Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, October 29, 2018. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Taxable vs. Tax Exempt High Yield Bonds

We continue our discussion on high yield bonds from last week’s newsletter. We are particularly interested in comparing taxable high yield bonds with tax exempt high yield bonds. First, let’s take a look at the recent returns. 

Tax exempt high yield bonds are performing well

Taxable high yield vs. tax exempt high yield bond funds (as of 10/1/2018):
Fund YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Trailing 12 Month Yield Taxable Equivalent Yield*
NHMAX (Nuveen High Yield Municipal Bond A) 1.9% 4.3% 5.8% 7.9% 6.4% 5.15% 7.9%
VWAHX (Vanguard High-Yield Tax-Exempt) -0.0% 1.8% 3.7% 4.9% 5.5% 3.78% 5.8%
VWEHX (Vanguard High-Yield Corporate Inv) 1.5% 2.2% 6.2% 5.1% 7.7% 5.34% 5.34%

* Taxable Equivalent Yield is based on the highest federal tax bracket (35%)

It stands out that tax exempt bond funds (especially Nuveen fund NHMAX) have had a comparable or even better return than taxable fund VWEHX, even before tax consideration. For example, for the last 5 years, NHMAX returned 7.9% annually compared with VWEHX’s 5.1%. 

At the moment, if 35% federal tax rate is used, both tax-exempt funds NHMAX and VWAHX have higher taxable equivalent yield than VWEHX. In terms of the total return (the annualized returns in the above table), one can see that if tax is factored in, the tax exempt funds will have much bigger advantage also. 

Tax exempt bond portfolios are outperforming 

Our tax exempt (free) bond portfolios listed on What We Do -> Brokerage Investors are also outperforming the taxable total return bond fund portfolios: 

Portfolio Performance Comparison (as of 9/28/18):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Max. Drawdown
Schwab Total Return Bond -1.1% 0.3% 5.0% 4.2% 8.0% 7.6%
Schwab Muni Bond Funds 1.5% 4.3% 4.8% 5.6% 6.8% 10.1%

The five year chart: 

A muni bond fund portfolio such as Schwab Muni Bond Funds picks one fund quarterly to invest from a list of candidate funds that include short term, intermediate term, long term and high yield municipal bond funds. The selection criterion is the highest momentum score. 

Again, for the past 5 years, the muni bond portfolio outperformed the total return bond portfolio, even before tax consideration. However, the muni bond portfolio has higher maximum drawdown and volatility than the total return bond one has. This is mostly due to the tax free high yield bond fund (in this case, Nuveen’s NHMAX) that can take up the whole portfolio at some period of time. On the other hand, the outperformance is also mostly attributed to the addition of tax exempt high yield bond fund as a candidate fund in this portfolio, 

We have pointed out that taxable high yield bonds possess a very good trending property. Similarly, a tax exempt high yield bond fund like NHMAX or VWAHX also exhibits this, only better. A simple way to gauge how trendy a fund is is to look at the returns of a timing portfolio based on a moving average. For example, the following chart compares the the return charts of two portfolios that use 20 days moving average as the buy/sell signal (when a fund’s total return is above the moving average, it holds the fund, otherwise, holds cash): 

Please note that the above portfolios are not really investable or practical as they require frequent trading of mutual funds, which is not feasible. they merely serve as a study on how trendy their underlying funds are. From the above figure, one can see that both charts are pretty smooth, indicating the momentum is excellent. Furthermore, the tax exempt one (the blue line) is smoother than the taxable one. This implies one can better utilize a tax exempt high yield  bond fund in a momentum based rotation portfolio, which is exactly shown in the above muni bond rotation portfolio performance. 


As always, we want to caution that both taxable and tax exempt high yield bonds belong to the highest risk category among all bonds. In fact, as a reminder, NHMAX had a whopping 42% maximum drawdown and VWEHX had over 30% drawdown during the last financial crisis. We do not advise holding high yield bonds (both taxable and tax exempt) blindly. We believe one should consider to invest in these bonds (or bond funds) using a tactical or dynamic strategy such as the one employed in the above portfolios. 

Because of the excellent trending property, we believe tax exempt high yield bonds are especially suited to a momentum based portfolio. 

At the moment, both taxable and tax exempt high yield bonds are in an upward trend. However, we do believe that, as stocks, the prices of these bonds have been driven higher by fixed income investors’ hunger for yields (or risk appetite). Based on S&P and other credit rating agencies, state and local government debt ratings have started to trend lower since 2017. Simply put, these bonds are risky and again, one should only invest them using a systematic strategy. 

Market Overview

Federal reserve raised interest rate last week. However, bond price rose as investors probably sensed that the pace of interest rate raise is going to be slow. Frankly, it’s becoming boring to write about market review. That itself is alarming as a crisis usually surfaces in times most unexpected. We call for staying the course while maintaining risk exposure to a level one is comfortable with. 

For more detailed asset trend scores, please refer to 360° Market Overview

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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