Best Active Bond ETFs

Dec 19, 2023 | Investing, Investment Portfolios, Newsletter

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 Tuesday, January 2, 2024. 

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.

We wish everyone a happy and healthy holiday!

We will resume our newsletters on January 9th, 2024. 

Best Active Bond ETFs

In this article, we extend our ongoing discussion from the previous newsletter, shifting our attention from the best bond mutual funds to the best active bond ETFs

For several years now, we have focused on so-called total return bond ETFs and their tactical portfolio. Similar to those total return bond mutual fund portfolios like Schwab Total Return Bond, we feature MPIQ ETF Fixed Income on the same Income Investor page. For the past articles, see, for example, the following: For several years, our focus has been on total return bond ETFs and their tactical portfolios. Much like the total return bond mutual fund portfolios, such as Schwab Total Return Bond, we also showcase MPIQ ETF Fixed Income on the same Income Investor page. For previous articles, please refer to the following:

The new and old total return bond ETFs

Similar to the total return bond mutual funds managed by excellent managers who have received the Morningstar Fixed-Income Manager of the Year award, we focus on ETFs managed by the same individuals or, at the very least, by the same firm employing similar investment strategies. Unfortunately, unlike mutual funds, there is a restricted number of such ETFs. Notably, three active total return bond ETFs are highlighted in the following candidate fund list for the MPIQ ETF Fixed Income portfolio:

Asset Class Ticker/Portfolio Name
Intermediate Bonds BND (Vanguard Total Bond Market ETF)
Total Return Bonds BOND (PIMCO Total Return Active ETF)
Total Return Bonds TOTL (SPDR® DoubleLine Total Return Tact ETF)
Total Return Bonds FBND (Fidelity Total Bond ETF)
Intermediate Corp Bonds VCIT (Vanguard Intermediate-Term Corp Bd ETF)
National Municipal Bonds (Tax-Exempt) MUB (iShares National AMT-Free Muni Bond)
High Yield Municipal Bonds (Tax Exempt) HYD (Market Vectors® High-Yield Municipal ETF)
Intermediate Treasury Bonds IEI (iShares 3-7 Year Treasury Bond)
Intermediate Term Mortgage Back Bonds VMBS (Vanguard Mortgage-Backed Securities ETF)
Cash equivalent TFLO (iShares Treasury Floating Rate Bond ETF)

The three active total return bond ETFs each have corresponding total return bond mutual funds that are included in our list of excellent bond funds. Let’s now compare them with their mutual fund counterparts:

Total return bond ETFs vs. mutual funds (as of 12/18/2023):
Funds YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR
BOND (PIMCO Total Return Active ETF) 6.2% 3.7% -3.3% 1.2% 2.1%
PTTAX (PIMCO Total Return A) 5.5% 3.3% -3.6% 1.1% 1.5%
TOTL (SPDR® DoubleLine Total Return Tact ETF) 5.3% 2.9% -2.7% 0.6%  
DLTNX (DoubleLine Total Return Bond N) 4.7% 2.0% -2.9% 0.2% 1.5%
FBND (Fidelity Total Bond ETF) 6.4% 3.9% -2.4% 2.3%  
FBNDX (Fidelity Investment Grade Bond) 5.9% 3.0% -3.1% 2.0% 2.2%

It’s very encouraging to see that the three ETFs all outperformed their mutual fund counterparts for the past 1, 3, 5 years! In the PIMCO fund case, BOND also outperformed PTTAX for 10 years!

Over the years, we have seen more excellent active bond ETFs coming to market. The following is the list of the possible new candidate funds: 

Total return bond ETFs returns (as of 12/18//2023):
ETF Name Morningstar Rating YTD
Return**		 1Yr AR 3Yr AR 5Yr AR Fund Size
JCPB (JPMorgan Core Plus Bond) Silver 7.0% 4.3% -2.4%   2.2B
HTRB (Hartford Total Return Bond ETF) Bronze 7.0% 4.3% -3.3% 1.6% 1.38B
BND (Vanguard Total Bond Market ETF) Gold 5.2% 2.6% -3.6% 1.1% 101B
CGCP (Capital Group Core Plus Income ETF) Gold 7.1% 5.0%     1.4B
TOTR (T. Rowe Price Exchange-Traded Funds Inc. – T. Rowe Price Total Return ETF) Gold 5.5% 2.8%     112M

Observations: 

  • HTRB in the provided table exhibited superior performance over the past 5 years when compared to the existing two total return bond ETFs (BOND and TOTL). However, its returns for the 1 and 3-year periods show a mixed pattern.
  • JCPB did better in the 3 years than BOND and TOTL and matched FBND. 
  • The fund sizes of these two ETFs are reasonable when compared to the existing three ETFs, which range from 3 to 6 billion in size.
  • The two Gold-rated ETFs, CGCP and TOTR, are intriguing. However, TOTR’s fund size is notably small, raising concerns about its liquidity. Conversely, CGCP, overseen by the renowned Capital Group—which manages numerous outstanding mutual funds like American Funds—boasts a relatively robust size. Let’s delve into a detailed comparison with a similar mutual fund also managed by Capital Group:
Capital Group/American Funds bond funds comparison 
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
CGCP (Capital Group Core Plus Income ETF) 7.1% 5.0%        
ABNFX (American Funds Bond Fund of Amer F-2) 4.5% 2.3% -3.0% 2.0% 2.2% 3.7%
PTTAX (PIMCO Total Return A) 5.5% 3.3% -3.6% 1.1% 1.5% 3.2%

From the above, we can see that American Funds Bond Fund of America (ABNFX) has an excellent track record, outperforming PIMCO PTTAX for most of time (as a reference). The good news is that CGCP has done a good job so far since its inception on 2/24/2022 (almost two years). 

The takeaway from the above data is that we have a few very good candidate funds to add to the roaster of the portfolio’s candidate funds. However, we might still want to wait a bit longer to get more data. 

MPIQ ETF fixed income portfolio

Let’s now look at the return of MPIQ ETF Fixed Income, compared with the total return bond ETFs and the flagship total return bond mutual fund portfolio Schwab Total Return Bond:

Portfolio Performance Comparison (as of 12/18/2023):
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR Since 12/31/14
MPIQ ETF Fixed Income 1.5% 1.7% 0.8% 2.4% 2.6%
Schwab Total Return Bond 1.7% 1.8% 1.5% 4.9% 4.2%
TOTL (SPDR® DoubleLine Total Return Tact ETF) 5.3% 2.9% -2.7% 0.6% 0.96% (2/24/15)
BOND (PIMCO Total Return Active ETF) 6.2% 3.7% -3.3% 1.2% 1.6%%
FBND (Fidelity Total Bond ETF) 6.4% 3.9% -2.4% 2.3% 2.1%
BND (Vanguard Total Bond Market ETF) 5.2% 2.6% -3.6% 1.1% 1.3%

MPIQ ETF Fixed Income portfolio inception date: 12/31/2014

Observations: 

  1. The ETF portfolio has consistently outperformed all other bond ETFs since its inception, demonstrating superior performance over both the 3-year and 5-year periods. Its returns far surpass that of these individual ETFs.
  2.  Nevertheless, this portfolio consistently fell behind the mutual fund-based portfolio (specifically, Schwab Total Return Bond) across all periods (1, 3, 5 years, and since 12/31/2014). The primary reason, as identified when initiating this ETF portfolio a considerable time ago, stemmed from the absence of equivalent ETFs matching the total return mutual funds PIMCO Income (PONAX) and Loomis Sayles Total Return Bond (LSBDX). These two mutual funds possess unique characteristics not found in a standard total return bond ETF or mutual fund:
    1. Both funds excel in investing in low-quality (high-yield) bonds, with Loomis bond fund, in particular, demonstrating exceptional proficiency. The fund frequently experiences enhanced returns due to its substantial exposure to high-yield bonds during certain periods.
    2. Additionally, PIMCO Income can invest in foreign bonds, including emerging market bonds. Although these carry higher risks, the fund can strategically capitalize on the outperformance of these risky bonds during certain periods.
    3. The PIMCO Income fund also has the flexibility to incorporate derivatives or utilize leverage as a means to enhance returns.
    4. None of the aforementioned features are feasible in the current candidate funds. To address these gaps, we introduced the high-yield municipal bond ETF (HYD), but even with this addition, it remains insufficient to fully compensate for the missing components.

In summary, the anticipated trend holds, with excellent active ETFs surpassing bond index funds. Moreover, our tactical ETF portfolio consistently outperforms each of these individual ETFs. We will remain vigilant in monitoring the emergence of new ETFs and strive to refine our methods to make them comparable with our bond mutual fund-based portfolios.

Market Overview

Investors construed the outcomes of the recent Federal Open Market Committee (FOMC) meeting as indicative of the central bank’s shift towards reducing interest rates. Federal Reserve Chairman Jay Powell noted that certain committee members had begun anticipating multiple rate cuts in the coming year. This announcement proved sufficient to fuel or validate investors’ inclination towards speculative risk, triggering a rally in both stock and bond markets. With the approaching season of the traditionally favorable Santa Claus rally, it appears that 2023 is shaping up positively for numerous stock and bond investors.

As always, we claim no crystal ball and we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as 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, preferably much longer, given the current high valuation. 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 and preferably many more 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 during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

Stock valuation has dropped, and now valuation is becoming less hostile. However, it is still not cheap by historical standards. For the moment, we believe it’s prudent to be extra cautious. 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 market 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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