advanced fixed income - etf · advanced fixed income: not your grandfather’s bonds. originally...

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Advanced Fixed Income:Not Your Grandfather’s Bonds

Originally PresentedJuly 30, 2009

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Advanced Fixed Income

Matt HouganEditor‐in‐ChiefIndexUniverse.comETFR

The Myths

The Alternatives

The Opportunities

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Our Panelists

Tom AndersonHead of Strategy and ResearchState Street Global Advisors

Tim AndersonPartnerChief Fixed Income OfficerRiverfront Investment Group

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What Is Fixed Income?

Steady Returns

Stable Income

Not Risk Free

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Fixed Income Is Everywhere

Source: ICI, Bespoke Investment Group

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1984 2008

$US, Billions

US Mutual Fund Assets by Category (End of Year)

Equity

Money Market

BondHybrid

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Fixed Income Is Misunderstood

Large‐Cap

Mid‐Cap

Small‐Cap

Growth

Value Intl.

Em. Mkts

Bonds

The Typical View

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All Bonds Are Not Created Equal

Large‐Cap

Mid‐CapSmall‐Cap

Growth

Value

Intl.

Em. Mkts

US Treasuries

Corporate Bonds

ABS

TIPS

Zero Coupon

Munis

Intl. Bonds

The Real World

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Broad‐Based Can Be Broad

U.S. Treasury

FNMA

FHLMCUS Agencies

Corp (Industrial)

Corp (Financial)

GNMAOther

Asset Breakdown

0‐1 Year

1‐5 Years

5‐10 Years

Long

Maturity

Inside AGG (6/30/09)

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Sources: Merrill Lynch, Barclays Capital, Bespoke Investment Group

‐20

0

20

40

60

80

100

120

J‐99 J‐09

Return (%

)

ML U.S. Treasuries, 7‐10 Yrs

BarCap Lehman Aggregate Bond Index

ML Global Government Bond Index II

ML U.S. Corporate Master

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Index Yield: 6/30/09 ML US High Yield Master II Index 13.06

ML Global Emerging Markets Sovereign & Credit 9.53

ML US ABS & CMBS Index 7.35

ML US Corporate Master 6.15

ML Global Broad Market Corporate Index 5.54

Barclays Capital Aggregate Bond Index 4.16

ML Municipal Master Index 4.13

ML Mortgage Master Index 3.79

ML US Treasuries, 7‐10 Yrs 3.42

ML Global Government Bond Index II 2.36

ML US Treasuries, Inflation‐Linked 1.63

ML Global Governments, Inflation‐Linked 1.57

Sources: Merrill Lynch, Barclays Capital, Bespoke Investment Group

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5‐Year Risk/ReturnIndex Total Return

Std Dev Monthly Returns

ML Global Emerging Markets Sovereign & Credit 49.64 3.70

ML US Treasuries, 7‐10 Yrs 34.30 1.98

ML Mortgage Master Index 33.88 0.86

Barclays Capital Aggregate Bond Index 27.72 1.05

ML US Treasuries, Inflation‐Linked 27.27 2.11

ML Global Governments, Inflation‐Linked 26.60 1.78

ML Municipal Master Index 23.80 1.43

ML Global Government Bond Index II 22.35 0.88

ML US High Yield Master II Index 22.23 3.72

ML US Corporate Master 19.66 2.03

ML Global Broad Market Corporate Index 16.82 1.41

MSCI EAFE 12.09 5.61

ML US ABS & CMBS Index ‐7.29 1.67

S&P 500 ‐10.72 4.48

S&P GSCI Commodities Index ‐16.09 8.48

Sources: Merrill Lynch, Bloomberg, Bespoke Investment Group

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Diversification: It Does Exist

Sources: Merrill Lynch, MSCI, Bespoke Investment Group

S&P 500 S&P GSCIBarCap

Agg. Bond

ML US CorporateMaster

ML GlobalGov. Bond

II

ML MunicipalMaster

ML US ABS & CMBS

ML US Treas,

Inflation‐Linked

ML Global Gov,

Inflation‐Linked

S&P 500 1.00 0.60 ‐0.09 0.57 ‐0.30 0.23 0.92 0.07 0.08

S&P GSCI Commodities 0.60 1.00 ‐0.06 0.36 ‐0.21 0.07 0.52 0.26 0.24

Barclays Capital Agg. Bond ‐0.09 ‐0.06 1.00 0.66 0.96 0.90 ‐0.42 0.93 0.93

ML US Corporate Master 0.57 0.36 0.66 1.00 0.47 0.82 0.32 0.76 0.75

ML Global Gov. Bond II ‐0.30 ‐0.21 0.96 0.47 1.00 0.80 ‐0.60 0.84 0.87

ML Municipal Master 0.23 0.07 0.90 0.82 0.80 1.00 ‐0.08 0.87 0.90

ML US ABS & CMBS 0.92 0.52 ‐0.42 0.32 ‐0.60 ‐0.08 1.00 ‐0.26 ‐0.24

ML US Treas, Inflation‐Linked 0.07 0.26 0.93 0.76 0.84 0.87 ‐0.26 1.00 0.98

ML Global Gov, Inflation‐Linked

0.08 0.24 0.93 0.75 0.87 0.90 ‐0.24 0.98 1.00

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Strategic Allocations

Source: SSGA

BWX Country Weights, 6/30/09

Japan

Italy

Germany

Greece

FranceSpain Belgium United Kingdom

Netherlands

Canada

Austria

TaiwanPolandDenmarkMexicoSwedenAustraliaSouth AfricaEuropean Union

Other

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International Diversification

ETF Total Return 2009 (Through 6/30)

PowerShares Emerging Mkt Sov Debt (PCY) 21.25

SPDR Barclays Intl Treasury Bond (BWX) 0.95

iShares S&P/Citi Intl Treasury (IGOV) 0.92

iShares Barclays 20+ Year Treas Bond (TLT) ‐19.59

Source: Bespoke Investment Group

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The Currency EffectImpact of Currency on German Bond Returns for US Investors

YearLocal MarketReturn (%)

Local Currency Appreciation/Depreciation

vs. US Dollar (%)Return to USInvestors (%)

1994 ‐1.8 11.8 10.0

1995 16.3 9.6 25.9

1996 7.3 ‐7.7 ‐0.4

1997 6.2 ‐15.2 ‐9.0

1998 10.9 8.9 19.8

1999 ‐2.1 ‐14.3 ‐16.4

Source: Salomon Smith Barney

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The Rate Effect

Sources: Merrill Lynch, Bespoke Investment Group

0

1

2

3

4

5

6

7

8

6/30/04 6/30/05 6/30/06 6/30/07 6/30/08 6/30/09

Effective Yield (%

)

US

Australia

UK

Japan

1‐3 Year Treasuries Effective Yield

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Country Default Risk

Sources: Bloomberg, Bespoke Investment Group

0

100

200

300

400

500

600

700

800

12/31/07 6/30/09

BPS

5‐Year CDS Prices on Sovereign Debt

RussiaChinaUKUSJapanGermany

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US vs. International Bonds

‐20

0

20

40

60

80

100

120

4/1/01 4/1/02 4/1/03 4/1/04 4/1/05 4/1/06 4/1/07 4/1/08 4/1/09

Return (%

)

Citi Intl Treasury Bond: 109.82%

ML 7 ‐ 10 Year US Treasury: 64.78%


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Correlation To Stocks

ML US Treasuries, 7‐10 Yrs

S&P/Citigroup Intl Treasury Bond Fund S&P 500 MSCI EAFE

ML US Treasuries, 7‐10 Yrs 1.00 0.89 ‐0.32 ‐0.08

S&P/Citigroup Intl Treasury Bond Fund

0.89 1.00 ‐0.02 0.21

S&P 500 ‐0.32 ‐0.02 1.00 0.96

MSCI EAFE ‐0.08 0.21 0.96 1.00

Monthly, 5‐year

Sources: Merrill Lynch, S&P, MSCI, Bespoke Investment Group

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Risk Management, And Returns


Selected Performance: April 2001 – June 2009

‐40

‐30

‐20

‐10

0

10

20

30

40

50

60

70

4/2/01 4/2/02 4/2/03 4/2/04 4/2/05 4/2/06 4/2/07 4/2/08 4/2/09

Return (%

)

50 S&P/10 AGG/10 IGOV/10 HY/10 Global Gvt/10 EM Liquid

50 S&P/50 AGG

80 S&P/20 AGG

100 S&P 500

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Cushion From A Fall

Total Return of Other Fixed‐Income ETFs (%)

Month Ending

Total Return (%) BSV ITR TLO TIP WIP TLT IGOV BWX PCY

10/31/08 ‐2.28 ‐2.01 ‐4.20 ‐3.47 ‐8.10 ‐12.54 ‐1.86 ‐4.90 ‐5.04 ‐26.26

1/30/09 ‐1.99 ‐1.09 1.16 ‐8.37 ‐0.04 ‐5.41 ‐13.07 ‐6.04 ‐6.71 9.37

9/30/08 ‐1.76 ‐0.23 ‐5.90 0.67 ‐4.02 ‐9.56 1.47 ‐2.36 ‐2.25 ‐8.06

5/30/08 ‐1.26 ‐0.76 ‐0.66 ‐2.15 0.11 0.25 ‐2.69 ‐1.41 ‐1.50 0.40

2/27/09 ‐1.06 ‐0.98 ‐1.35 ‐1.13 ‐2.20 ‐3.85 ‐1.54 ‐2.32 ‐3.34 ‐5.04

Five Worst Months for AGG: 6/30/06 – 6/30/09


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Slices Of The Yield Curve

Sources: Merrill Lynch, Bespoke Investment Group

Three‐Year Total Return

Municipal 1‐10 Year 17.27

Municipal 10+ Year 7.13

Corporate 1‐10 Year 13.19

Corporate 10+ Year 12.35

Government 1‐10 Year 22.58

Government 10+ Year 28.22

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Fixed Income Allocation

The Old Way

Bond Allocation

=

Age

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Fixed Income: Risk ManagementS&P 500 and BarCap Aggregate Bond Index Portfolios: 8/29/08 ‐ 3/31/09

Sources: Bloomberg, Merrill Lynch, Bespoke Investment Group

‐40

‐30

‐20

‐10

0

10

8/29/08 3/31/09

Return (%

)

AGG: 3.29%

50 AGG/50 S&P: ‐17.2%

20 AGG/80 S&P: ‐29.1%

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Fixed Income = Strong Returns

0.1

1.0

10.0

100.0

1,000.0

1801 1821 1841 1861 1881 1901 1921 1941 1961 1981 2001

Stock vs Bond, Cumulative Relative Performance, 1801‐2008

Equity vs 20‐Year Bond Rel Rtn

Last High Water Mark

68‐Year Span,1803‐71,

Bonds Beat Stocks

20‐Year Span,1929‐49,

Bonds Beat Stocks 40‐Year Span,

1969‐2009,Bonds Match

Stocks

Source: Research Affiliates, LLC

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Wall Street Gives Notice “This year’s going to be a good one for credit.” – Societe Generale

“We still believe there is significant opportunity in high‐quality investment grade corporate bonds.” – PIMCO, July 2009

“Even against the backdrop of contracting GDP, rising default rates and uncertainty around price inflation, investment grade corporate credit at current income levels is clearly a great place to be.”

– Neuberger Berman, May 2009

“We believe investors should focus on senior corporate bonds and senior secured bank loans over equities, and the senior‐most mortgage and structured credit assets.” – Goldman Sachs, Q1 2009

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Shift Of Premium?


‐50

‐40

‐30

‐20

‐10

0

10

8/29/08 6/29/09

Return (%

)

ML US Corporate Master

S&P 500

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Opportunities In Fixed Income


“Municipal bonds, in particular, have become a more dynamic area of focus because the sector was hammered heavily last year, making them cheap and attractive.”

– Steve Rodosky, PIMCO, in Wall Street Journal, July 9

20

30

40

50

60

70

80

90

100

110

7/1/08 6/30/09

Basis Po

ints Over Treasuries

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Not Your Grandfather’s Bonds

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Accessing The Market

Bonds

vs.

Bond Funds

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Active Vs. PassivePercentage of Fixed‐Income Funds Outperformed By Benchmark

Fund Category Index 1‐Year 3‐Year 5‐Year

Govt Long Funds Barclays Long Government 89.8 93.3 92.7

Govt ST Funds Barclays 1‐3 Year Govt 84.2 91.4 91.4

Inv‐Grade Long Funds Barclays Long Govt/Credit 94.8 94.7 100.0

Inv‐Grade Short Funds Barclays 1‐3 Year Govt/Credit 98.7 100.0 100.0

High‐Yield Funds Barclays High Yield 37.0 43.8 52.3

MBS Funds Barclays MBS 93.7 100.0 100.0

Global Income Funds Barclays Global Aggregate 78.1 86.4 79.1

Emerging Mkts Debt Funds Barclays Em Mkts 65.2 68.8 62.5

General Muni Debt Funds S&P National Muni Bond 80.6 84.7 95.9

Source: Standard & Poor’s

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Bond ETFs Vs. Bond Mutual Funds

ETF Pros• Liquid• Transparent• Tax Efficient• Low Cost

ETF Cons• Trading costs• Bid/ask spreads can mean overpayment• Can trade at discount/premium

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Growth Of Fixed‐Income ETFs

Source: State Street Global Advisors

•Bond ETFs represent 12.6% of total ETF assets•71% asset growth in 2007 •62% asset growth in 2008•31% asset growth YTD

$0

$10

$20

$30

$40

$50

$60

$70

$80

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 5/31/2009

$US, Billions

# of ETFs

Assets

# of ETFs

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Diversification Of Bond ETFs

Source: IndexUniverse.com

Total Market 5 Money Market 3

Total Market ‐ ST 2

Total Market ‐ Int 4 Treasuries 11

Total Market ‐ LT 2 Treasuries ‐ ST 3

Treasuries ‐ Int 4

MBS 3 Treasuries ‐ LT 4

Muni Bonds ‐ Natl 3 TIPS 2

Muni Bonds ‐ ST 5

Muni Bonds ‐ Other 3 Intl Treasuries ‐ ST 2

Muni Bonds ‐ Calif 3 Intl Treasuries 3

Muni Bonds ‐ NY 3 Emerg. Market Treasuries 2

Corp General 2

Corp High Yield 3

Corp Convert. 1

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Bond ETFs: Choice, SelectioniShares iBoxx $ Investment Grade Corporate Bond Fund

iShares Barclays Credit

iShares iBoxx $ HiYld Corp

PowerShares High Yield Corporate Bond Portfolio

SPDR BarCap High Yield

SPDR Barclays Capital Convertible Bond

iShares S&P National Municipal Bond Fund

PowerShares Insured National Municipal Bond Fund

SPDR BarCap Municipal Bond ETF

iShares S&P Short‐Term National Municipal Bond

Market Vectors LB AMT‐Free Short Municipal

Market Vectors Pre‐Refunded Municipal Index

PowerShares VRDO Tax‐Free Weekly Portfolio

SPDR BarCap Short‐Term Municipal Bond

Market Vectors LB AMT‐Free Intermediate Municipal Index

Market Vectors LB AMT‐Free Long Municipal Index ETF

Market Vectors High Yield Municipal Bond

iShares S&P California Municipal Bond ETF

PowerShares Insured CA Municipal Bond

SPDR BarCap California Municipal Bond

iShares S&P New York Municipal Bond ETF

PowerShares Insured New York Municipal Bond

SPDR BarCap New York Municipal Bond

iShares Barclays 1‐3 Year Treasury

iShares Barclays Short Treasury

SPDR BarCap 1‐3 Month T‐Bill



PowerShares 1‐30 Laddered Treasury

SPDR BarCap Intermediate‐Term Treasury


iShares Barclays 20+ Year Treasury

SPDR BarCap Long Term Treasury

Vanguard Extended Duration Treasury ETF

iShares Barclays TIPS Bond

SPDR Barclays Capital TIPS

iShares S&P/Citi 1‐3 Intl

SPDR BarCap S/T Intl Treasury

iShares S&P/Citi International Treasury

SPDR BarCap Intl Treasury Bond ETF

SPDR DB International Government Inflation Protected Bond

iShares JPMorgan USD Emerging Markets Bond Fund

PowerShares Emerging Markets Debt

Claymore US Capital Markets Bond

iShares Barclays Aggregate

iShares Barclays Government/Credit

SPDR BarCap Aggregate Bond

Vanguard Total Bond Market

Vanguard Short‐Term Bnd ETF

iShares Barclays 1‐3 Credit

iShares Barclays Intermediate Government/Credit

Vanguard Intermediate‐Term Bond ETF

iShares Barclays Intermediate‐Term Credit

SPDR Barclays Capital Intermediate‐Term Credit

Vanguard Long‐Term Bond

SPDR BarCap Long Credit

Claymore US Capital Markets Micro‐Term Fixed Income

PowerShares Active Low Duration Fund

WisdomTree US Current Income

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Bond ETFs Compared: Broad‐Based

Ticker

AUM$US, MM

Exp Ratio

12‐Month 3‐Year 5‐Year

Claymore US Capital Markets Bond UBD 5.1 0.27 ‐1.12 N/A N/A

iShares Barclays Aggregate AGG 9,748.0 0.20 6.36 6.47 4.93

iShares Barclays Government/Credit GBF 113.0 0.20 5.56 N/A N/A

SPDR Barclays Capital Aggregate Bond LAG 196.2 0.13 7.03 N/A N/A

Vanguard Total Bond Market BND 4,399.3 0.11 6.59 N/A N/A

Vanguard Short‐Term Bnd ETF BSV 1,894.7 0.10 5.71 N/A N/A

iShares Barclays Intermediate Government/Credit GVI 341.8 0.20 5.50 N/A N/A

Vanguard Intermediate‐Term Bond ETF BIV 849.3 0.11 5.65 N/A N/A

Vanguard Long‐Term Bond BLV 140.2 0.11 5.71 N/A N/A

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ETFs Compared: Corporate, Govt, ABSCorporate Government Treasuries

Mortgage-Backed

iShares Barclays 1‐3 Year Treasury SHY

iShares Barclays Short Treasury SHV

SPDR BarCap 1‐3 Month T‐Bill BIL

iShares Barclays 3‐7 Year Treasury IEI

iShares Barclays 7‐10 Year Treasury IEF

PowerShares 1‐30 Laddered Treasury PLW

SPDR BarCap Intermediate Treasury ITE

iShares Barclays 10‐20 Year Treasury TLH

iShares Barclays 20+ Year Treasury TLT

SPDR BarCap Long Term Treasury TLO

Vanguard Extended Duration Treasury EDV

iShares Barclays MB Bond MBBiShares Barclays Agency Bond AGZSPDR Barclays MB Bond MBG

iShares iBoxx $ Investment Grade LQD

iShares Barclays Credit CFT

SPDR Barclays Capital Convertible Bond CWB

iShares Barclays 1‐3 Credit CSJ

iShares Barclays Intermediate Credit CIU

SPDR BarCap Intermediate Credit ITR

SPDR BarCap Long Credit LWC

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Bond ETFs Compared: International

Ticker

AUM($US, MM) Exp Ratio 12‐Month

iShares S&P/Citi 1‐3 Intl ISHG 20.2 0.35 N/A

SPDR BarCap S/T Intl Treasury BWZ 10.5 0.35 N/A

iShares S&P/Citi International Treasury IGOV 19.9 0.35 N/A

SPDR BarCap International Treasury Bond BWX 1,091.8 0.50 1.46

SPDR DB International Government Inflation Protected Bond WIP 395.6 0.50 ‐10.93

iShares JPMorgan USD Emerging Markets Bond Fund EMB 267.0 0.60 1.33

PowerShares Emerging Markets Sov. Debt PCY 205.0 0.50 2.27

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Bond ETFs Compared: MunisNational MunisNew York Munis

Calif. Munis

iShares S&P National Municipal MUB

PowerShares Insured National Municipal PZA

SPDR BarCap Municipal Bond TFI

iShares S&P Short‐Term National Municipal SUB

Market Short Term Municipal SMB

Market Vectors Pre‐Refunded Municipal PRB

PowerShares VRDO Tax‐Free Weekly PVI

SPDR BarCap Short‐Term Municipal SHM

Market Vectors Intermediate Municipal Index ITM

Market Vectors Long Municipal Index ETF MLN

Market Vectors High Yield Municipal HYD

iShares S&P California Municipal Bond CMF

PowerShares Insured CA Municipal Bond PWZ

SPDR BarCap California Municipal Bond CXA

iShares S&P New York Municipal Bond NYF

PowerShares Insured HY Municipal Bond PZT

SPDR BarCap NY Municipal Bond INY

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Bond ETFs Compared: High Yield

TickerAUM

($US, MM) Exp Ratio 12‐Month

iShares iBoxx $ HiYld Corp HYG 3,340.0 0.50 ‐5.4

PowerShares High Yield Corporate Bond Portfolio PHB 110.7 0.50 ‐18.8

SPDR BarCap High Yield JNK 1,895.8 0.40 ‐8.1

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Bond ETFs in Illiquid Markets

AuthorizedParticipant

Market

IBM

MSFT

AAPL

CAT

CSCO

SecurityBasketETF Shares

Premiums & Discounts

100k Shares $ $25

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Bond ETFs In Illiquid Markets

‐10%

‐5%

0%

5%

10%

15%

J‐08 A‐08 S‐08 O‐08 N‐08 D‐08 J‐09 F‐09 M‐09 A‐09 M‐09 J‐09

Prem

ium (%

)

HYG Premium/Discount

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ConclusionA Balanced Approach

‐40

‐30

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‐10

0

10

20

30

40

50

60

70

4/01 4/02 4/03 4/04 4/05 4/06 4/07 4/08 4/09

Return (%

)

50 S&P/10 AGG/10 IGOV/10 HY/10 Global Gvt/10 EM Liquid

50 S&P/50 AGG

80 S&P/20 AGG

100 S&P 500


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Our Panelists

Tom AndersonHead of Strategy and ResearchState Street Global Advisors

Tim AndersonPartnerChief Fixed Income OfficerRiverfront Investment Group

Sponsored by …

Thank You

For more information:

www.IndexUniverse.comwww.spdrs.com

advanced fixed income - etf · advanced fixed income: not your grandfather’s bonds. originally...

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