September 20, 2021: Benchmarking MyPlanIQ Fixed Income Bond Portfolios

Sep 21, 2021 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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 Friday October 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.

Benchmarking MyPlanIQ Fixed Income Bond Portfolios

We continue our review of MyPlanIQ portfolios. In this newsletter, we look at one popular tactical or dynamic bond ETF (PTBD (Pacer Trendpilot US Bond ETF)) and compare with our Fixed Income Bond Portfolios listed on fixed income investor page. 

PTBD: a popular tactical or dynamic bond ETF

PTBD (Pacer Trendpilot US Bond ETF) is a popular dynamic bond ETF. It was introduced to market in late 2019 (10/23/2019) and quickly grew its asset under management to over $1.3 Billion, an impressive feat. 

This ETF is the one that garnered Morningstar’s analyst Bronze rating. Note Morningstar’s analyst rating is very different from its popular fund star rating. The analyst rating has Gold, Silver and Bronze (and unrated) categories. It’s more subjective and is based on analysts’ opinions while its fund star rating is based on the fund’s Sharpe ratios in the past. For example, its default star rating is based on trailing 5 year Sharpe ratio. 

Pacer Trendpilot fund employs a trend-following based strategy (or so called rule-based) that’s similar to MyPlanIQ’s. The following is  PACER’s official description: 

Essentially, it utilizes 100 day simple moving average of a so called risk ratio index (a combination of US high yield bond index and US Treasury bond index) to decide to its exposure in the following 3 settings:

  1. 100% in high yield bonds
  2. 50% in high yield bonds and 50% in 7-10 years Treasury bonds
  3. 100% in 7-10 years Treasury bonds

Both Morningstar and Pacer itself classify PTBD into US high yield bond category. 

Unfortunately, its expense ratio is on the high side: 0.6%. This compares with SPDR high yield bond ETF JNK’s 0.4% or VanEck High Yield Muni ETF HYD’s 0.35%. 

Benchmarking MPIQ Fixed Income Portfolios

As this fund employs a similar strategy as MyPlanIQ’s, we are particularly interested in their comparison. The following compares PTBD with two MPIQ portfolios — one ETF based and the one mutual fund based:

Portfolio Performance Comparison (as of 9/17/2021):
Ticker/Portfolio Name Maximum Drawdown YTD
Return**		 1Yr AR Since 10/23/19 AR
MPIQ ETF Fixed Income 2.6% 2.0% 4.3% 7.3%
Schwab Total Return Bond 7.8% 4.5% 7.6% 8.4%
PTBD (Pacer Trendpilot US Bond ETF) 6.5% 1.2% 6.9% 7.5%
BND (Vanguard Total Bond Market ETF) 8.7% -0.9% -0.3% 3.7%

AR: Annualized Return, PTBD inception date: 10/23/2019

Observations:

  • PTBD was slightly better than MPIQ ETF Fixed Income since its inception in 2019. However, it suffered a bigger loss than MPIQ ETF portfolio in 2020. 
  • On the other hand, our total return bond mutual fund based portfolio Schwab Total Return Bond has outperformed PTBD by a much bigger margin 8.4% vs. 7.5% since 2019. Even adding back the fund’s 0.6% expense, its gross before fee return is still lower than our portfolio. 
  • Note our portfolios don’t directly invest in high yield corporate bonds or their funds. The MPIQ ETF portfolio can invest in a high yield muni bond fund but that still has lower risk than PTBD. 
  • Our ETF portfolio has much lower maximum drawdown and smooth return curve than PTBD. The mutual fund based portfolio Schwab Total Return Bond did a bit worse in 2020 due to its exposure in PIMCO corporate bond fund PTBD. But in general, its Sharpe ratio is still better than PTBD’s. 

To summarize, PTBD has performed well, comparable with our fixed income portfolios in terms of returns and has higher risk because of its aggressive exposure in high yield corporate bonds. We are happy to see that our methodology has been validated. Of course, as always, investing is a (very) long term process and it will take more time to see a more accurate picture. 

Market Overview

Risk assets (stocks) continued to experience more loss. The rapid development of the largest Chinese property developer Evergrande’s debt crisis has now spread to global financial markets. We are seeing a wide spread (though still well contained) liquidation of stocks. Though it’s been speculated (and hoped?) that this company’s trouble will be eventually stabilized and contained by its government’s intervention, at the moment, it’s just a speculation. Furthermore, one should be reminded that financial assets are currently in some of highest valuation levels in history. Further weakness in fundamentals can exacerbate the already fragile stock prices.  

For now, we maintain our cautious stance and will respond according to market’s further development. As always, we advocate 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 is still extremely high by historical standard. 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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