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Alternate Bond Index Mutual Funds
Here is a list of low-cost Vanguard funds that come reasonably close to approximating the same opportunity and risk as the indexes that the bond ETFs track. They have the additional appeal of not risking your investment going to premium or discount levels like closed-end funds. Most are index-based, except in categories where such an option isn't offered by the fund company. (The list also includes two relatively low-cost T. Rowe Price foreign bond funds since there aren't any Vanguard mutual fund alternatives.)
Because at least some of them are superficially obviously not "substantially identical" to the bond ETFs, and also because of the broken arbitrage, they may also be useful as asset allocation substitutes in a tax loss harvesting and rebalancing effort that would be compliant with the IRS Wash Sale Rule (ask your tax advisor first).
These funds are reasonable alternatives to the corresponding ETF bond funds.
Click here to see a larger version of this table.
The indices they track are not exactly the same. Vanguard offers three maturity ranges based on Lehman indices (recently renamed Barclays indices after Lehman was purchased by Barclays), whereas Barclays offers five maturity ranges based on Lehman/Barclays Treasury indices.
The Vanguard 1-5 year U.S. Treasury fund overlaps the Barclays 1-3 year fund and the 3-7 year fund. The Vanguard 5-10 year U.S. Treasury fund overlaps both the Barclays 3-7 year fund and the Barclays 7-10 year fund. The Vanguard "long" Treasury fund overlaps the Barclays 10-20 year fund and the Barclays 20+ year Treasury fund.
The Barclay's mortgage-backed securities fund was not formerly a good match to the Vanguard GNMA fund, but now that the U.S. government has expressly guaranteed FNMA and other agency debt of the type found in the mortgage-backed Barclays fund, the credit risk of the two funds is virtually the same.
The Vanguard funds are available in two series with different expense ratios based on the size of the investment (minimum $100,000 for the lower expense ratio).
Chart Comparisons Of Bond ETFs And Their Mutual Fund Alternatives
Price charts below plot the bond ETF and the no-load mutual fund alternative together. The left scale is for the mutual fund, and the right scale is for the ETF.
MBB and its alternate fund show huge differences until recently when they began to move together. That appears to be caused by the fact that before the bailout, the alternate GNMA fund was government guaranteed, while the mortgage backed ETF had agency debt that was not federally guaranteed. Now that debt of GNMA, FNMA, FREDDIE and other key mortgage agencies are all federally guaranteed, the funds should, and apparently do, serve as reasonable substitutes for each other.
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