qandaQ:   I don't think turnover rates mean as much for bonds as equities, but should I even be looking at turnover rates of bonds?

 

 


Question:  I have Vanguard funds and was analyzing the Short-Term and Intermediate-Term Treasury Bond Funds that you recommend (VFISX) and (VFITX). Both bond funds have high turnover rates (273% and 302%). I currently have the Vanguard Total Bond Index Fund (VBMFX) and it only has a turnover rate of 73%.  I don’t think turnover rates mean as much for bonds as equities, but should I even be looking at turnover rates of bonds? 

Answer:  The management of a bond fund may lead to high turnover as the manager is able to find very small advantages in moving within the market. Vanguard  knows the return of these government guaranteed securities you mention, and if they can trade for very small additional profits (after trading costs), they will.  On the other hand, notice the turnover of the Vanguard High Yield Bond Fund is only 26%.  The cost of buying and selling in that asset class is much higher and the outcome is less guaranteed, so keeping the turnover low is important. I think the Total Bond Index is fine. I sometimes worry that the desire to squeeze every last ounce of profit causes investors too much work.