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Top 10 non-leveraged ETFs over the last year

I saw an article on a financial planning site pointing to the fact that 8 of the top 10 performing ETFs in 2011 were US Government Bond funds. So I just did a quick double check via Morningstar's ETF screener, though the screener doesn't let me pick a specific year - it lets me do 1yr, so we have a week or so shift from the article:

  1. 60.74% Pimco 25+ yr Zero Cpn (ZROZ)
  2. 57.98% Vanguard Extended Dur. Tsy (EDV)
  3. 33.48% iShares Barclays 20+ yr Treas (TLT)
  4. 29.39% SPDR BarCap Long Term Treas (TLO)
  5. 29.04% Vanguard Long-Term Govt (VGLT)
  6. 27.24% Pimco 15+ year US TIPS (LTPZ)
  7. 24.12% SPDR Nuveen BarCap BAB (BABS)
  8. 22.91% PowerShares Dynamic Pharma (PJP) -- the only non-Bond
  9. 22.53% Vanguard Long-Term Bond Index (BLV)
  10. 22.14% Pimco Build America Bond (BABZ)

The next five also include 4 more long gov't bond funds plus one more Pharmaceuticals fund. The top

15 all had returns over 20%. The 16th was just under 20% (and the 16th was also not bonds - it was US Gasoline)

As we all know, Bill Gross got 2011 wrong - he underweighted Treasuries (eliminated them altogether for a while from Total Return) and was beaten by the rest of the bond market which kept their (or increased their) Treasury/Gov't exposure.

If Treasuries looked like a bad bet last year - and it was perfectly rational thinking -- how much lower could interest rates really go? - they look worse now.

The kind of capital appreciation which drove the very long zero-coupon bonds to greater-than 50% returns in

2011 is not sustainable.

There are generally two reasons to have bonds in a passive stock and bond portfolio: (a) diversification/lower volatility and (b) income

Treasuries right now certainly aren't doing anything for income, so is there a justification for keeping them in place for diversification and lowering of volatility? Perhaps, but they sure look like they pose a lot more downside risk than anything else right now.

This may sound like market timing, but is it really? The equity market goes up and down but ultimately, as profits increase, there's potentially unlimited upside.

Bonds don't have that same unlimited upside - for ZROZ to repeat its performance, interest rates on 25+ year bonds would have to go from their current level of just under 3% down to below 1%. It's not impossible, but it is highly unlikely. On the other hand, if rates go up by even 1% to a still quite low by historical standards of 4% - you'd see a loss of almost 30% in ZROZ. That looks like a lot of risk.

Reply to
David S Meyers CFP
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I forgot to add -- Gross offered a "mea culpa" last October and by November, he'd boosted Total Return's Treasury allocation back up to over 20%.

It was reported today by Bloomberg that Gross has further increased Treasury exposure to 30%. That's still somewhat underweight compared to his benchmark indices (BarCap Agg) or other similar reasonable benchmarks (ie. int-term diversified bonds indexes).

Of course, like all fund managers, beating his index will require not just having a better performing portfolio, but having that portfolio beat the index by enough to overcome management expenses as well. That's quite a trick to pull off in any actively managed investment-grade bond fund. Total Return institutional shares have 46bp expenses. In a world where Treasury bonds are yielding only 2%, that's a huge hurdle. Unless treasury yields drop a lot, and an active bet is made on that by extending duration, it's highly unlikely that any portfolio with a big swath of treasuries is going to overcome those expenses. And that active bet adds a lot of risk.

It's hard to see Gross's logic in making the treasury bet *after* they've risen so much. Nevertheless, folks have given him hundreds of billions of dollars to manage.

And further, an ETF version of Total Return is set to debut in a month or two. Part of the appeal, though, of Total Return lies in that many folks with 401k accounts just don't have a lot of choice in fixed income. If they have an index at all, it's likely to be the BarCap agg, and a huge number have little beyond such an index and perhaps this very Pimco fund.

Nevertheless, even with the recent underperformance, Pimco total return has, long-term, done better than the agg, and even now is still underweight treasuries vs. the agg - a position which seems like a smart move given the environment.

[As usual, nothing contained in the above notes is intended as investing advice or a recommendation for or against any particular investment.]
Reply to
David S Meyers CFP

He gave a recent interview interview to introduce his etf version of total return and gave gloomy prospects for his fund - even the stock portion he expected to give low single digit returns IIRC. His interviews over the last year haven't impressed me - he seemed out of touch with what's happening in the world. His El-Erian partner has seemed a bit more convincing of a Pimco spokesman.

I like the less gloomy investment allocation ideas of a UBS researcher (Mike Ryan) on "the decade ahead". Weirdly, the UBS websites that carry that report are down at the moment, but a few snippets are available on google cache, etc.

Reply to
dumbstruck

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