Some Summary Index Charts At June 30, 2012

Jun 30, 2012



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'Bernanke Is Killing Savers' -- Reality Check Part 2

Jun 24, 2012

We wrote some blog posts in  2011 about the top 25 bond ETFs in terms of assets.    This is by definition what fixed-income ETF investors actually own.    We don't have to guess -- or say comments like 'Bernanke has killed savers returns with its 0% interest rate policy'  ---  we can just observe the assets in each fund and calculate the actual achieved returns.

Using the exact same list from a May 2011 blog as a proxy, over the past 13 months fixed-income ETF investors are up in the range of +7.0%.   Over exactly 12 months, its +6.3%.



It's not spectacular -- but it certainly hasn't been 'near 0%'  as some commentators seemed to be predicting based on their views of U.S. Federal Reserve policies.   If you are just watching the stated yield-to-maturity of 10-year Treasuries relative to history and think that is all there is to it,  well then --- good luck.

Two ETFs we like to watch closely are IEF and LQD.   They aren't the only ones to watch of course, but these are 2 key intermediate index segments (Treasuries and Investment Grade Corporates).  Neither has much in terms of yield now....  NOR DID THEY 12-13 months ago.  For LQD, the total return path neatly factors in all of the following:   1) the interest earned along the way   2) the change in interest rates since the start date (for the index)  3) the change in the credit spread vs treasuries  and 4) all the bond trades the ETF manager has done to maintain the characteristics of the underlying index.    As CFA charterholders, we had to learn bond mechanics like how to calculate convexity/duration and Option Adjusted Spreads (OAS).  But in the end, a portfolio manager just wants to analyze portfolio management strategies that make money --- the mechanics of individual security analysis are important to a bond fund manager in competition with an index  -- but such mechanics are really not very meaningful when put in the context of managing an overall asset-allocation.

Below is a chart of IEF & LQD  -- and then we include XLE and DBC (the Deutsche Bank commodity index) since May 2011.  The point here is simply to re-iterate the point made 1 and 2 and 3 years ago -- you can't simplify something as vast and nuanced as the bond market into 'avoid bonds' just because the YTM of 10-year Treasuries is low.


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Learning Through Portfolio Backtesting - The Short-Term Isn't That Meaningful

Jun 10, 2012 in Backtest

In this post, we will check back in on the 'Sample Portfolio' -- which was a portfolio we set up over 2 years ago and included as the starter example portfolio for new members.   The idea behind it was to show one type of simple mix of ETFs that can serve as good complements to each other in terms of a rotation strategy.

As seen below,  this rotation portfolio has performed pretty well over the past 2 years.   

But the more specific point we wanted to make here was in the statistical profile that accompanies the report (marked with an arrow at the bottom).  

In the last 'out of sample' 18 monthly results (2011 & 2012), while this strategy is well ahead of the major indexes -- it has actually underperformed the S&P 500 in 10 out of 18 of those months.   Yes, that is right --  it has handily beat the S&P 500 on a cumulative basis while still underperforming more times than not in terms of months.  That seems counter-intuitive -- but this actually isn't that unusual in investing.  

Many times you run a backtest and it shows good results --- make sure to scan down to that number in the table below and take a look at how often is outperforms your inputted benchmark.  If you do this a lot, you will start to understand some of the common pitfalls of bahavioral finance issues.

This is the important part --- if you didn't know this, imagine how your psychology might affect your investing process.  The start to 2012 is a good example.  Our allocations board portfolio fell behind the S&P 500 return on a Year-To-Date basis in March (relative basis only).   Was this underperformance meaningful?  No.  Not if we believe that our strategy is solid and that we don't care about the short-run --- we only care about the equity curve over time.  Through backtesting, we are armed with the knowledge that good strategies might indeed underperform in 40% or more of the months and this does nothing to change the validity of the strategy.

Summary:   We all want to outperform the indexes in every single period --- but if you obsess about this kind of thing --- chasing a benchmark around in every short-term timeframe -- it will ultimately be your un-doing.   The behavioral/mental side of investing is hugely underrated.   The specific numbers in this one example are not the point.   The point here is to use the portfolio backtesting process as a way to battle against the behavioral biases that keep you from doing well in investing.   In our view, backtesting ideas can greatly help because if you are like us, you have to SEE it and imprint it on your brain to actually believe it.  Only through a good and never-ending research process will we ever truly believe in these kinds of things.


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ETF Bond Market Performance Since QE Began

Jun 07, 2012 in Bonds

The Federal Reserve has made a lot of money on its Treasury Bond purchases.  However, that is dwarfed by what high-yield bond investors have received over the last few years:

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Corporate Bonds vs MLPs

Jun 02, 2012


Treasury Bonds Are Going Parabolic.   But its not well reported that high-grade US corporate bonds are also in a strong rally.  It's not just treasuries.   Meanwhile,  Oil & Gas MLPs are having very poor run and should be a reminder of the difference between fixed-income securities and riskier assets.


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