Last week I posted a bond ETF portfolio to spark some conversation about how to structure bond portfolios and the role ETFs can or should play in a diversified bond portfolio. Since the virtual ink dried on that one we've had quite a few new bond ETFs come out, so I thought it would be interesting to construct a completely different portfolio and see where the discussion goes.
The portfolio from last week was;
iShares TIP Bond Fund (TIP) 25% (client holding)
iShares iBoxx Investment Grade Corp Bond Fund (LQD) 20%
iShares Barclays Intermediate Credit Bond Fund (CIU) 20%
iShares JPMorgan USD Emerging Markets Bond Fund (EMB) 15%
Currency Shares Australia Trust (FXA) 20% (client holding)
For the portfolio this week, I'm mostly targeting the same segments of the bond market but hopefully the funds are different enough to continue the dialogue.
PIMCO 1-5 Year TIPS ETF (STPZ) 25% (I own this one)
Claymore Bulletshares 2013 Corporate Bond ETF (BSCD) 20%
SPDR Barclays Capital Convertible Bond ETF (CWB) 15%
SPDR Barclays Capital International Corporate Bond ETF (IBND) 15%
iShares Diversified Alternatives Trust (ALT) 15%
WisdomTree Dreyfus Brazilian Real Fund (BZF) 10%
So the TIP exposure. Obviously, I believe in the exposure despite the balance tilting toward deflation these days. The other day a reader left a comment on a different post saying why he liked the iShares 1-3 Year Treasury Bond Fund (SHY). Since STPZ' inception it is up 3.39% versus 0.26% for SHY. The two seem to have the same day to day volatility but STPZ has been inching up as opposed to inching sideways. STPZ has payed a few small dividends but interestingly the dividends are a little bigger (eyeballing the dividends reported on Yahoo finance) than from SHY.
Claymore just (as in yesterday) listed a suite of corporate bond ETFs that each target maturing in a specific year. They run from 2011-2017 and the funds will liquidate on December 31 of the year they are scheduled to mature. They obviously allow for targeting very narrow portfolio elements, which is a plus, but the yield will still not be constant from the day someone might buy one of the funds. The reason for this is that over time if the funds attract assets then more bonds will have to be bought for the fund and those subsequent purchases will take in the prevailing yield at that time. I think this concept for an ETF is a huge positive because while the yield might move the interest rate sensitivity will be very similar to buying an individual bond with the same maturity. Including BSCD in this portfolio creates awareness for anyone who has not heard about these funds yet.
CWB's chart looks a lot like the chart for the SPDR High Yield Bond ETF (JNK). Since CWB's inception 14 months ago it is up 17.91%, versus 12.89% for JNK. CWB was not around in 2008 but in the last few weeks CWB is down 5.38%, versus 4..07% for JNK. When times are good CWB is a good bet to party on, relative to bond funds, but it will likely feel plenty of pain during the bad times. The question becomes, "do you want that sort of attribute in your bond portfolio in the current environment?"
IBND is also a new fund. I wrote about it for thestreet.com so the short version is that it is very heavy in euro denominated bonds, which is a negative. One point I make in the street article is that for the time being corporate bonds in Europe could be less volatile than sovereigns and as ugly as the euro is right now, it is down a lot from where it was.
ALT is not a bond fund, it is an absolute return vehicle. In its six months it has generally traded like a bond fund minus the yield. The point is not to buy a fund that pays no dividend but to think about the possibility that if interest rates rise some portion of a bond portfolio should possibly be allocated to bond fund substitutes. The Collar Fund (COLLX) bills itself as a bond substitute. If rates do go up in a meaningful way bond funds will go down in varying magnitudes. Finding a couple of things to hold that might pay a little interest but more importantly are less likely to go down a lot if rates go up a lot could be better ways to offset the volatility of an equity portfolio.
The question with BZF, as in the other post with FXA, is whether or not a currency fund can be a bond fund substitute. BZF went down quite a bit less than JNK in 2008 and came back quicker too. It has been much bumpier than the iShares 3-7 Year Treasury ETF (IEI) most of the time but that may not be as useful a comparison as with JNK.
There are increasingly more bond ETFs available, making more sophisticated portfolios possible, and this space will continue to see new products coming out (like maybe single country bond ETFs, as the indexes for these already exist), making it all the more useful. PowerShares (I think it was PowerShares) filed for bond sector funds a while back, it would be nice to see those list as well.