Bonds

Fees

According to a May 2014 WSJ article, after 30 years, a $200,000 mutual fund investment (8% gross annualized return) grows to $1.4 million after paying the typical mutual fund annual fee of 1.25%. This was the average expense ratio for mutual funds for 2013 (source: Morningstar). The same investment grew to $2.0 million if annualized returns were the same but a 0.04% annual expense ratio (source: ETF.com).

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Leasing vs. Buying a Car

Fundamentally Weighted Bond Index ETFs

A small number of ETFs offer “fundamental” indexing. Virtually all bond indexes assign weights based upon outstanding debt. With fundamental bond indexing, securities are weighted based on measures of the issuers’ financial strength—not the market value of outstanding bonds. Advocates of fundamental bond indexing point out a traditional index (or ETF) could end up overweighting heavy indebted companies, thereby resulting in higher credit risk to investors.

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Ultra-Short Bond Funds

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Charlie Munger

Closed-End Bond Funds

Closed-End  Bond  Funds

Closed-end funds (CEFs) trade on exchanges and almost always trade at a NAV discount or premium. For example, at the end of September 2012, 70% of CEFs traded at premiums; a year later, 89% traded at discounts (67% traded at discounts > 5%). One risk often not considered is the fact may CEFs are leveraged, which can magnify yields, losses, and gains. 

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American Funds

Bill Gross and PIMCO

Despite the beating bond funds suffered in June of 2013, bond investors have still done well over the past 3-10 years, particularly those in the PIMCO Total Return Fund (the company’s flagship mutual fund) and the PIMCO Investment Grade Corporate Bond Fund. In 2010, Bill Gross, PIMCO’s chief money manager, was named best mutual fund manager for the decade by Morningstar.

 

Annualized Returns Through June 24, 2013

 

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Target-Date Funds

Best Period for Bonds

In 1948, the Federal discount rate was 1.3%; by 1981, it was 13.4%. During this extensive period (34 years) of rising interest rates, the annualized returns for bonds was 3.83% (4.5% for 3-month T-bills), 11.00% for the S&P 500. Bond returns are based on total return figures for intermediate-term U.S. government bonds from 1948-1975 and the Barclays Aggregate Bond Index returns from 1976-2011.

 

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Commission-Free ETFs

Junk Bond Update

At the beginning of May 2013, had a average yield of 5.2%, 4.5 percentage points above U.S. government paper—well above the “crazily tight spread of 2.44 percentage points seen just before the (2008) financial crisis (source: WSJ). Issuance of junk bonds hit records in the U.S. and Europe in 2012.

 

In 1997, a group of Los Angeles-based traders, led by Michael Milken, helped structure and market the first “junk” bond, a $30 million offering for an oil company, Texas International.

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Municipal Bonds

Municipal Bonds

Roughly 20% of the nearly 50,000 issuers of U.S. municipal debt do not supply timely disclosures after their bonds have been issued (source: WSJ, May 2013). It appears Harrisburg, Pa is one of those municipalities, agreeing to settle SEC charges. The SEC faulted Harrisburg for making misleading financial statements from 2009 to 2011. The SEC brought a similar case against New Jersey in August 2010.

 

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Junk Bond Update

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