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Stocks are hot, bonds not. But not all bond ETFs are doing badly, and some are performing better than others.

One way to measure how a bond ETF is doing is to look at its Relative Strength Index. RSI is a technical momentum indicator that assesses whether a security is overbought or oversold. It ranges from zero to 100, so 50 is neutral. A reading of 70 means that the ETF is relatively overbought and perhaps headed for a sell-off, while a reading of 30 means that it is relatively oversold and perhaps ready for a rebound. Looking ahead to the 2Q2012, bond investors seeking a momentum play may want to move into ETFs that have a RSI between 50 and 70.

At the same time, with interest rates threatening to take off, it's important to pay attention to a bond ETF's duration. Duration is a measure of the sensitivity of bond prices to changes in interest rates. Bond prices move inversely to changes in interest rates, and the higher the duration, the more a bond's price will rise as interest rates fall and fall as interest rates rise. In anticipation of rising interest rates, bond investors can reduce their risk by shortening the durations of their portfolios.

To show the relationship between these two concepts, the graph below plots RSI by duration for the twenty-eight largest bond ETFs with assets of at least $1B (size data from ETFdb.com, all other data from Morningstar).

click to enlarge

Seeking alpha bond ETF RS by DUR v1.jpg

The graph's trend line shows a clear relationship between duration and RSI. Bond ETFs with longer durations have lower relative strength on average than those with shorter durations. All things being equal (which they never are), investors may want to be in low-duration, high-RSI ETFs as we move into the second quarter.

The points above the trend line represent ETFs that offer higher relative strength for a given duration. For instance, AGG and CIU have similar durations (4.36 and 4.29 years, respectively), but CIU has a much higher RSI at 61.85 compared to AGG's 50.92. It's thus a better buy, with more relative strength for the same interest rate risk.

From this perspective, one standout is MINT, the relatively new PIMCO short maturity bond ETF, located in the top left corner of the graph. Conversely, the least attractive ETF is TLT, the iShares long Treasury bond index, which has the longest duration and the lowest RSI. One interpretation of the difference between these two ETFs is that investors are bailing out of long Treasurys in anticipation of rising interest rates and moving into very short duration investments with less interest rate risk.

The average duration for this collection of ETFs is 5.28 years. Only five ETFs lie on or above the trend line with a below-average duration: MINT, CIU, VCSH, CSJ, and MBB. For the retail investor these ETFs may be worth careful consideration. CIU and CSJ are iShares' intermediate and short term credit bond ETFs, respectively. VCSH is Vanguard's short term corporate bond ETF, and MBB is iShares' mortgage backed security ETF. All offer lower interest rate risk with above-average relative strength.

But what really counts is performance, so the following graph plots RSI by year-to-date total return (Morningstar as of 3/30/12) for the same twenty-eight bond ETFs.

Seeking Alpha Bond ETF RS by YTD.jpg

As to be expected, the trend line shows a clear positive relationship between relative strength and year-to-date total return. Year-to-date the average total return is 1.35%, and the graph shows only four ETFs above the trend line with above-average total return: CIU, VCSH, BWX, and WIP. BWX is the SPDR international Treasury bond ETF, and WIP is the SPDR international government TIPS ETF. Both have long durations (see the first graph) and thus higher potential interest rate risk. For me they are too speculative.

The two remaining funds, CIU and VCSH were also standouts on the first graph, suggesting that they may be the best bets for retail investors looking for better performance at lower risk in their bond portfolios.

The table below provides the data on which these graphs are based, for those who want to do further analysis.

SYMB

NAME

YIELD

DURATION

RS

YTD

MINT

PIMCO Short Maturity

0.97

0.83

72.82

1.07

CIU

iShares Intermed Credit Bond

3.62

4.29

61.85

2.15

WIP

SPDR Int'l Gov TIPS

4.32

9.78

59.31

6.52

VCSH

Vanguard Short Term Corp

2.29

2.72

58.14

1.89

BWX

SPDR Int'l Treasury Bond

3.41

6.98

56.05

2.21

CSJ

iShares 1-3 Year Credit Bonds

1.85

3.28

55.16

1.14

MBB

iShares MBS Fixed-Rate Bond

3.28

1.59

54.20

0.44

PCY

PwrShares Em Mkt Sov Debt

5.26

8.65

53.54

3.77

LQD

iShares Inv Grade Corporates

4.24

7.56

51.75

2.35

EMB

iShares USD Emerging Mkts

4.69

7.38

51.60

3.52

AGG

iShares US Aggregate Bd Fund

2.81

4.36

50.92

0.14

BND

Vanguard Total Bond Market

3.06

5.04

50.81

0.17

HYG

iShares Hi Yld Corporates

7.26

4.14

50.73

2.63

SHY

iShares 1-3 Year Treasuries

0.77

1.84

50.60

-0.13

ELD

WisdomTree Em Mkts

4.21

4.44

50.40

7.51

TFI

SPDR Municipal Bond Fund

3.23

8.37

50.35

0.93

CFT

iShares Credit Bond Fund

4.01

6.50

50.19

1.33

SHV

iShares Short Treasuries

0.07

0.43

49.82

-0.04

VCIT

Vanguard Int-Term Corp

3.71

6.16

49.72

2.23

MUB

iShares National Muni Bond

3.24

6.58

49.35

1.59

BIV

Vanguard Intermed Bond Idx

3.54

6.40

49.26

0.54

BSV

Vanguard Short-Term Bonds

1.86

2.65

49.07

0.40

SHM

SPDR Short Term Muni Bond

1.43

2.84

48.19

0.35

IEI

iShares 3-7 Year Treasuries

1.62

4.45

48.06

-0.58

TIP

iShares TIPS

3.89

4.84

45.79

0.82

JNK

SPDR High Yield Bond

7.28

4.32

45.67

3.57

IEF

iShares 7-10 Year Treasuries

2.52

7.54

45.36

-1.83

TLT

iShares 20 Year Treasuries

3.37

16.80

42.45

-7.01

AVG

5.38

51.83

1.35

Bottom line: CIU and VSCH may be the safest places for bond ETF investors to be in 2Q2012.

Source: Adding Relative Strength To Your Bond ETF Portfolio