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

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday March 1, 2021. 

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.

Total Return Bond ETFs Review

Total return bond ETFs managed by excellent managers are candidate funds for our popular MPIQ ETF Fixed Income portfolio (see Fixed Income page). In this newsletter, we look at some new ETFs in this category and review the portfolio. 

Total return bond ETFs vs. their mutual fund counterparts

Our total return bond mutual funds based fixed income portfolios have continued their excellent return streak (see mutual fund Latest Performance on Fixed Income page). These portfolios pick one candidate fund every month based on their return momentum to invest (thus rotation). The candidate funds need to satisfy one important condition: they are at least once managed by managers who have won Morningstar Fixed Income manager of the year award. 

We have monitored these so called ‘total return bond funds’ in ETF space. We believe if there are good enough number of such ETFs, the portfolio constructed based on the similar strategy should be more useful and hopefully have better returns than the mutual fund portfolios as ETFs are inherently more flexible (not subject to minimal holding period, for example, that’s sometimes imposed for mutual funds by fund companies or a brokerage). Often, ETFs are somewhat cheaper in terms of their expense ratios too. 

Our MPIQ ETF Fixed Income is the portfolio constructed mostly out of total return bond ETFs as candidates. 

One of the main concerns for these ETFs is that their returns might not be in par with their mutual fund counterparts. Fortunately, as time goes, the ETFs we have used have become more mature and reliable. 

The following compares ETFs with their mutual funds (as of 2/5/2021):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 3Yr Sharpe 5Yr AR
BOND (PIMCO Total Return Active ETF) -0.5% 5.5% 5.7% 0.95 4.6%
PTTAX (PIMCO Total Return A) -0.8% 5.9% 5.2% 1.02 4.2%
TOTL (SPDR® DoubleLine Total Return Tact ETF) -0.0% 2.8% 4.0% 0.68 3.3%
DLTNX (DoubleLine Total Return Bond N) 0.0% 2.6% 3.9% 1.03 3.0%
FBND (Fidelity Total Bond ETF) -0.7% 7.0% 6.2% 0.67 5.5%
FTBFX (Fidelity Total Bond) -0.7% 7.1% 6.1% 1.32 5.3%
FIXD (First Trust TCW Opportunistic Fixed Income ETF) -0.6% 6.7% 6.2% 0.99  
TGMNX (TCW Total Return Bond N) -0.8% 5.6% 5.4% 1.14 3.5%
WBND (Western Asset Total Return ETF) -1.3% 6.9%      
WABRX (Western Asset Core Bond R) -1.3% 5.5% 5.6% 1.17 4.3%

The good news is that almost all of the ETFs have outperformed their mutual fund counterparts for the past 1 and 3 years!  Also, the ‘old’ total return bond ETFs (BOND, TOTL and FBND) have also outperformed for the past 5 years. That is a good news for ETF investors. 

On the other hand, one needs to be aware that ETFs are inherently more volatile, as evident with their lower 3 Yr Sharpe ratio than their mutual fund counterparts. They are often much more volatile. In fact, we don’t think it’s a good idea to buy and hold these ETFs. Dynamically using these ETFs, coupled with our composite momentum market indicator, however, can effectively mitigate the high volatilities that often occur in a market downturn and reap their good returns when they are outperforming. 

New ETF additions

Let’s look at the following ‘new’ total return bond ETFs: 

Ticker/Portfolio Name Asset Under Management (AUM) Expense Ratio Inception Date
FIXD (First Trust TCW Opportunistic Fixed Income ETF) $5.1B 0.56% 7/9/18
WBND (Western Asset Total Return ETF) $141M 0.47% 10/4/18
UITB (VictoryShares USAA Cor Intmdt-Trm Bond ETF) $719M 0.4% 10/27/17
BOND (PIMCO Total Return Active ETF) $4.2B 0.55% 3/1/12

As a comparison, we add PIMCO total return bond ETF BOND to the above table. 

The good news is that FIXD (First Trust TCW Opportunistic Fixed Income ETF) has been able to grow to a large liquid ETF with over $5B AUM. It’s actually bigger than BOND ($4.2B), FBND ($1.7B) and TOTL ($3.3B), making it the biggest total return bond ETF in this category. 

FIXD is managed by veteran portfolio managers from TCW

  • Tad Rivelle, Chief Investment Officer of the Fixed Income Group of TCW
  • Stephen M. Kane, CFA, Generalist Portfolio Manager in the Fixed Income Group of TCW
  • Laird Landmann, Co-Director and Generalist Portfolio Manager in the Fixed Income Group of TCW
  • Bryan T. Whalen, CFA, Generalist Portfolio Manager in the Fixed Income Group of TCW

Tad Rivelle is also the key portfolio manager for TCW total return bond fund (TGMNX), which is a candidate fund in our total return bond mutual fund portfolios. 

This fund has had the best 3 Yr Sharpe ratio among those in the first table. It also had the best 3 yr Annualized Return. 

Unfortunately, WBND’s AUM is way below our cutoff threshold (at least $500M) and it’s thus excluded in our candidate list. In the above table, we also included UITB, USAA Core Bond ETF. USAA is famous for its conservative core bond fund, but it hasn’t been able to win a fixed income manager award from Morningstar. We thus have to forgo this fund for now. 

MPIQ ETF Fixed Income portfolio update

We have added FIXD to the portfolio’s candidate list. This fund is also in MPIQ ETF Allocation portfolios (see for example, Brokerage Investors page). The addition will be reflected in the next rebalance. 

In the following, we compare our ETF fixed income portfolio with Schwab Total Return Bond, one of the best mutual fund fixed income portfolios (again, see Fixed Income page for other portfolios and more details). 

Portfolio Performance Comparison (as of 2/5/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
MPIQ ETF Fixed Income -0.7% 8.3% 8.5% 6.3%  
Schwab Total Return Bond 0.3% 8.5% 6.7% 6.8% 6.4%
BND (Vanguard Total Bond Market ETF) -1.2% 4.9% 5.5% 4.0% 3.7%

**YTD: Year to Date


  • The ETF portfolio has outperformed the mutual fund one for the past 3 years. It was accomplished by its more adept usage of high yield muni bond fund and a tight risk control using composite momentum market indicator. 
  • Both BND and Schwab Total Return Bond portfolio suffered a deep loss in March 2020. However, it was remarkable that both were able to quickly recover. 
  • The one year chart also showed that the Schwab portfolio was able to catch up since November last year. This again shows the power of the mutual fund candidate list lineup — some of very good funds are still missing in the ETF list (and thus we have to rely on using some index ETFs to make up the missing ones). 

Market overview

With 59% of the S&P 500 companies reporting Q4 earnings, the blended earnings growth rate is now 1.7% (as of last Friday, see Factset). This is compared with the previous several weeks: -2.3% two weeks ago, -4.7% 3 weeks ago and -9.2% expected on 12/31/2020. For now, investors are encouraged by the ‘positive surprises’. Equity markets are still almost non-stop rising from their record territories. 

Bond yields, however, are telling a different story. The 10-year Treasury note yield has been rising, above 1% since early this year. For now, it might seem harmless for the interest rates to rise. But there is a big concern on when the inflation will finally rise to a level that’s harmful to economy (and stocks). 

Again, in the current very over-valued and over-extended markets, we reiterate the following practice: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that 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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