Fidelity U.S. Bond Index Fund (FBIDX): Trying To Beat The Benchmark?

Since I am expanding my portfolio to beyond just IRAs and 401ks, I will need to move my more tax-inefficient investments like bonds into those tax-deferred accounts. This way, I’ll put more of my stocks in a plain taxable account which is taxed at the more favorable long-term capital gains rates.

Fidelity is my Solo 401k provider, so I was looking through their bond offerings. Their only bond index funds are the Fidelity U.S. Bond Index Fund (FBIDX) and essentially a US Treasury bond index fund with different maturity lengths. Looking at FBIDX, its benchmark is the Barclays Capital U.S. Aggregate Bond Index. This index covers the all US bonds on the market that are investment grade and taxable, including Treasuries, corporate bonds, and mortgage-backed and asset-backed securities.

This is basically the same benchmark index as the Vanguard Total Bond Market Index fund (VBMFX), which follows the Barclays Capital U.S. Aggregate Float Adjusted Bond Index. (ETF version is ticker BND.) The “float-adjusted” part just accounts for all those Fannie Mae bonds that are now owned by the government and thus not actually available on the market anymore. They should be the same, right? Nope.

A perk of being a financial blogger is companies give you free stuff to try, and Morningstar offered me a free 1-year subscription to their paid Morningstar Premium service which offers stock and mutual fund research. Being a mostly a low-cost index fund investor, most of their content didn’t really interest me. However, I started reading the FBIDX Analyst Report and was surprised. The teaser line was:

Although this fund is designed to track the Barclays Capital U.S. Aggregate Bond Index, it lagged that bogy by more than 3 percentage points from mid-2007 through the end of 2008.

Lagging a benchmark by 3 full percentage points is a lot in the index world. Passive investors want low costs and low tracking error from the target benchmark! That’s how we get our greater-than-average return over the long run. It turns out that Fidelity had been making “modest” bets outside of the index in order to juice their returns, including minor exposure to subprime mortgages through an “ultra-short” bond portfolio*. FBIDX costs more than VBMFX by about 0.12% a year, so they would always lag if all other things were equal, and needed to take such additional risks in order to have better performance numbers.

The report goes on to report that the fund hired a new manager in February 2009, who says he’ll run a tighter ship:

Since joining the fund in February 2009, he [lead manager Curt Hollingsworth] has taken steps to ensure that it will closely track its benchmark from month to month. He thinks actively run internal bond portfolios have no place in this passively run offering, which should reduce the chance of things going awry. He also pared the fund’s exposure to out-of-index bonds from 8% to just 2% of assets lately.

Well, that’s nice to hear, but too late for me. When I see “index” in the fund name, I expect it to match the benchmark, not try to beat it like everyone else. Thus, I’m most likely going to construct my portfolio out of Vanguard bond ETFs instead. My transaction size should be great enough to counteract the hit from each individual stock trade. (Read about the Vanguard ETF vs. mutual fund cost comparison tool.)

24 Hour Fitness Promo: $0 Initiation Fee and $29.99/Month

24 Hour Fitness has some promotions right now for those interested. You can get $0 Initiation Fee and $29.99 Monthly Dues on All-Club Sport Memberships. Expires 1/31/10.

Offer not valid in Reno, Northern CA, Maryland, New Jersey, New York and other select locations or at Super/Ultra Sport Clubs. Membership dues are $29.99 per month. All-Club access depends on membership purchased; All-Club Sport memberships do not include access to Super/Ultra Sport clubs. Taxes may apply. Not valid for current members. Dues must be paid by pre-authorized payment (eft).

Alternatively, you can get a One-Club membership for $199 a year upfront. Costco members can also get a 2-year All-Club membership for $299.

“Fear the Boom and Bust”: Hayek vs. Keynes Economics Rap

Ever heard the term “Keynesian economics” and wanted to learn more? Here’s a new rap video that explores the competing theories from the Austrian business cycles of Friedrich von Hayek and the interventionist theories of John Maynard Keynes. Yes, I said rap… and it’s actually pretty good! I like the quotes at the end.

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle, and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No … it’s the animal spirits

Full lyrics and song download available at EconStories.tv. Via NPR, thanks to reader Tim.

H&R Block At Home 2009 Deluxe Discounts (TaxCut)

I don’t know how long this will last, but right now former H&R Block TaxCut fans can get H&R Block At Home 2009 Deluxe Federal + State for only $25 from Amazon, including five federal e-files and free Super Saver shipping. Retail is $45.

From the description: This is the Deluxe version, which handles things like home interest tax deduction, donations, and investment income. Imports data from TaxCut, TurboTax, Quicken, and Microsoft Money software. Compatible with both Windows and Mac OS X. Includes H&R Block Audit Support.

* You can save another $1.26 and download it directly onto your computer if you have Windows.

Sharebuilder – 10 Free Automatic Investment Plan Trades

Here’s a another Sharebuilder promotion, this time for existing customers. (New customers should grab their free $50 sign-up bonus first and then come back). Visit this page, click on “Kick-start your account” and then log into your account. Although the fine print says they take 2-4 weeks to arrive, I received immediate confirmation of my 10 free Automatic Investment credits. You must set up a new plan by January 31st, 2010.

Thank you for participating in our promotion. We have just credited your ShareBuilder Account with 10 free Automatic Investment credits. Your credit(s) will expire on 12/31/2010. Credit(s) must be used by the last Tuesday of the month in which they expire.

A reminder: These are not good for real-time trades, but for when you set up an automatic investment plan in advance to regularly buy stocks or ETFs in smaller amounts every week or month.

ExxonMobil Speedpass Promo: Up to $20 in Gas Rebates

Buy gas from Exxon Mobil? If you are a new Speedpass customer and activate by 1/31/10, you’ll receive a 5¢ per gallon rebate on fuel purchases for 90 days in most states, up to a max of $20. In certain states, you’ll just get a flat $20 – FL, LA, MA, NC, NJ, RI and SC.

This appears to be a keychain fob that links to any existing credit/debit card but allows you to purchase gas without needing to swipe. So that would be 5 cents per gallon on top of your existing credit card rewards. Thanks to reader Kyle for the tip.

*Offer limited to new Speedpass customers. Offer excludes fleet card accounts. Both enrollment and activation must be done online at speedpass.com to qualify. New Speedpass customers in FL, LA, MA, NC, NJ, RI and SC will receive a $20 ExxonMobil Gift Card (or a $20 ExxonMobil Credit Card statement credit if Speedpass is linked to an ExxonMobil Credit Card) for activating a new Speedpass account. The $20 gift card offer cannot be combined with the 5 cent per gallon rebate offer. Maximum rebate is $20 (or $20 gift card) per new account. Allow a minimum of 90 days to receive rebate credit(s) or gift card. Rebates will be posted to the credit or debit card that is linked to Speedpass. Purchases must be made with a valid Speedpass. Offer expires January 31, 2010.

Discover Card Matching Haiti Donations

If you have a Discover More Card from the old $50 bonus, or any Discover card that has the earns their CashBack Bonus, you can donate your balance towards Haiti relief directly to the American Red Cross and Discover will match it 100% dollar-for-dollar, up to $1 million total.

Free Ben & Jerry’s Ice Cream with ChunkMail

A tipster told me that if you join the Ben & Jerry’s fan club newsletter, called ChunkMail, they will email you a printable coupon good for a free single scoop at your local Ben & Jerry’s shop. I was skeptical, but it did indeed come for me. Kinda cold, but free ice cream is free ice cream!

Sharebuilder – $50 Bonus, IRAs Get Free Trades During 2010

Sharebuilder has a new promotion offering free window trades for all of 2010 if you open an IRA with them before April 15th (1,500 max). These usually cost $4 each, $12/month for 6, or $20/month for 20. Thanks to reader Ron for the tip.

Open an IRA before 4/15/10 to receive 1,500 Automatic Investment Plan credits. The trade credits will be posted to your account the next business day and will expire on 12/31/10. This offer applies to Individual Retirement Accounts only. AIP credits for mutual fund purchases apply only after the minimum investment has been met.

It is important to note that these Automatic Investments are not real-time market/limit trades that most brokerages offer, but market orders that only execute in batches once a week on Tuesdays. In most cases, this is best suited for people gradually dollar-cost-averaging into ETFs or widely-traded stocks. If you want to do an ACAT transfer out, it will cost you $75.

For taxable accounts, Sharebuilder is offering a $50 cash bonus as long as you open a new account with $50 by April 16th with promo code 50WCFA. It doesn’t appear that you even need to make a trade.

You must open a new account with ShareBuilder and deposit at least $50 to be eligible for this promotion. Initial deposit must be completed by 4/16/10. ShareBuilder will deposit a $50 bonus approximately 4-6 weeks after your first $50 deposit. The $50 bonus offer is available for Individual, Joint and Custodial accounts only.

For more background, you can see my slightly-dated Sharebuilder review as well as a follow-up post on a possibly better way to invest with them.

2010 Roth IRA Income Limits Effectively Removed

Okay, let’s try this again. There are no longer any income phase-outs on Roth IRA conversions from Traditional IRAs. As in previous years, individuals or couples with a modified adjusted gross income (MAGI) over a certain limit are ineligible to contribute directly to a Roth IRA. In 2010, the phase-outs begin at $105,000 for single filers and $167,000 for those married filing jointly.

However, with no conversion limitations, people with any income can simply contribute to a Traditional IRA and then convert that to a Roth IRA immediately afterwards.

This is great news for those higher income earners who have been previously unable to contribute to a Roth IRA. In addition, if you have been contributing to a non-deductible Traditional IRA in previous years, you can now finally convert those already-taxed funds into a Roth IRA, which is almost as good as retroactively contributing to a Roth IRA. You’ll only have to pay taxes on any gains you earned on the contributions, not the actual contributions themselves since they were already taxed before. (With the recent market performance, that isn’t much of a problem for most of us…)

One additional wrinkle is that if you have a mix of pre-tax and post-tax contributions inside all of your combined Traditional IRA funds, you cannot convert them separately. For example, if you have a mix of 50% pre-tax and 50% already-taxed funds, then any converted amount will be assumed to be 50% pre-tax and 50% post-tax. You can’t just convert the post-tax part. This could be one reason not to roll over all pre-tax 401k funds into a Traditional IRA whenever possible.

More info: IRS Publication 590, “What’s New for 2010”

2010 Roth IRA Income Limits Removed

Due to stupid errors in my original post, I have gone ahead and written it over. Please see my updated post: 2010 Roth IRA Income Limits Effectively Removed.

2010 Tax Brackets – Federal

Here are the new 2010 federal income tax brackets, as formatted for my own future reference. Due to low inflation, they only differ very slightly from the 2009 tax brackets. These tables are based on taxable income, which is not the same as the gross income on your paystub or the adjusted gross income (AGI) listed on your tax return. Taxable income is after taking any deductions and other exemptions you are eligible for.

Marginal Tax Rate [Taxable Income] Single Married Filing Jointly
10% $0-$8,375 $0-$16,750
15% $8,375-$34,000 $16,750 -$68,000
25% $34,000-$82,400 $68,000-$$137,300
28% $82,400-$171,850 $137,300-$209,250
33% $171,850-$373,650 $209,250-$373,650
35% > $373,650 > $373,650

The value of each personal exemption stays the same as 2009, at $3,650. The standard deduction also remains $11,400 for married couples filing a joint return and $5,700 for singles and married individuals filing separately. Heads of household get slight $50 bump up to $8,400.

Since we’re married, I always pay attention to the point where you jump from 15% to the 25% bracket, which this year is $68,000. If you assume we only take the two personal exemptions and a standard deduction, this would work backwards into a gross income of $86,700.

More info: IRS.gov