Bonds

How do exchange-traded-funds (ETF) focused on Treasury Inflation-Protected Securities (TIPS) perform? To investigate, we consider ten of the largest TIP ETFs, all currently available, as follows:

• • iShares TIPS (TIP)
  • Schwab U.S. TIPS (SCHP)
  • Vanguard Short-Term Inflation-Protected Securities (VTIP)
  • iShares 0-5 Year TIPS (STIP)
  • SPDR Portfolio TIPS (SPIP)
  • FlexShares iBoxx 3-Year Target Duration TIPS Index (TDTT)
  • PIMCO 1-5 Year US TIPS Index (STPZ)
  • SPDR Bloomberg Barclays 1-10 Year TIPS (TIPX)
  • PIMCO 15+ Year US TIPS Index (LTPZ)
  • FlexShares iBoxx 5-Year Target Duration TIPS Index (TDTF)

As benchmarks, we consider iShares 1-3 Year Treasury Bond (SHY), iShares 3-7 Year Treasury Bond (IEI), iShares 7-10 Year Treasury Bond (IEF) and iShares 20+ Year Treasury Bond (TLT). To match duration of each TIPS ETF, we assign the one of these four benchmarks with the highest correlation of monthly returns. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the 10 TIPS ETFs and the four benchmark ETFs as available, and concurrent monthly changes in the U.S. Consumer Price Index (CPI), through October 2024, we find that: Keep Reading

Do target retirement date funds, offering glidepaths that shift asset allocations away from equities and toward bonds as target dates approach, safely generate attractive returns? To investigate, we consider seven such mutual funds offered by Vanguard, as follows:

• • Vanguard Target Retirement 2020 Fund (VTWNX)
  • Vanguard Target Retirement 2025 Fund (VTTVX)
  • Vanguard Target Retirement 2030 Fund (VTHRX)
  • Vanguard Target Retirement 2035 Fund (VTTHX)
  • Vanguard Target Retirement 2040 Fund (VFORX)
  • Vanguard Target Retirement 2045 Fund (VTIVX)
  • Vanguard Target Retirement 2050 Fund (VFIFX)

We consider as benchmarks SPDR S&P 500 ETF Trust (SPY), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and both 80-20 and 60-40 monthly rebalanced SPY-LQD combinations. We look at monthly and annual return statistics, including compound annual growth rate (CAGR) and maximum drawdown (MaxDD). Using monthly total returns for SPY, LQD, three target retirement date funds since October 2003 and four target retirement date funds since June 2006 (limited by Vanguard inception dates), all through September 2024, we find that:

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Does investor fear level predict U.S. Treasury instrument returns? In their September 2024 paper entitled “Fear in the ‘Fearless’ Treasury Market”, Tianyang Wang, Yuanzhi Wang, Qunzi Zhang and Guofu Zhou examine how investor fear relates to future returns on U.S. Treasuries. They define bond risk premiums by duration as annual returns in excess of the 1-year interest rate. To measure investor fear level, they employ Thomson Reuters MarketPsych Indices (TRMI), which apply natural language processing to assess investor fear, positivity, negativity, optimism, pessimism, trust, stress, surprise, credit risk and volatility from 42,000 news and 800 social media inputs. They construct a bond market Fear Index by combining these assessments and suppressing noise via a 12-month moving average. They decompose the Fear Index by duration (short-term vs. long-term), depth (intense vs. mild) and source (news vs. social media). They compare their bond Fear Index with other sentiment metrics and examine its import globally. Using end-of-month prices for 1-year to 5-year zero-coupon U.S. Treasury notes, contemporaneous TRMI outputs and data for other potential bond return predictors during January 1998 through December 2022, they find that:

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How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR  and look at lead-lag relationships between change in EFFR and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

• Equities:
  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
• Bonds:
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
  • iShares JPMorgan Emerging Markets Bond Fund (EMB)
• Real assets:
  • Vanguard REIT ETF (VNQ)
  • SPDR Gold Shares (GLD)
  • Invesco DB Commodity Index Tracking (DBC)

Using end-of-month EFFR and dividend-adjusted prices for the 10 ETFs during December 2007 (limited by EMB) through August 2024, we find that: Keep Reading

The Trading Calendar looks at S&P 500 Index behaviors over the calendar year, finding some consistent patterns. Are there any comparable insights from movements of the U.S. Treasury 10-year constant maturity note (T-note) yield over the calendar year? To investigate, we track T-note yield and cumulative change in T-note yield by business day over all available calendar years, even (U.S. national election) years, odd years and presidential election years. Using daily T-note yield during January 1962 through early September 2024, we find that: Keep Reading

How does the performance of the global multi-class market look when evaluated at a monthly frequency? In their August 2024 paper entitled “The Risk and Reward of Investing”, Ronald Doeswijk and Laurens Swinkels assess global investing rewards and risks via an exhaustive $150 trillion portfolio of investable global assets priced at a monthly frequency, enabling greater granularity of risk estimates than does the annual frequency used in prior research. They consider five asset classes: equities, real estate, non-government bonds, government bonds and commodities. For these classes and the multi-class market, they examine stability of Sharpe ratios and severity, frequency and duration of drawdowns. Their default base currency is the U.S. dollar, but they measure effects of choosing one of nine other currencies on global market portfolio performance. They calculate excess investment returns generally relative to government bill yields as a proxy for return on savings. Using monthly returns for all investable global assets with reinvested dividends during 1970 through 2022, they find that:

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How should global investors assess country sovereign bond and equity risks? In his July 2024 paper entitled “Country Risk: Determinants, Measures and Implications – The 2024 Edition”, Aswath Damodaran examines country risk from multiple perspectives. To estimate a country risk premium, he considers measurements of both country government bond risk and country equity risk. Based on a variety of sources and methods, he concludes that: Keep Reading

Do exchange-traded funds (ETF) that hold convertible corporate bonds offer attractive performance? To investigate, we compare performance statistics for the following four convertible bond ETFs, all currently available, to those for a monthly rebalanced 60%-40% combination of SPDR S&P 500 ETF Trust (SPY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD):

1. SPDR Bloomberg Convertible Securities ETF (CWB)
2. iShares Convertible Bond ETF (ICVT)
3. First Trust SSI Strategic Convertible Securities ETF (FCVT)
4. American Century Quality Convertible Securities ETF (QCON)

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted returns for all specified ETFs since inceptions and for SPY and LQD over matched sample periods through July 2024, we find that: Keep Reading

Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, based on feedback from subscribers about combinations of interest, we look at three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:

1. 50-50 Best Value – EW Top 2: SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 2 (aggressive value and somewhat aggressive momentum).
2. 50-50 Best Value – EW Top 3: SACEVS Best Value paired with SACEMS EW Top 3 (aggressive value and diversified momentum).
3. 50-50 Weighted – EW Top 3: SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).

We consider as a benchmark a simple technical strategy (SPY:SMA10) that holds SPDR S&P 500 ETF Trust (SPY) when the S&P 500 Index is above its 10-month simple moving average and 3-month U.S. Treasury bills (Cash, or T-bills) when below. We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS, SACEMS, SPY and T-bills during July 2006 through July 2024, we find that: Keep Reading

What happens if we extend the “Simple Asset Class ETF Value Strategy” (SACEVS) with a utilities risk premium, derived from the yield on Utilities Select Sector SPDR Fund (XLU)? To investigate, we apply the SACEVS methodology to the following asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond ETF (TLT)
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
XLU
SPDR S&P 500 ETF Trust (SPY)

This set of ETFs relates to four risk premiums, as specified below: (1) term; (2) credit (default); (3) utilities; and, (4) equity. We focus on effects of adding the utilities risk premium on gross compound annual growth rates (CAGR), maximum drawdowns (MaxDD) and annual Sharpe ratios of the Best Value (picking the most undervalued premium) and Weighted (weighting all undervalued premiums according to degree of undervaluation) versions of SACEVS. Using lagged quarterly S&P 500 earnings, monthly S&P 500 Index levels and monthly yields for 3-month U.S. Treasury bill (T-bill), the 10-year Constant Maturity U.S. Treasury note (T-note), Moody’s Seasoned Baa Corporate Bonds since March 1989 (limited by availability of earnings data), XLU prices and dividends since December 1998 (inception) and monthly dividend-adjusted closing prices for the above asset class ETFs since July 2002, all through May 2024, we find that: Keep Reading