Finally, we come to our article on the TSP F Fund (“the Fund”), the only bond fund out of the five individual funds under the TSP.
We will be elaborating on the below topics:
- Who can invest in TSP F FUND?
- What is the Fund’s primary investment objective?
- What kind of expected returns does the Fund provide?
- What kind of risk profile does an investor in the Fund have?
- What are some of the primary reasons for me to invest in the Fund?
- What should I know before investing in the Fund?
Who can invest in TSP F FUND?
Most government employees can invest in the Fund as the TSP is one of the components of the Federal Employees Retirement. To check whether you as a government employee meet the eligibility requirements, kindly refer to the TSP official site here:
What is the TSP F Fund’s primary investment objective?
The Fund is a passively-managed index fund, and in this case it tracks the performance of the Barclays Capital US Aggregate Bond Index, with the ‘F’ in the fund standing for ‘fixed income’. This index seeks to represent the US bond market (investment grade only) and includes US Government, mortgage-backed, corporate, and foreign government (issued in the US) sectors of the bond market. A breakdown of the index by sectors and rating is presented below:
Source: https://index.barcap.com/indices/action/indexDownload?id=-3d41c351d7d2f26f1c8b01391bb42820
What kind of expected returns does the Fund provide?
In the charts below, you will find TSP F Fund’s historical performance. The return on the Fund is based on its earnings, which consist of the interest income from the bonds as well as gains (or losses) in the value of the bonds. Again, please note that historical performance does not necessarily translate to future performance, but rather should just be used as a broad indicator.
Source: https://www.tsp.gov/InvestmentFunds/FundPerformance/returnSummary.html
What kind of risk profile does an investor in the Fund have?
As you can see from the sector and rating breakdown of the index, over 65% of the index comprises government or government-related bonds with about 70% of the index carrying a Aaa rating. The returns from the Fund are comparatively low, and hence, an investor in this Fund is likely looking at wealth protection from hedging and diversification.
What are some of the primary reasons for me to invest in the Fund?
1. Risk Reduction via Non-Equity Diversification
While TSP Funds C, S, and I allow for a broad spectrum of equity diversification in your portfolio, both locally and globally, investing in the Fund allows you to add an additional layer of diversification as well. Bonds are typically much less volatile (read: less risky) compared to stocks, and are in fact used as hedge for the portfolio, lowering its overall risk. Of course, the TSP G Fund is the least risky option, being entirely comprised of Treasury securities; however its returns are commensurately lower when compared against the Fund.
2. Lowest Expense Ratios Amongst Index Funds
TSP funds have an average net expense ratio of 0.029% in 2015, or only $0.29 for every $1000 invested, allowing eligible investors a much lower expense ratio compared to other index funds. The table below shows the expense ratios of the other index funds that track the Barclays Capital US Aggregate Bond Index in comparison.
| Index Fund | Expense Ratio |
|---|---|
| Vanguard Total Bond Market Index Fund | “0.16% (Investor shares) |
| 0.06% (Admiral shares)” | |
| Vanguard Total Bond Market ETF | 0.06% |
| iShares Core U.S. Aggregate Bond ETF | 0.08% |
| Fidelity US Bond Index Fund | 0.15% |
Source: Respective company websites
What should I know before investing in the Fund?
1. There is Interest Rate Risk
Unlike equities, bonds are directly inversely correlated with interest rates; meaning that when interest rates go up, bond prices go down, and vice-versa. For more details on this correlation, you may refer to this article here: http://www.investopedia.com/ask/answers/04/031904.asp. As such, bond investors typically take a view of the interest rate (i.e. whether or not the Federal Reserve raises or lowers interest rates) as it will have a direct effect on the value of their bonds portfolio. It should also be noted that we are currently in a rising interest rate environment (with the Federal Reserve raising interest rates in December 2015 for the first time since 2006, with anticipation of a further hike in the works. As such, in the current risking interest rate environment, it may not be ideal to invest in bonds and you may want to consider other options.
Source: http://www.tradingeconomics.com/united-states/interest-rate
2. Lack of Flexibility
In general, TSP Funds do not allow the most flexibility, which is the trade-off for having such low expense ratios. Some of the restrictions imposed on investors include:
- Only two interfund transfers allowed per month unless transferring into the TSP G Fund.
- Income taxes to be paid upon withdrawal.
- When using the hardship withdrawal option, additional 10% penalty tax and a restriction on further account contributions for a 6 month period.
- One partial withdrawal upon leaving Federal employment with only full withdrawal available thereafter.
For further information on withdrawal conditions, kindly refer to: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals
Thank you for reading this article on TSP F Fund. We sincerely hope you found it to be of use in helping you make the right decision according to your financial goals. For further information on the other TSP funds, please take a look at our other articles on the matter.
