Why Bonds aren’t moving like Bond ETFs

It’s easy enough to start surfing the web, looking for low cost investments and end up in the ETF space. The ETF has been the answer to the demands of investors looking for asset class (or sub asset class, or inverse asset class, and so on ad infineum) exposure on the cheap, in a sort of give me the returns without the hassle. Welcome to the age of the “Robo-Advisors.” Just today, Goldman Sachs released a report (that we read via Josh Brown) that ETF Assets are going to double to $6 Trillion by 2020 (yes that’s a T– as in trillion).

We can’t help but notice that with this growth in ETF assets might also come some growth in confused investors. Let’s take the Bond market, and the past couple of months for Bond ETFs $BND and $AGG as an example. The $BND ETF tracks the Barclays Capital U.S. Aggregate Index. That index is comprised of Treasury, Corporate Related, Government Related, and Securitized related bonds via the Barclays Factsheet. All that is fine.

But investors might not equate that exact index with the ‘bond market’ as they hear about it on a daily basis. We’re talking the constant mentions of the 30yr US Treasuries and 10yr US Note interest rates. Turns out, the $BND ETF has just a 29.48% allocation to the 10 year note and a 7.92% allocation to 30 year. And that there’s also allocations to mortgaged backed securities, gold, and Verizon bonds (corporate securities). The idea here is to give the investor a broad allocation to the whole bond market (not just the US Bond portion), and most investors understand that, and most probably know what they’re signing up for.

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But we can’t help but think a few investors are going to be a little shocked the next time Treasuries diverge significantly from the overall bond index. Over the past two months, the US 30 year Bonds have moved lower around -9.15%, while the 10 year note moved -4.15%. But when we take a look at the etf BND, it’s only down -0.78% {past performance is not necessarily indicative of future results}. Now, this isn’t likely to scare anybody, but we can’t help but wonder what happens when the roles are reversed. What will investors think when the “Bonds” on their TB (US treasuries) are up/rates down, and the $BND ETF is down because corporates and the rest have diverged. The divergence is to the benefit of the investor right now, but could easily flip in the future.

Anyway, we digress… here’s all of the different asset classes through the first 5 months of the year – with that Bond market sneakily up, despite what we know is happening in the biggest bond market – US Treasuries. Here’s you go:

Asset Class Scoreboard May_1


(Disclaimer: past performance is not necessarily indicative of future results.)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate,
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy (QAI)
Commodities = iShares GSCI ETF (GSG);
Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)