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

For regular SAA and TAA portfolios, the next re-balance will be on Monday, October 14, 2019. You can also find the re-balance calendar for 2019 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.

Boosting Bond ETF Portfolio’s Return With Muni Bond ETFs

We monitor total return bond ETFs and discussed how to use momentum based rotation strategy to construct a portfolio. In the latest discussion, May 13, 2019: Total Return Bond ETFs Review, we reviewed this portfolio and saw that the portfolio is becoming more comparable (though still not completely matching) to total return bond mutual funds based portfolios (see, for example, January 28, 2019: Fixed Income Review for reviews of these portfolios).

In this newsletter, we show that by adding a few muni bond ETFs to the total return bond ETFs candidate list, we can boost the portfolio return to a notch.  

Total Return Bond ETFs and Muni ETFs

Let’s first look at the total return bond ETFs and the two new muni ETFs: 

ETF Performance Comparison (as of 9/27/2019):
Name YTD
1Yr AR 3Yr AR 5Yr AR
FBND (Fidelity Total Bond ETF) 9.0% 9.6% 3.2%  
FTBFX (Fidelity Total Bond) 8.9% 9.6% 3.3% 3.7%
BOND (PIMCO Total Return Active ETF) 9.0% 10.5% 3.9% 3.9%
PTTAX (PIMCO Total Return A) 8.0% 9.8% 3.1% 3.2%
TOTL (SPDR® DoubleLine Total Return Tact ETF) 6.0% 7.7% 2.4%  
DLTNX (DoubleLine Total Return Bond N) 5.8% 7.6% 3.0% 3.3%
BND (Vanguard Total Bond Market ETF) 8.8% 10.6% 2.9% 3.3%
MUB (iShares National AMT-Free Muni Bond) 6.4% 8.4% 2.8% 3.2%
HYD (Market Vectors® High-Yield Municipal ETF) 8.5% 7.7% 4.1% 5.5%

See detailed comparison >>

A brief review: 

  • Similar to what we observed in the previous newsletter, FBND continued to match its peer FTBFX; BOND has continued to outperform its PIMCO total return bond fund PTTAX for the past 3 years. TOTL is now becoming comparable to DoubleLine mutual fund DLTNX (though its 3 year annualized return is marred by its earlier underperformance). 
  • The two largest municipal ETFs have the following AUMs (asset under management) and expense ratios: 

In general, we would like to see an ETF that has at least over $1 billion AUM to ensure enough liquidity and less trade friction. These two muni ETFs have large enough liquidity and very reasonable expense ratios. So they can be used without much concern in a portfolio. 

Boosted returns

Recall that portfolio Total Return Bond ETFs uses the following taxable bond ETFs as candidate funds and then it selects the top performing ETF every month based on their total return (dividends included) momentum scores:

BOND (PIMCO Total Return Active ETF)
TOTL (SPDR® DoubleLine Total Return Tact ETF)
FBND (Fidelity Total Bond ETF)
VCIT (Vanguard Intermediate-Term Corp Bd ETF)
VMBS (Vanguard Mortgage-Backed Securities ETF)
BND (Vanguard Total Bond Market ETF)

We then add both the muni ETFs  (intermediate muni bond fund MUB and high yield muni bond fund HYD) to the above list to form portfolio Total Return Bond ETFs Muni Plus

The following table compares the returns of these portfolios: 

Portfolio Performance Comparison (as of 9/27/2019):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR Since 2/28/15 AR
Total Return Bond ETFs 10.7% 11.3% 3.4% 3.5%
Total Return Bond ETFs Muni Plus 10.7% 10.6% 5.2% 5.6% 
Schwab Total Return Bond 8.7% 9.0% 5.2% 4.6%
Schwab TRB Plus 8.8% 9.2% 5.6% 5.6%
VBMFX (Vanguard Total Bond Market Index Inv) 8.3% 10.2% 2.5% 2.8%

AR: Annualized Return

**YTD: Year to Date

For comparison purpose, we also include two mutual fund based total return bond portfolios Schwab Total Return Bond and Schwab TRB Plus. For more information of the latter, see October 29, 2018: Taxable Total Return Bond Plus Muni Bond Fund Based Portfolios

A few observations: 

  • The taxable bond ETFs only portfolio Total Return Bond ETFs, though recently has performed well, probably still can’t match their mutual fund based peers such as  Schwab Total Return Bond. This is mostly due to its lack of super total return bond mutual funds such as PIMCO Income fund (which uses some derivatives to boost returns) and Loomis Sayles fund LSBRX that can dabble/overweight into high yield bonds. 
  • The new portfolio Total Return Bond ETFs Muni Plus has returns very comparable to Schwab TRB Plus for the past 3 years and the whole history (4 plus years). This means that by adding the two muni bond ETFs, we can remedy the drawback mentioned above.
  • However, one should be aware that the above performance is in an environment where muni bonds have performed exceptionally well.

To summarize, as we mentioned before, muni bond funds can add good value to a fixed income portfolio even without considering their tax advantages. We believe that by it’s getting more and more closer to be able to match mutual fund based bond portfolios by smartly including ETFs in various spectrums of bond segments in a fixed income portfolio. 

Market overview

As economy stays relatively stable, headline stock indexes like S&P 500 have been hanging around levels close to their records. However, as we are approaching to the third quarter earnings report season in a traditionally volatile October, one should be cautious. Because of the ongoing trade war and the over-stretched economy, it’s increasingly likely to have some serious negative earnings surprises that can potentially derail current strength. At any rate, we should stay the course and manage risk level to a reasonable level.  

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

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

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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