Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on next Monday, March 9, 2015. You can also find the re-balance calendar for 2014 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Total Return Bond Fund Update

First, just to follow up last year’s Morningstar’s fixed income manager of the year award,  Western Asset Core Bond fund management team eventually garnered the award. This is the second time for the team to win the award. This also mean that we will not add any new fund to the candidate fund lists in those portfolios listed on Fixed Income Bond Fund Portfolios as Western Asset Core Bond fund has been in the lists already. 

Total Return Bond ETFs

It is exciting and very encouraging to see that DoubleLine just introduced its total return bond ETF (TOTL) last week. Since PIMCO introduced its flagship total return bond ETF (BOND) in March 2012 (exactly 3 years ago), we have monitored this space closely. Let’s first review how this fund has done: 

Performance Comparison (as of 3/2/2015):

Ticker/Portfolio Name YTD
1Yr AR Since 3/2/2012
BOND (PIMCO Total Return Active ETF) 2.0% 6.8% 6.2%
PTTRX (PIMCO Total Return Instl) 1.8% 4.7% 3.7%
BND (Vanguard Total Bond Market ETF) 1.1% 4.7% 2.2%

See detailed comparison >>

The ETF has out performed its mutual fund counter part by a large margin. In fact, the difference is so large that one wonders why. At the moment, other than the explanations that the ETF does not use derivatives (as the mutual fund does) and it has a relatively smaller asset to deal with, we can’t find other meaningful reasons. It is also possible that the mutual fund has suffered from steady but quite substantial redemption in the recent years, starting long before Bill Gross left PIMCO last year and continuing up till now. For a mutual fund, cash outflow can affect its performance materially especially when the fund is of the size like PIMCO total return bond fund (over $100 billions). 

The ETF Advantages 

In fact, ETF total return bond funds have the following advantages.

Lower cost: in general, ETFs have lower cost, at least when compared with retail class shares of a mutual fund (often called D share).  Their expenses are still more expensive than institutional shares (though are closer now).  

Ticker/Portfolio Name Expense
BOND (PIMCO Total Return Active ETF) 0.55%
PTTRX (PIMCO Total Return Instl) 0.46%
PTTDX (PIMCO Total Return D) 0.75%
DI (PIMCO Diversified Income Active ETF) 0.85%
PDIIX (PIMCO Diversified Inc Instl) 0.75%
PDVDX (PIMCO Diversified Inc D) 1.15%
TOTL (SPDR® DoubleLine Total Return Tact ETF) 0.55%
DLTNX (DoubleLine Total Return Bond N) 0.73%
DBLTX (DoubleLine Total Return Bond I) 0.48%

It is not surprising to see that both BOND and TOTL have the same expense ratios. 

However, these active ETFs are still way more expensive than those of index ETFs. For example, Vanguard bond index fund BND has expense ratio 0.08%, same as iShares Core US Aggregate bond AGG now. 

Smaller asset base: the active ETFs have much smaller asset under management, making them much easier to manage and outperform. At the moment, BOND has about $2.5 billion asset while TOTL has about $50 million.  DI’s asset is $47 million. 

No trading restriction: compared with mutual funds, ETFs have no trading restrictions. This makes it much more preferable, especially in a brokerage that charges low or even free commission (for example, Merrill Edge has 30 commission free trades monthly for accounts with over $25,000).  This has another major advantage for those who need to withdraw money from such an account frequently. 

On the other hand, as TOTL is too new at this moment, care should be taken to make sure you don’t pay too much slippage or bid/ask spread when trading it. 

Total return bond ETF portfolio

Now that we have two excellent total return bond ETFs and a total bond index fund BND, we can construct a total return bond tactical portfolio. Since these ETFs have shorter history, let’s look at the performance of their mutual fund counterparts. 

We use the following candidate funds: 

  • PIMCO total return bond fund: PTTRX (ETF equivalent: BOND)
  • Doubleline total return bond fund: DBLTX (ETF equivalent: TOTL)
  • Vanguard total bond market index: VBMFX (ETF equivalent: BND)

You can use this portfolio as a proxy and/or reference to invest in their corresponding ETFs. 

Portfolio Performance Comparison (as of 3/2/2015):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
PIMCO DoubleLine Total Return Bond 0.6% 4.5% 3.8% 5.4% 5.7% 1.28
PTTRX (PIMCO Total Return Instl) 1.3% 4.1% 3.8% 4.9% 6.1% 1.24
DBLTX (DoubleLine Total Return Bond I) 0.8% 4.9% 4.7%      
VBMFX (Vanguard Total Bond Market Index Inv) 1.0% 4.8% 2.6% 4.1% 4.7% 0.93

See detailed performance >>

The portfolio outperformed VBMFX in the last 3, 5 and 10 year time frame. It did better than PIMCO fund in the last 5 years but under performed in the last 10 year. Notice as DoubleLine fund only started in 2010, the portfolio really had only PIMCO fund and Vanguard Bond fund to choose 5 years ago. 

To summarize, with two total return bond fund powerhouses being in ETFs, we feel it is possible to construct an ETF based portfolio using the same principles as we outlined in June 3, 2013: Total Return Bond Fund Portfolios For Major Brokerages

Portfolio Review

Our total return bond fund portfolios (Fixed Income Bond Fund Portfolios)  did well compared with total bond index fund:

Portfolio Performance Comparison

Ticker/Portfolio Name 2014 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Schwab Total Return Bond 5.8% 4.7% 6.2% 6.8% 1.31
Fidelity Total Return Bond 4.9% 4.7% 5.8% 6.3% 1.47
TDAmeritrade Total Return Bond 6.1% 6.8% 6.0% 7.0% 1.39
FolioInvesting Total Return Bond 5.8% 4.7% 6.2% 6.8% 1.31
Etrade Total Return Bond 5.8% 4.7% 6.1% 6.9% 1.33
PTTRX (PIMCO Total Return Instl) 4.7% 3.8% 4.9% 6.1% 1.24
VBMFX (Vanguard Total Bond Market Index Inv) 5.8% 2.6% 4.1% 4.7% 0.93

Market Overview

US stocks had a very strong month in February. Even though several major economic indicators are pointing a slowdown in economy, investors were encouraged by the improving job market statistics. However, bond investors are maintaining a more balanced or restrained view on the current condition. For those who are interested, we recommend Loomis Sayles’ recent article US Economy: Cooler than Consensus. On the major asset trends, we see both international and emerging market stocks finally exhibited some strength. 

For more detailed asset trend scores, please refer to 360° Market Overview.

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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