Bonds versus Bonds

My earlier bond comparison "Bonds vs. The Stock Market" has led me to make a deeper look at major bond funds with varying maturities and varying credit quality ratings. Below are the results for the 10 largest bond funds in the world: 

Results first, analysis follows: 

Methodology

The method here is fairness to the small individual investor and NOT to the fund managers. Yes, there are hundreds of bond funds offered by dozens of companies but few will know these companies unless they are sold to you-a costly proposition. In the end bond funds differ only in expenses, credit quality and duration (a fancy name for time to maturity).  So I picked the TEN LARGEST funds I could find on Yahoo Finance and from searching.

All the numbers here can be found by typing the fund symbol in Yahoo finance, including daily prices since inception. If you do this, be sure to use the "Adjusted Close". This includes the interest payouts of the funds over time. 

Five of the ten are Vanguard funds. Vanguard manages over $800 Billion of the $1.2 Trillion held by the ten largest funds. PIMCO had the reputation as the largest bond fund manager in the world and today is far from it. 

Results

The ten largest bond funds had an average yield of 2.2% but with rates rising in 2021 are down 2% year-to-date (as of 3/3/2021). That is, they already lost all their income for the year plus another 2 points. Duration averages 5 years and is a measure of the gain or loss a fund is likely to have for every 1% change in interest rates (in this case 5% down in price for every 1% rise in interest rates). The average credit rating for these funds are a very good AA. 

Note, as expected, the short term funds with the shortest durations have the best year-to-date returns. PIMCO has excelled here but note the low BBB average credit quality combined with the shortest 1.9 year duration. 

Conclusion

Bond funds are NOT bonds. Bond prices fluctuate prior to their maturity and, if they don't go bankrupt, will eventually mature and return your capital regardless of interest rates. As a former bond trader I could never see the value of bond funds. 

Funds never mature. A bond fund always is buying new bonds to replace those it matures and a large portion of the bond portfolio will always be subject to interest rates.

 

For those who really want to preserve capital, the shortest term bond funds, will do best. Money market funds and CDs will do better. Bank CDs, which pay more than money markets, are usually non-negotiable, you cannot get your money early barring a penalty. Money markets have the lowest rates.

The trade offs are always the same, the safer and shorter the bond, the lower the yield. 

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please follow this blog by email.

© 2021 Vista Market Research.

Back to Basics: FBND versus BND

Fidelity has been touting the performance of their total bond fund, showing impressive charts in ads. As is my want, let's test these results and compare the Fidelity Total Bond Fund ETF (FBND) to the Vanguard Total Bond Fund ETF (BND).

First the fund companies' own published comparable results, in their own words:

Fidelity's FBND "Snapshot"

Quarter-End Average Annual Total Returns AS OF 09/30/2019

                NAV Return Market Return

1 Year +9.67%          +9.62%
3 Year +3.36%          +3.25%
5 Year     -- --
10 Year -- --
Life         +3.59%          +3.50%

Life as of NAV inception date: 10/06/2014   Life market returns are as of the first day the ETF traded on an exchange, which may occur a few days after the NAV inception date. Market returns are based on the closing price on the listed exchange at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times.
Gross Expense Ratio: 0.36%

Vanguard BND ETF "Profile"

Performance
Total Bond Market ETF
Average annual returns
as of 09/30/2019
Total Bond Market ETF

1-yr         3-yr         5-yr       10-yr        Since inception 04/03/2007
10.91% 4.16% 3.06% 3.52% 4.23%

Given Fidelity's own published results, one wonders why advertise them?

Using Yahoo daily historical data, let's do our own analysis.

Frankly, there is little difference between ETFs. Beginning with the FBND start date 10/9/2014 until 12/3/2019, using continuously compounded daily returns, $1000 in BND has grown to $1180.72 while FNBD has grown to $1191.54 over the same period.

Note, ALL these returns are highly period dependent. Given today's results, Fidelity would be happy to advertise the FBND ETF return.

Quick note on yield or distribution claims. They are not relevant. What is relevant to investors, including income investors, is ONLY the "Total Return". Total returns are the source of growth, dividends, "distributions" or withdrawals of any kind. Total return is the number that income investors and all investors must pay attention to.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.