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Summary

  • I attempt to estimate the total returns that bond ETFs will have when interest rates start rising.
  • I created a simple formula that anyone can use to estimate how much a bond ETF or mutual fund could rise/fall.
  • Based on my findings, areas worth looking at are Short-Term high yield corporate bonds, and ultra short bond ETFs are worth looking at.

In this article, I will be looking at the largest bond ETFs to assess the projected total returns they may have with a rate increase. The reason for writing this article is that I read an article by a fellow contributor who had a good start to estimating projected value of bond ETFs and mutual funds. However, his title of "How Much Money Are You Planning to Lose in Your Bond Portfolio?" I believe was misleading and I believed he left out a few important items. There are two items that I added that I believe will make estimating future total returns more accurate. The first was that income was not added to his estimates. The second is many bond ETF investors have funds set up on a DRIP plan, so I accounted for that as well in my analysis.

Step 1: Finding Bond ETFs

For the first step, I used the Fidelity stock screener to get my list of ETFs that I would be researching, and I used the following criteria. After using the screener criteria below I found 63 bond ETFs that I would be focusing on.

  • Exclude leveraged & Inverse Funds
  • Asset Class: Fixed Income
  • ETF Type: Exchange Traded Fund
  • Inception Date: Before 7/13/2013
  • Assets: > 500 million
  • Tracking Error: < .35

Step #2: Data Entry & Calculation

For this step, I went to each of the 63 ETFs funds pages and retrieved the Duration & SEC 30-day yield for each fund, and entered it into the second table below. I used the same assumption that the other contributor used for a rate increase of 1.35% from current levels. My formula for calculating the projected total return for each bond ETF is simple:

Projected Total Return= (Duration x Rate Increase) + (Yield x Drip Factor)

The Drip factor is the part of the equation that I am most likely to get a response on, so below is an example of how I came up with the DRIP factor. I created a DRIP spreadsheet and it shows the Dividend $ that would be earned by reinvesting dividend. I then took that number and compared it to what the Dividend $ would be if they were not reinvested, and that number is my DRIP Factor. For the two examples I used below the DRIP factor was 1.11 and 1.10 so I made it a round even number of 1.10 for my calculations in the second table below.

LQD

AGG

Mon/Qtr

Price

Shares

Value

Div Rt

Div $

Mon/Qtr

Price

Shares

Value

Div Rt

Div $

1

$119.05

84.00

$10,000.20

$ 0.337

$ 28.31

1

$109.16

91.61

$10,000.15

$ 0.200

$ 18.32

2

$119.05

84.24

$10,028.51

$ 0.34

$ 28.39

2

$109.16

91.78

$10,018.47

$ 0.20

$ 18.36

3

$119.05

84.48

$10,056.90

$ 0.34

$ 28.47

3

$109.16

91.95

$10,036.83

$ 0.20

$ 18.39

4

$119.05

84.72

$10,085.36

$ 0.34

$ 28.55

4

$109.16

92.11

$10,055.21

$ 0.20

$ 18.42

5

$119.05

84.96

$10,113.91

$ 0.34

$ 28.63

5

$109.16

92.28

$10,073.64

$ 0.20

$ 18.46

6

$119.05

85.20

$10,142.54

$ 0.34

$ 28.71

6

$109.16

92.45

$10,092.09

$ 0.20

$ 18.49

7

$119.05

85.44

$10,171.25

$ 0.34

$ 28.79

7

$109.16

92.62

$10,110.58

$ 0.20

$ 18.52

8

$119.05

85.68

$10,200.05

$ 0.34

$ 28.87

8

$109.16

92.79

$10,129.11

$ 0.20

$ 18.56

9

$119.05

85.92

$10,228.92

$ 0.34

$ 28.96

9

$109.16

92.96

$10,147.67

$ 0.20

$ 18.59

10

$119.05

86.16

$10,257.88

$ 0.34

$ 29.04

10

$109.16

93.13

$10,166.26

$ 0.20

$ 18.63

11

$119.05

86.41

$10,286.91

$ 0.34

$ 29.12

11

$109.16

93.30

$10,184.89

$ 0.20

$ 18.66

12

$119.05

86.65

$10,316.03

$ 0.34

$ 29.20

12

$109.16

93.47

$10,203.55

$ 0.20

$ 18.69

If reinvested

$345.03

If reinvested

$222.09

Not Reinvested

$310.00

Not Reinvested

$202.00

Reinvested/Not Reinvested ratio AKA the DRIP Factor

1.11

Reinvested/Not Reinvested ratio AKA the DRIP Factor

1.10

Current 10 Year Rt.

Proj 10 Yr rate

Projected Rate Increase

Projected move down

Drip Factor

Final Projected Total Return

ETF Description

Symbol

Duration

Yield

ISHARES CORE TOTAL U.S. BOND MARKET ETF

(NYSEARCA:AGG)

5.17

2.02%

2.52%

3.87%

1.35%

-6.98%

1.10

-4.76%

POWERSHARES BUILD AMERICA BOND PORTFOLIO

(NYSEARCA:BAB)

8.79

4.16%

2.52%

3.87%

1.35%

-11.87%

1.10

-7.29%

SPDR BARCLAYS 1-3 MONTH T-BILL ETF

(NYSEARCA:BIL)

0.14

0.00%

2.52%

3.87%

1.35%

-0.19%

1.10

-0.19%

VANGUARD INTERMEDIATE-TERM BOND ETF

(NYSEARCA:BIV)

6.5

2.56%

2.52%

3.87%

1.35%

-8.78%

1.10

-5.96%

POWERSHARES SENIOR LOAN ETF

(NYSEARCA:BKLN)

5.08

4.43%

2.52%

3.87%

1.35%

-6.86%

1.10

-1.99%

VANGUARD LONG-TERM BOND ETF

(NYSEARCA:BLV)

14.5

4.07%

2.52%

3.87%

1.35%

-19.58%

1.10

-15.10%

VANGUARD TOTAL BOND MARKET ETF

(NYSEARCA:BND)

5.6

2.13%

2.52%

3.87%

1.35%

-7.56%

1.10

-5.22%

VANGUARD TOTAL INTERNATIONAL BOND ETF

(NASDAQ:BNDX)

6.8

1.34%

2.52%

3.87%

1.35%

-9.18%

1.10

-7.71%

PIMCO TOTAL RETURN ETF

(NYSEARCA:BOND)

5.04

2.30%

2.52%

3.87%

1.35%

-6.80%

1.10

-4.27%

GUGGENHEIM BULLETSHARES 2015 CORPORATE BOND ETF

(NYSEARCA:BSCF)

1.22

0.36%

2.52%

3.87%

1.35%

-1.65%

1.10

-1.25%

GUGGENHEIM BULLETSHARES 2016 CORPORATE BOND ETF

(NYSEARCA:BSCG)

2.11

0.69%

2.52%

3.87%

1.35%

-2.85%

1.10

-2.09%

GUGGENHEIM BULLETSHARES 2017 CORPORATE BOND ETF

(NYSEARCA:BSCH)

3.04

1.21%

2.52%

3.87%

1.35%

-4.10%

1.10

-2.77%

GUGGENHEIM BULLETSHARES 2016 HIGH YIELD CORPORATE BOND ETF

(NYSEARCA:BSJG)

3.09

4.30%

2.52%

3.87%

1.35%

-4.17%

1.10

0.56%

VANGUARD SHORT-TERM BOND ETF

(NYSEARCA:BSV)

2.7

0.90%

2.52%

3.87%

1.35%

-3.65%

1.10

-2.66%

SPDR BARCLAYS INTERNATIONAL TREASURY BOND

(NYSEARCA:BWX)

7.11

1.16%

2.52%

3.87%

1.35%

-9.60%

1.10

-8.32%

ISHARES INTERMEDIATE CREDIT BOND ETF

(NYSEARCA:CIU)

4.22

1.99%

2.52%

3.87%

1.35%

-5.70%

1.10

-3.51%

ISHARES 10+ YEAR CREDIT BOND ETF

(NYSEARCA:CLY)

12.68

4.39%

2.52%

3.87%

1.35%

-17.12%

1.10

-12.29%

ISHARES CORE U.S. CREDIT BOND ETF

(NYSEARCA:CRED)

6.69

2.77%

2.52%

3.87%

1.35%

-9.03%

1.10

-5.98%

ISHARES 1-3 YEAR CREDIT BOND ETF

(NYSEARCA:CSJ)

1.94

0.71%

2.52%

3.87%

1.35%

-2.62%

1.10

-1.84%

WISDOMTREE EMERGING MARKETS LOCAL DEBT FUND

(NYSEARCA:ELD)

5.11

5.18%

2.52%

3.87%

1.35%

-6.90%

1.10

-1.20%

ISHARES J.P. MORGAN USD EMERGING MARKETS BOND ETF

(NYSEARCA:EMB)

7.09

4.32%

2.52%

3.87%

1.35%

-9.57%

1.10

-4.82%

MARKET VECTORS EMERGING MARKETS LOCAL CURRENCY BOND ETF

(NYSEARCA:EMLC)

4.54

4.51%

2.52%

3.87%

1.35%

-6.13%

1.10

-1.17%

ISHARES FLOATING RATE NOTE ETF

(NYSEARCA:FLOT)

0.13

0.31%

2.52%

3.87%

1.35%

-0.18%

1.10

0.17%

GUGGENHEIM ENHANCED SHORT DURATION BOND ETF

(NYSEARCA:GSY)

0.46

1.09%

2.52%

3.87%

1.35%

-0.62%

1.10

0.58%

ISHARES INTERMEDIATE GOVERNMENT/CREDIT BOND ETF

(NYSEARCA:GVI)

3.8

1.35%

2.52%

3.87%

1.35%

-5.13%

1.10

-3.65%

MARKET VECTORS HIGH-YIELD MUNICIPAL ETF

(NYSEARCA:HYD)

10.53

5.12%

2.52%

3.87%

1.35%

-14.22%

1.10

-8.58%

ISHARES IBOXX $ HIGH YIELD CORPORATE BOND ETF

(NYSEARCA:HYG)

3.95

4.19%

2.52%

3.87%

1.35%

-5.33%

1.10

-0.72%

PERITUS HIGH YIELD ETF

(NYSEARCA:HYLD)

2.28

7.72%

2.52%

3.87%

1.35%

-3.08%

1.10

5.41%

PIMCO 0-5 YEAR HIGH YIELD CORPORATE BOND INDEX FUND

(NYSEARCA:HYS)

1.92

2.90%

2.52%

3.87%

1.35%

-2.59%

1.10

0.60%

ISHARES 7-10 YEAR TREASURY BOND ETF

(NYSEARCA:IEF)

7.6

2.50%

2.52%

3.87%

1.35%

-10.26%

1.10

-7.51%

ISHARES 3-7 YEAR TREASURY BOND ETF

(NYSEARCA:IEI)

4.54

1.47%

2.52%

3.87%

1.35%

-6.13%

1.10

-4.51%

ISHARES INTERNATIONAL TREASURY BOND ETF

(NASDAQ:IGOV)

7.08

0.95%

2.52%

3.87%

1.35%

-9.56%

1.10

-8.51%

SPDR BARCLAYS CAPITAL TIPS ETF

(NYSEARCA:IPE)

8.52

0.10%

2.52%

3.87%

1.35%

-11.50%

1.10

-11.39%

MARKET VECTORS BARCLAYS AMT-FREE INTERMEDIATE MUNI

(NYSEARCA:ITM)

7.45

2.32%

2.52%

3.87%

1.35%

-10.06%

1.10

-7.51%

SPDR BARCLAYS HIGH YIELD BOND ETF

(NYSEARCA:JNK)

4.19

4.65%

2.52%

3.87%

1.35%

-5.66%

1.10

-0.54%

SPDR BARCLAYS AGGREGATE BOND ETF

(NYSEARCA:LAG)

5.61

1.94%

2.52%

3.87%

1.35%

-7.57%

1.10

-5.44%

ISHARES IBOXX $ INVESTMENT GRADE CORPORATE BOND ETF

(NYSEARCA:LQD)

7.74

3.10%

2.52%

3.87%

1.35%

-10.45%

1.10

-7.04%

ISHARES MBS BOND ETF

(NYSEARCA:MBB)

4.14

2.16%

2.52%

3.87%

1.35%

-5.59%

1.10

-3.21%

PIMCO ENHANCED SHORT MATURITY STRATEGY FUND

(NYSEARCA:MINT)

0.54

0.54%

2.52%

3.87%

1.35%

-0.73%

1.10

-0.14%

ISHARES NATIONAL AMT-FREE MUNI BOND ETF

(NYSEARCA:MUB)

6.15

1.89%

2.52%

3.87%

1.35%

-8.30%

1.10

-6.22%

POWERSHARES EMERGING MARKETS SOVEREIGN DEBT

(NYSEARCA:PCY)

8.68

4.54%

2.52%

3.87%

1.35%

-11.72%

1.10

-6.72%

POWERSHARES HIGH YIELD CORPORATE BOND PORTFOLIO

(NYSEARCA:PHB)

4.13

3.28%

2.52%

3.87%

1.35%

-5.58%

1.10

-1.97%

POWERSHARES INSURED NATIONAL MUNICIPAL BOND

(NYSEARCA:PZA)

7.52

3.15%

2.52%

3.87%

1.35%

-10.15%

1.10

-6.69%

SCHWAB SHORT-TERM U.S. TREASURY ETF

(NYSEARCA:SCHO)

1.94

0.30%

2.52%

3.87%

1.35%

-2.62%

1.10

-2.29%

SCHWAB U.S. AGGREGATE BOND ETF

(NYSEARCA:SCHZ)

5.2

2.02%

2.52%

3.87%

1.35%

-7.02%

1.10

-4.80%

SPDR BARCLAYS CAPITAL SHORT TERM CORPORATE BOND ETF

(NYSEARCA:SCPB)

1.91

0.92%

2.52%

3.87%

1.35%

-2.58%

1.10

-1.57%

SPDR BARCLAYS SHORT TERM MUNICIPAL BOND

(NYSEARCA:SHM)

2.81

0.54%

2.52%

3.87%

1.35%

-3.79%

1.10

-3.20%

ISHARES SHORT TREASURY BOND ETF

(NYSEARCA:SHV)

0.4

0.06%

2.52%

3.87%

1.35%

-0.54%

1.10

-0.47%

ISHARES 1-3 YEAR TREASURY BOND ETF

(NYSEARCA:SHY)

1.89

0.33%

2.52%

3.87%

1.35%

-2.55%

1.10

-2.19%

SPDR BARCLAYS CAPITAL SHORT TERM HIGH YIELD BOND ETF

(NYSEARCA:SJNK)

2.27

3.89%

2.52%

3.87%

1.35%

-3.06%

1.10

1.21%

SPDR BLACKSTONE/ GSO SENIOR LOAN ETF

(NYSEARCA:SRLN)

5.48

3.38%

2.52%

3.87%

1.35%

-7.40%

1.10

-3.68%

ISHARES 0-5 YEAR TIPS BOND ETF

(NYSEARCA:STIP)

2.35

3.76%

2.52%

3.87%

1.35%

-3.17%

1.10

0.96%

PIMCO 1-5 YEAR U.S. TIPS INDEX FUND

(NYSEARCA:STPZ)

2.54

3.57%

2.52%

3.87%

1.35%

-3.43%

1.10

0.50%

ISHARES S&P SHORT TERM NATIONAL AMT-FREE BOND ETF

(NYSEARCA:SUB)

2.05

0.32%

2.52%

3.87%

1.35%

-2.77%

1.10

-2.42%

FLEXSHARES IBOXX 3-YEAR TARGET DURATION TIPS INDEX FUND

(NYSEARCA:TDTT)

3.09

2.32%

2.52%

3.87%

1.35%

-4.17%

1.10

-1.62%

SPDR BARCLAYS CAPITAL MUNICIPAL BOND ETF

(NYSEARCA:TFI)

8.12

2.10%

2.52%

3.87%

1.35%

-10.96%

1.10

-8.65%

ISHARES TIPS BOND ETF

(NYSEARCA:TIP)

7.67

3.75%

2.52%

3.87%

1.35%

-10.35%

1.10

-6.23%

ISHARES 20+ YEAR TREASURY BOND ETF

(NYSEARCA:TLT)

16.79

3.26%

2.52%

3.87%

1.35%

-22.67%

1.10

-19.08%

VANGUARD INTERMEDIATE-TERM CORPORATE BOND ETF

(NASDAQ:VCIT)

6.5

3.08%

2.52%

3.87%

1.35%

-8.78%

1.10

-5.39%

VANGUARD LONG-TERM CORPORATE BOND ETF

(NASDAQ:VCLT)

13.8

4.51%

2.52%

3.87%

1.35%

-18.63%

1.10

-13.67%

VANGUARD SHORT-TERM CORPORATE BOND ETF

(NASDAQ:VCSH)

2.9

1.40%

2.52%

3.87%

1.35%

-3.92%

1.10

-2.38%

VANGUARD SHORT-TERM INFLATION-PROTECTED SECURITIES ETF

(NASDAQ:VTIP)

2.5

0.04%

2.52%

3.87%

1.35%

-3.38%

1.10

-3.33%

SPDR DB INT GOV INFLATION-PROTECTED BOND ETF

(NYSEARCA:WIP)

10.3

0.48%

2.52%

3.87%

1.35%

-13.91%

1.10

-13.38%

Results/ Closing Thoughts

After running the above calculation, I found that only eight ETFs were projected to have a positive return, and they are listed in the table below. The fund with the highest projected total return was the AdvisorShares Peritus High Yield ETF. The Peritus High Yield ETF is an actively managed high yield corporate bond fund; therefore, the managers can adjust to rising rates unlike other passive bond ETF funds. Out of the eight funds with a projected positive total return, I noticed a couple trends. The first was that all of the eight funds were focused on shorter durations. The second item I noticed was that there were three bond categories represented: Short-Term High Yield Corporate Bonds, Short-Term TIPS, and Floating Rate Notes. Finally, I know there are many more bond funds that I did not cover because I used the criteria of having $500 million in assets, however if you are looking to calculate for a desired bond ETF or mutual fund, please refer to my simple formula above.

Final Projected Total Return

PERITUS HIGH YIELD ETF

HYLD

5.41%

SPDR BARCLAYS CAPITAL SHORT TERM HIGH YIELD BOND ETF

SJNK

1.21%

ISHARES 0-5 YEAR TIPS BOND ETF

STIP

0.96%

PIMCO 0-5 YEAR HIGH YIELD CORPORATE BOND INDEX FUND

HYS

0.60%

GUGGENHEIM ENHANCED SHORT DURATION BOND ETF

GSY

0.58%

GUGGENHEIM BULLETSHARES 2016 HIGH YIELD CORPORATE BOND ETF

BSJG

0.56%

PIMCO 1-5 YEAR U.S. TIPS INDEX FUND

STPZ

0.50%

ISHARES FLOATING RATE NOTE ETF

FLOT

0.17%

Past Performance

Finally, I looked at how the eight funds performed during the last rate spike from May 2nd 2013, where the rate on the 10 year was 1.63% and rose to a high of 3.03% on December 31st 2013, which was a 1.40% increase which is slightly higher than the 1.35% increase I used for this article. [Data from calculator at Dividendchannel.com] Based on the results the last time interest rates rose it is clear that short duration high yield bonds were the clear winners, with the top four total return spots going to that category. The next two funds GSY, and FLOT, are a both ultra short-term bond funds, with GSY being an actively managed "money market equivalent" ETF, and FLOT tracks ultra short-term floating rate notes. Finally, the last two funds STIP and STPZ are both short-term TIPS funds and I was surprised to see that these two funds had a negative total return during this period. Going forward, I believe short-term high yield corporate bonds and ultra short-term bonds represent the best value out of these three categories.

Total Return May 2nd 2013 to Dec. 31st 2013

HYLD

5.03%

HYS

3.55%

SJNK

2.85%

BSJG

2.62%

GSY

0.69%

FLOT

0.43%

STIP

-1.44%

STPZ

-1.69%

Disclaimer

Source: Projecting Bond Total Returns For Rising Rates