bonds

This is the first episode of “We Eat Dollar Weighted Returns” where the fare is yummy.  Here’s the twist: investors in some bond ETFs have done better than one who bought at the beginning and held.

Now, all of this is history-dependent.  The particular bond funds I chose were among the largest and most well-known bond ETFs — HYG (iShares iBoxx $ High Yield Corporate Bd), JNK (SPDR Barclays Capital High Yield Bond), and TLT (iShares Barclays 20+ Year Treas Bond).

As bond funds go, these are relatively volatile.  TLT buys the longest Treasury bonds, taking interest rate risk. iShares iBoxx $ High Yid Corp Bond (ETF) (NYSEARCA:HYG) and SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) buy junk bonds, taking credit risk.

Let’s start with TLT:

Date

Cash Flow

Buy & Hold Return

Cumulated

11/9/2002

248,935,892

1

8/31/2003

-73,889,166

12.31%

1.1231

8/31/2004

439,348,999

3.11%

1.15802841

8/31/2005

73,509,821

6.72%

1.235847919

8/31/2006

442,211,811

6.12%

1.311481812

8/31/2007

165,784,828

3.37%

1.355678749

8/31/2008

-344,202,681

9.54%

1.485010502

8/31/2009

887,336,789

12.30%

1.667666793

8/31/2010

120,142,522

-5.85%

1.570108286

8/31/2011

-452,062,384

4.64%

1.64296131

2/29/2012

-3,038,265,474

32.32%

2.173966406

IRR

Buy & Hold

Difference

11.47%

8.42%

3.05%

I analyzed this back in June, saw the anomalous result, an decide to sit on it until I had more time to analyze it.  The way to think about it is that investors reached for yield at a time when stocks were in trouble, and indeed, rates went lower.  The average investor beat buy-and-hold by 3%.

Here are the results for the junk ETFs:

HYG

4/4/2007

2/29/2008

2/28/2009

2/28/2010

2/28/2011

2/29/2012

Distributions

-9,708

-92,708

-358,324

-512,979

-694,209

Net Additions

371,140

1,989,303

1,781,425

3,201,608

5,840,594

Net Assets

352,636

2,089,054

4,611,414

8,257,928

14,258,718

Investment Return

-8,796

-160,176

1,099,260

957,884

854,406

ROA

-4.57%

-13.12%

32.81%

14.89%

7.59%

4/4/2007

9/16/2007

8/29/2008

8/29/2009

8/29/2010

8/30/2011

2/29/2012

13.40%

IRR

-361,432

-1,896,594

-1,423,100

-2,688,629

-5,146,384

14,258,718

6.04%

Buy-and hold

7.36%

Difference
JNK

11/28/2007

6/30/2008

6/30/2009

6/30/2010

6/30/2011

6/30/2012

Distributions

-9,011

-111,409

-361,521

-616,525

-735,822

Net Additions

404,658

1,481,309

2,180,582

2,366,102

3,928,526

Net Assets

394,346

1,900,709

4,301,252

6,915,538

10,780,535

Investment Return

-1,302

136,463

581,481

864,710

672,292

ROA

-0.61%

11.89%

18.75%

15.42%

7.60%

IRR

11/28/2007

3/14/2008

12/29/2008

12/29/2009

12/29/2010

12/30/2011

6/30/2012

13.22%

IRR

-395,648

-1,369,900

-1,819,061

-1,749,577

-3,192,704

10,780,535

6.49%

Buy-and hold

6.73%

Difference

Both funds were small in advance of the credit crisis, and investors bought into them as yields spiked, and bought even more as income opportunities diminished largely due to the Fed’s low-rate monetary policies. The average investor beat buy-and-hold by 6%+.

Now, the  junk funds were small during default, and grew during the boom, amid unprecedented monetary [policy from the Fed. 

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