Yield To Maturity vs Holding Period Return

Nov 27, 2012 in Bonds

For more volatile bonds (those with at least intermediate duration),  yield to maturity is not a valid forecast of what you will get during time periods spanning far less the average maturity.   What does that mean?

We constantly read about how low yields are -- and we agree, fixed-income yields are low.    But this has been said for many years now and many people seem to draw conclusions and try to forecast based on misinformation.

For more volatile bonds, the return you get will relate to the duration of the bonds and the change in interest rates.   You are not required to hold bonds until maturity.   Individual bonds are often held to maturity because it is difficult to sell them at a reasonable bid.   Trading INDIVIDUAL bonds is very difficult, if not impossible for smaller accounts  ---- and still very difficult for large accounts.   However, ETFs have changed this dynamic.   You can now (somewhat amazingly) do bond strategies with no transaction restrictions.   No purchase fees, no redemption fees.    You can even trade things like Junk Bonds at TD Ameritrade for no commission.   And JNK very often has just a one penny spread.  This is not your grandfathers bond market.

But let's take a very basic case -- not even a long-duration example.   Below is the stated Yield-to-Maturity of Barclays Aggregate Index on specific dates.   The 2nd bar (in green) shows the actual 12-month realized return of AGG, a bond ETF that tracks that index.    As you can see, there is a fair bit of difference between the 1-year return and the stated YTM at the starting date.    Importantly, these differences increase dramatically if you go out to ETFs with longer durations.    Note that Barclays Aggregate index has a stated effective duration of just 4.5 years.   This is much more dramatic the longer you go out in maturity/duration.




To stay balanced, just keep in mind what has happened to the YTM for Barclays Aggregate Index.   Should it rise materially, you should expect the total return for an ETF like AGG to come in well below the index YTM.   The point is --- YTM is not a good 'forecast' of near-term total return UNLESS maturity/duration is short.   



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Utilities XLU and China GXC

Nov 11, 2012


Utility stocks are having very tough month so far.   The Utility index is often a big part of dividend funds and this segment is having a very tough go lately with dividend tax rates likely to increase.  XLU is now negative YTD 2012:




Here are all monthly returns for the past 10 years sorted from low to high for a logical look at XLU vs its own volatility over time.  This month is not over but if it closed here would be the 8th worst since 2002:




Perhaps this is decent example of how markets continually rotate.   Once hated, China ETFs have have now outperformed U.S. Utilities by well over 10% since June 30:


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Reaction on Day After Election 2008

Nov 07, 2012

You can set the ETF screener back to historical dates --- here is a look at what happened the day after the 2008 election:




Using the Fidelity No-Commission List As A Sample


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Global Investing and Home Country Bias

Nov 01, 2012 in Country Funds

If you follow the daily news cycle at all, you are probably getting a lot of news exposure to things that are pretty meaningless in the context of a global asset allocation.    Think about it for a minute -- a typical 'growth' allocation portfolio might be 75% risk assets and 25% income-oriented ('spread product' or gov't bonds).   Of that 75% risky, some percentage is U.S. equities -- and some percentage of that might be risk assets OTHER than US-based common stocks.  Already, we are taking a percentage of a percentage.

Then you think about how much coverage CNBC and other media outlets give to domestic company earnings reports -- and then compare that to something like the coverage of the entire "Asia-Pac" regional ETF investment opportunity.  Do you really need any coverage at all on Zynga and GroupOn? 

Let's put it another way -- how much have you heard about the Pacific Ex-Japan segment (Australia, Hong Kong & Singapore all combined) returning +20% this year?  Just the Hong Kong market alone has a weight in the Global index well above that of Apple or any other single stock.    Apple is of course a very important company and you should certainly pay attention to it -- but then you should also think about global investing opportunities at least as much (more) than you think about any specific individual U.S. company.  If you don't, you will be missing a lot of opportunities that may provide leadership for extended periods of time.

Let's look at the last ten years as an example.   While the U.S. market was leading the worlds equity markets for much of 2011-2012, keep it in context of what happened prior to that:

Home country bias is to be expected to a degree -- people invest in what they know.  Moreover,  prior to the ETF movement it was somewhat difficult to find low-fee vehicles that access international markets.   But that has all changed.   It's now ultra low-cost (no purchase fees, low expense ratios and in some cases zero commission).

The rankings chart below demonstrates a shift in relative strength that have been picked up and reflected in our Allocations Board portfolios back when it was occurring -- in August.   If you were just following news on a set of specific U.S. companies, you probably weren't paying attention to things like this.


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