makes their total losses around 0.6%.

This doesn't fully explain the underperformance of VFITX compared to a 3 year bond (which should have made 8 mo/12 mo * 2% = 1.3% in interest and lost around 0.7% on rising interest rates), a net gain of 0.6%.

So VFITX underperformed a three year bond by 1.2%. 0.13% of this is their management fee (0.2% * 8 mo/12 mo). I'm not able to explain the last 1% of difference.

However, in theory, a bond fund loses just as much value on an interest rate rise as the bonds it is holding lose. In my example above, the bond is worth ~$99 after the increase to a 3% rate, just like the fund. The only difference between the bond and the fund is the choice of when to liquidate or roll.

It's possible that VFITX got unlucky on the timing of their bond rolling (see cousin comment).

[DavidHull]

According to the VFITX portfolio page (https://investor.vanguard.com/mutual-funds/profile/portfolio...), the average maturity of its holdings in 6 years, which probably explains why its performance is different than that of a 3 year treasury bond.

[mvilim]

Five and ten year US bonds have had lost less value than the three year bond in the past 8 months, so that doesn't seem sufficient to explain it (i.e. it makes the difference worse).

That said, I was very loose in my calculations. Without exact knowledge of their holdings and careful calculations, I'm not surprised that the numbers don't fully add up.

[twblalock]

Fair enough, but if someone is interested in holding bonds to maturity it seems like investing in a fund is not actually the same as doing that.

[jstrom]

If you attempted to sell those treasury bonds now on the secondary, you would have to accept the same $99 the shares of VFITX are worth. The immediate, liquid value is the same either way. (You need a common unit to comapre in instead of VFITX in now-$ to bonds in principle-$.)

If you hold the bonds and/or VFITX instead, the interest pay out of the bonds and the distributions of VFITX should also come out equal (except not, the fund has the advantage that it can change its composition from buying/selling bonds, but also has the overhead of selecting and performing those transactions).

(In reference to your below comment, yes, fund != holding bonds. The fund is closer to you buying the bonds, but also buying/selling as bonds mature or you anticipate changes in rates)

[twblalock]

As mvilim noted in his response to my comment, the outcome is actually not equal, and VFITX underperformed bonds over the same period, by a larger amount than can be explained by its expense ratio.

[ThrustVectoring]

You're simply not marking your losses to market - not having a loss here is an accounting fiction, not a real financial difference. In both situations, you have less money than if you'd bought the bonds at a later time instead.

[twblalock]

> In both situations, you have less money than if you'd bought the bonds at a later time instead.

But this is not the situation I described. My point is that buying the bonds in January would have been better than buying the bond fund in January.

If you look at mvilim's response to my comment you will see that the fund underperformed bonds between January and today.