Vanguard Tax Free Offerings

While searching for a good Low-Duration or Ultrashort bond type fund, I came across Vanguard Short-Term Tax-Exempt fund (Symbol: VWSTX). I was specifically looking for the fund with duration of 1 year or less, which is what I found with this fund. This fund has current yield of 2.61%.

Before I invested in the fund, I wanted to check the yield of the Vanguard Tax-Exempt Money Market Fund (symbol: VMSXX) to find out how much access return I was getting for getting risky with extra duration.

To My surprise, I found out that the yield on the Money Market Fund is higher than the short term bond fund. The duration of the Money Market fund is only 23 days.

Why is this? My guess is that short rates have come up too fast is last 9-10 months, which caused the money market rate to shoot up faster than the short term bond fund. The bond fund may be carrying the low yielding bonds from the 10 months ago period on its portfolio.

All disclaimers apply.

S&P 500 Investment Thought Process

What to think when you invest in S&P 500 Index fund?

• I am an owner of the 500 largest companies in the United States.
• The price/book ratio of the index is 2.8 so my underlying value of the investment is $427.50 based on the today’s closing price of 1197.62.
• The index is expected to earn $75.26 (operating earnings) this year, so those are my earnings.
• Considering 5% earnings growth each year for the next 5 years, my businesses will earn me following amounts:
• In 2006, I will earn $79.02.
• My pocket will have $82.97 from the S&P index earnings in 2007.
• $87.12 from 2008.
• $91.47 from 2009.
• $96.05 from 2010.
• The total expected amount I will earn for the next 5 years will be about $79.02 + $82.97 + $87.12 + $91.47 + $96.05 = $436.63.
• My current book value plus my expected earnings for the next 5 years will be a solid $864.13 ($427.50 + $436.63).
• If the market sets the price of the S&P 500 at 15 times the operating earnings at the end of 2010 then my holding will have market value of $96.05 * 15 = 1440.17.