NEW YORK (TheStreet) -- Because of their low expenses, index funds often outdo 60% or more of their actively managed competitors. But in some recent years, Vanguard Total Bond Market Index (VBTLX) has delivered unusually strong performance. In 2008, the fund surpassed 91% of intermediate-term bond competitors, and last year Vanguard topped 88%, according to Morningstar.Do the results prove once and for all that active managers aren't worth the fees they charge? Hardly. Vanguard's strong showing is due to temporary shifts in the bond markets. Soon enough the pendulum is likely to swing the other direction, and active managers will easily outdo the benchmark. Like many bond index funds, Vanguard Total Bond tracks a version of the Barclays Capital U.S. Aggregate bond index, the most popular fixed-income benchmark. Seeking to mimic the investment-grade bond markets, the Barclays index holds a mix of Treasuries, corporate bonds and mortgage-backed securities. The benchmark gives each sector roughly the same weight as it has in the markets. In recent years, the biggest issuer by far has been Uncle Sam. Struggling to finance mounting expenditures, the government has sold a flood of bonds. Now Treasuries account for 35% of the Barclays benchmark, up from 21% in 2002. The big Treasury stake has helped to keep the index funds afloat in recent downturns. During difficult periods in 2008 and 2011, corporate bonds sank as investors worried about defaults. At the same time, Treasury bonds soared because they offered safety. Since many active managers have big stakes in corporate bonds, their funds trailed the Barclays index.
While Treasuries will fall eventually, the downturn could be several years away. The Federal Reserve has announced that it intends to hold down rates until at least 2014. If the Fed sticks to its plans, Treasuries could avoid losses for some time and funds that track the Barclays index may continue to thrive.
Taubes is willing to make contrarian moves. When municipal bonds sank at the end of 2010, he began buying. At the time investors were dumping municipals because of fears about defaults. But the bonds soon revived, and Taubes scored nice gains. "We bought issues from top-rated universities that were not going to default even if the economy was weak," he says.