'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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Comments (3) -

Jun 24, 2012 21:39 #

What is your opinion, if any, about what the future (near and longer term) might bring for achieved returns of the major bond ETF's?

Paul Belgium

Jun 25, 2012 06:11 #

Low but positive, uncorrelated returns with light but occasional drawdowns.     During times of world deflationary stress, bonds can be the best thing available.     Bonds won't be attractive for their big returns, that is not what bonds characteristics are  --- bonds will be attractive as a way to preserve capital and balance a portfolio out so that it is less volatile and allow you to tactically pursue more aggressive strategies elsewhere in your portfolio.

Chris United States

Jun 25, 2012 11:37 #

the point is that people looking for fixed income are not necessarily looking for capital risk

dmedina United States

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