By Carla Fried
Heading into the backstretch, stocks are on pace for quite the winning year. The Standard & Poor’s 500 is up more than 25% year to date, which is actually behind the gains for the Nasdaq.
^SPX data by YCharts
Over on the bond side, it’s of course a much different story as the 1.3 percentage point rise in the 10-year Treasury between May and September sent bond prices skidding.
In fact, the Barclay’s Aggregate bond index is heading toward its second worst showing in nearly 20 years. The iShares Core Total US Bond Market ETF (NYSEARCA:AGG) tracks the Aggregate index:
AGG Total Return Price data by YCharts
If that holds up it would be the weakest calendar year performance since 1994 when the index fell 2.9%. The index’s only other negative year was 1999 when it lost 0.82% but given what was going on with stocks that year, who was paying attention?
With the specter of tapering beginning sometime in the near future, rising rates will continue to be a factor going forward. While ETFs provide cost-effective diversification, most bond ETFs have the same drawback endemic to mutual bond funds: they are a fluid portfolio of bonds that lacks the guaranteed principal payback of individual bonds held to maturity (assuming no default).
A new, and still very small universe of next-generation bond ETFs gets around that drawback by building a fixed portfolio of bonds scheduled to mature at a set date. After all the bonds reach maturity the term-specific ETF disburses the cash to shareholders and shuts down. So unlike a basic bond fund or ETF with no set maturity date, there is a set end date at which principal is returned.
The iShares 2016 S&P AMT-Fee Municipal ETF (MUAE) has an 0.90% current yield. For someone in the 35% federal tax bracket that works out to 1.4%. Principal will be paid back in 2016. You’d have to stretch out to five years to get the same sort of yield on a Treasury.
Over on the corporate side, the Guggenheim ETFs have a lineup of BulletShares funds with various target maturity dates. The Guggenheim BulletShares 2016 ETF (NYSEARCA:BSCG) has a trailing 12 month yield that surpasses the taxable equivalent yield for the iShares 2016 muni fund. The 1.9% current yield is just a smidge less than the dividend yield for the S&P 500 index — with a whole lot less risk exposure than owning stocks for their income at this juncture.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.