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TheStreet Open House

The Death of Bond ETFs? Change Your Fixed-Income Lenses

Stocks in this article: TLTCWBHYGEBND

NEW YORK ( ETF Expert) -- The S&P 500 is above 1500. CBOE S&P 500 Volatility (VIX) is sitting near 15-year lows. And 88% of iShares S&P 100 (OEF) component stocks are above respective 200-day moving averages.

Normally, you might hear more discussion about complacency and/or an imminent selloff. Instead, you're hearing more about the "Great Rotation" out of bonds and into stocks. In fact, if Laszlo Birinyi or Jeremy Siegel have your ear, we've just barely begun an exuberant stage for equities.

Bullish prognosticators certainly do have a mound of evidence to fall back on. Consider the iShares 20-Year Treasury Bond Fund (TLT). Its current price is well below short- and long-term trendlines. And the 50-day recently crossed below the 200-day ... a price movement pattern known as a "death cross." (Note: The last "death cross" for TLT occurred more than two years ago.)

It may be reasonable to agree that long-term Treasuries are facing hardship. Or perhaps ... the potential rewards of owning TLT over the next year (e.g., yield, capital appreciation, perceived safety, etc.) are not commensurate with the possible risks (e.g., loss of principal, excessive volatility, etc.).

On the other hand, it may be a bit nearsighted to dismiss the entire community of debt instruments. For example, over the past three months, the S&P 500 SPDR Trust (SPY) has put together 5.5%. The fiscal cliff impasse kept the market range-bound for a period of time, but the market has since gone on to hit a five-year peak; similarly, TLT has logged a dismal 3.1% decline.

Nevertheless, a wide range of bonds has provided admirable risk-adjusted returns over the period. SPDR Convertible Bonds (CWB) garnered 4.1%, iShares High Yield Corporate (HYG) registered 2.2%, SPDR Barclay Emerging Market Local Bond (EBND) amassed 1.9% and Market Vectors High Yield Muni (HYD) served up a tax-free 1.3%.

3-Month Total Returns For A Wide Range Of Bond ETFs
Winners %
SPDR Barclays Convertible Bond (CWB) 4.1%
Peritus High Yield (HYLD) 2.6%
iShares High Yield Corporate (HYG) 2.2%
SPDR Barclays EM Local Bond (EBND) 1.9%
PIMCO 0-5 ST High Yield (HYS) 1.7%
PowerShares Senior Loan (BKLN) 1.6%
Market Vectors High Yield Muni (HYD) 1.3%
Losers %
Vanguard Extended Duration (EDV) -4.9%
iShares 20+ Year Treasury (TLT) -3.1%
SPDR Barclays International Treasury (BWX) -1.4%
Vanguard Long-Term Bond (BLV) -1.0%
iShares 7-10 Year Treasury (IEF) -1.0%
Vanguard Total Bond (BND) -0.5%
PowerShares Build America Bond (BAB) -0.4%

Granted, if a steady stream of outflows from intermediate- and long-term Treasuries turns into a stampede, higher Treasury yields may put pressure on other fixed-income vehicles. Indeed, if we witness a full-fledged exodus at a pace that the Federal Reserve isn't able to offset through its quantitative easing policies, stock investors might also find themselves struggling with a sharp uptick in the 10-year. After all, most of the country's mortgage and car loan euphoria is dependent on subdued five-, seven- and 10-year notes.

As of this moment, however, iShares 7-10 Year Treasury (IEF) has not entirely thrown in the towel. For the better part of nine months, it has traded in a fairly stable range.

It follows that a slow rotation out of lower-yielding Treasuries might be manageable and moderately bullish. Conversely, a rapid-fire rotation would likely bring bears back to the dance floor.

Regardless of how it ultimately plays out, it's important to recognize that not all bond ETFs are cut from the same cloth. I maintain a healthy allocation to emerging market bonds, short-term high yield bonds as well as munis in taxable accounts.

You can listen to the ETF Expert Radio Show "LIVE", via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a Web site that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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