Joel Schofer's Career Planning Blog

TSP Fund Deep Dive – The G Fund – Free Lunches Do Exist

Posted on October 13, 2019 Updated on October 9, 2019

There are only five investments available in the Thrift Savings Plan (TSP), so let’s take a detailed look at them one at a time. In this post we’ll cover the G Fund.

The G Fund is proof that free lunches do actually exist because in the G Fund the government is paying you more interest than they actually should. Read on to find out how and why.

Inception Date

1 APR 1987

Fund Management

Unlike the other TSP funds that are managed by Blackrock, the G Fund is managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a non-marketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money.

Investment Strategy

The G Fund invests exclusively in a non-marketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security.

The G Fund’s investment objective is to produce a rate of return that is higher than inflation while avoiding exposure to credit (default) risk and market price fluctuations. It is designed to provide investors with interest income without risk of loss of principal.

What is the Risk?

Your investment in the G Fund is subject to inflation risk, meaning your G Fund investment may not grow enough to offset the reduction in purchasing power that results from inflation.

What is the Benefit?

The payment of G Fund principal and interest is guaranteed by the U.S. Government. This means that the U.S. Government will always make the required payments. In other words, your G Fund investment is not subject to credit (default) risk.

The G Fund interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security. Generally, long-term interest rates are higher than short-term rates. This is the free lunch that the government periodically talks about getting rid of.

The G Fund is the lowest risk fund in the TSP and will have the lowest volatility, as you can see below. The major benefit is that you are guaranteed not to lose money. In trade for this you are receiving lower returns. Here is all the performance data as of 8 OCT 2019:

Types of Earnings

The G Fund makes money for its investors with interest paid by the U.S. Government.

Expenses

The net expenses paid by investors is 0.04% or 4 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It costs $0.40 for each $1,000 invested. You won’t find a lower cost U.S. government bond fund anywhere.

How Should I Use the G Fund in my TSP Account?

Consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss. If you choose to invest in the G Fund, you are placing a higher priority on the stability and preservation of your money than on the opportunity to potentially achieve greater long-term growth in your account through investment in the other TSP funds.

It is the TSP equivalent of a U.S. Treasury bond fund you’d find at Vanguard or other investing firms.

Advice from My Favorite Short Investing Book

Here is what my favorite investing book, The Elements of Investing: Easy Lessons for Every Investor, says about U.S. government bond index funds like the G Fund:

The U.S. Treasury issues large amounts of bonds. These issues are considered the safest of all and these bonds are the one type of security where diversification is not essential…High quality bonds can moderate the risk of a common stock portfolio by providing offsetting variations to the inevitable ups and downs or the stock market.

If you want to know how to integrate the G fund into your own TSP investments, read the Crush the TSP series. In particular, step 3 tells you how to figure out how much of your portfolio to devote toward bonds.

TSP Fund Deep Dive – The F Fund

Posted on October 8, 2019 Updated on October 6, 2019

There are only five investments available in the Thrift Savings Plan (TSP), so let’s take a detailed look at them one at a time. In this post we’ll cover the F Fund.

Inception Date

29 JAN 1988

Fund Management

The Federal Retirement Thrift Investment Board currently contracts BlackRock Institutional Trust Company, N.A. (BlackRock) to manage the F Fund assets. The F Fund remains invested regardless of the performance of the securities markets or the overall economy.

Investment Strategy

The F Fund is invested in a bond index fund that invests in government, corporate, and mortgage-backed bonds. The F Fund’s objective is to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index.

The F Fund is a passively managed fund that remains invested according to its indexed investment strategy regardless of securities market movements or general economic conditions.

What is the Risk?

Your investment in the F Fund is subject to market risk, credit risk, prepayment risk, and inflation risk.

Because the F Fund returns move up and down with the returns in the bond market, your F Fund investment is subject to market risk. For example, when interest rates rise, bond prices (and thus, the returns of the index and the F Fund) fall. Conversely, in an environment of falling interest rates, bond prices, as well as the index and F Fund returns, rise.

As an F Fund investor, you are also exposed to credit (default) risk, or the possibility that principal and interest payments on the bonds that comprise the index will not be paid.

The F Fund is subject to inflation risk, meaning your F Fund investment may not grow enough to offset the reduction in purchasing power that results from inflation.

Your F Fund investment is also exposed to prepayment risk, which is the probability that if interest rates fall, bonds that are represented in the index will be paid back early thus forcing lenders to reinvest at lower rates.

What is the Benefit?

Although there are several types of risks associated with the F Fund, the overall risk is relatively low in comparison to certain other fixed income investments in the market because the F Fund includes only investment-grade securities. As a result, F Fund investors are rewarded with the opportunity to earn higher rates of return over the long term than they would from investments in short-term securities such as the G Fund. Here is all the performance data as of 6 OCT 2019:

Types of Earnings

The F Fund changes in value as the market price of its bond holdings change. In addition, the F Fund makes money for its investors with capital gains (net of trading costs), interest on notes and bonds, interest on short-term investments, and securities lending income.

BlackRock credits interest income each business day. This income is then reflected in the TSP share prices.

Share Price Calculations

The value of your account is determined each business day based on the daily share price and the number of shares you hold. At the end of each business day, after the stock and bond markets have closed, the total value of the funds’ holdings (net of accrued administrative expenses) is divided by the total number of shares outstanding to determine the share price for that day. The daily change in TSP share prices reflects all investment income (interest on short-term investments, dividends, capital gains or losses, and securities lending income) net of TSP administrative expenses.

Expenses

The net expenses paid by investors is 0.041% or 4.1 basis points, which like all the TSP funds is ridiculously low and is a major benefit of the TSP. It cost $0.41 for each $1,000 invested.

How Should I Use the F Fund in my TSP Account?

In periods of falling interest rates, the F Fund will experience gains from the resulting rise in bond prices. So in the long run, you may expect F Fund returns to exceed those of the G Fund; however, you should also expect greater price volatility (up and down movements).

It is also important to know that higher returns are not guaranteed. This is because losses may occur when interest rates are rising, causing bond prices to fall.

The F Fund can be useful in a portfolio that also contains stocks funds. This is because the prices of bonds and stocks don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains stock funds, like the C, S, and I Funds, along with the F Fund, will tend to be less volatile than one that contains stock funds alone.

Advice from My Favorite Short Investing Book

Here is what my favorite investing book, The Elements of Investing: Easy Lessons for Every Investor, says about investment-grade bond index funds like the F Fund:

If indexing has advantages in the stock market, its superiority is even greater in the bond market. You would never want to hold just one bond (such as an IOU from General Motors or Chrysler) in your portfolio – any single bond issuer could get into financial deficiency and be unable to repay you in full. That’s why you need a broadly diversified portfolio of bonds – making a mutual fund essential. And it’s wise to use bond index funds: They have regularly proved superior to actively managed bond funds.

They also say, “Well-diversified portfolios should have holdings of bonds as well as stocks.”

If you want to know how to integrate the F fund into your own TSP investments, read the Crush the TSP series. In particular, step 3 tells you how to figure out how much of your portfolio to devote toward bonds.