March 28, 2016: Total Return Bond ETFs Review

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Correction: in the previous newsletter March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles, there was a mistake in the last column of the first table. The two entries should be swapped: i.e. since 1/18/91, VFINX annualized return should be 9.6% while NAESX’s annualized return should be 11.3%. We thank a user who pointed this out.

Total Return Bond ETFs Review

For portfolio construction purpose, we are very much interested in total return oriented bond funds. In general, we view a bond fund as a total return bond fund if it can invest in various bond sectors (such as domestic, emerging market, high yield and investment grade) but with disciplined constriants such as in general, it is of intermediate term maturity and does not overweight in risky sectors such as emerging market or high yield bonds.

We believe that a portfolio that is constructed out of a selected list of total return bond mutual funds can be a core fixed income investment. You can find these portfolios customized for major brokerages on Brokerage Investors page. We have discussed these portfolios in various newsletters like June 3, 2013: Total Return Bond Fund Portfolios For Major Brokerages. You can find more newsletters on this subject on our Newsletter Collection page (MyPlanIQ Newsletters -> Newsletter Collection (pull down menu)).

We are also interested in total return bond ETFs as they can be a more flexible substitute to their mutual fund counterparts. Our last review on these funds is March 2, 2015: Total Return Bond ETFs, a year ago. Unfortunately, for the past one year, there hasn’t been any new total return bond ETF introduced, at least not the ones we are interested in. At the moment, we are still limited to the two ETFs: PIMCO’s total return bond active ETF BOND and DoubleLine’s total return bond ETF TOTL.

PIMCO Total Return Bond ETF (BOND)

PIMCO’s ETF has not fared well for the past one year:

Fund Performance Comparison (as of 3/28/2016):

Ticker/Portfolio Name	YTD Return	1Yr AR	3Yr AR	3Yr Sharpe	5Yr AR	10Yr AR
BOND (PIMCO Total Return Active ETF)	1.0%	-1.1%	2.1%	0.5
PTTRX (PIMCO Total Return Instl)	0.9%	-0.6%	1.4%	0.37	3.6%	5.9%
BND (Vanguard Total Bond Market ETF)	2.3%	1.1%	2.2%	0.63	3.3%

See detailed comparison >>

Observations:

BOND underperformed against PTTRX, its mutual fund counterpart. The ETF had done better for a couple of years when it was first introduced but for the latest one year, it has lagged behind.
For the past 3 years, however, BOND still outperformed PTTRX, mostly because of its early years’ outperformance. It’s still too early to see whether or not the past year’s underperformance was just a temporary deviation.
Both PIMCO’s ETF and mutual fund lagged behind BND (Vanguard Total Bond Market ETF) for the 12 months. The reason: they have been in more corporate bond exposure while BND in general has been more overweight in Treasury bonds.

It’s also likely the mutual fund (no so for the ETF) was impacted by the redemption pressure caused by Bill Gross’ leaving PIMCO. However, PIMCO’s more optimistic bet on economy (thus more exposure in corporate bonds) is definitely an important factor affecting the performance.

DoubleLine Total Return Bond ETF (TOTL)

TOTL was introduced in February 2015 and it has performed better than BOND:

Fund Performance Comparison (as of 3/28/2016):

Ticker/Portfolio Name	YTD Return**	1Yr AR	1Yr Sharpe	3Yr AR	5Yr AR	5Yr Sharpe
TOTL (SPDR® DoubleLine Total Return Tact ETF)	1.6%	1.3%	0.4
DBLTX (DoubleLine Total Return Bond I)	1.3%	1.9%	0.69	3.1%	5.3%	2.04
DLTNX (DoubleLine Total Return Bond N)	1.2%	1.6%	0.56	2.8%	5.0%	1.94
BND (Vanguard Total Bond Market ETF)	2.3%	1.1%	0.29	2.2%	3.3%	0.97

See detailed comparison >>

Observations:

TOTL underperformed both DoubleLine total return bond mutual funds (institutional and retail classes) for the past one year.
All DoubleLine’s funds underperformed BND (Vanguard Total Bond Market ETF). The main reason: DoubleLine funds have been more in mortgage backed securities that have lagged behind a Treasury overweight BND.

PIMCO vs. DoubleLine

The following table compares the two ETFs in terms of their expenses, premium/discount and average volumes:

Fund	Expense ratio	Premium/Discount	Average Volume	Average Trading Value/Day	Yield
TOTL (SPDR® DoubleLine Total Return Tact ETF)	0.55%	0.06%	340K	$17 Million	2.9%
BOND (PIMCO Total Return Active ETF)	0.57%	-0.21%	210K	$21 Million	2.45%

In general, the two funds are very comparable. The Premium/Discount shows that investors are more negative on BOND than TOTL. Adding the premium/discount back, the YTD return difference between TOTL and BOND is narrowed down to 0.33%, still a significant difference. In terms of trading volume (or liquidity), BOND is still slightly better than TOTL, but the difference has been narrowing.

Based on the above discussion, the two ETFs have performed reasonably well, though lagging behind their mutual fund counterparts. Investors who are interested in constructing a total return bond ETF portfolio might have to include other intermediate bond ETFs such as total bond market index (like BND or AGG), intermediate corporate bonds and/or mortgage backed bonds. The good news here is that the two ETFs have distinct investment strategies, which can increase diversification and opportunities. However, for now, we prefer to stick to the mutual fund based portfolios that have been more stable and proven.

Market Overview

For the past several years, markets have been hanging on a fragile and unstable border several times. At the moment, economic indicators have sent various signals that have shown the economy has weakened but not uniform enough to be in a recession mode. Though the odds of an economy slowdown increase, we do not exclude a possibility that stocks might be again range bound for a while before a more visible trend materializes.

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 6 years. Since the financial crisis in 2008-2009, we have not seen meaningful or substantial structural change in the U.S., European and emerging market economies. Even though U.S. stocks have had a recent correction, their valuation is still at a historical high level. It is thus not a good time to take excessive risk.

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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