Are Bonds Boring?

Last week, Mike Venuto sat down with Connor O’Brien, CEO of O’Shares, to discuss markets, thematic ETFs and Fixed Income investing. The conversation drifted toward concerns with bonds, going forward from two key points:

  1. Expected returns compared to risk
  2. Role in asset allocation as correlation increases

The debate on the future utility of bonds to investors will continue, but here at the ETF Think Tank, we were inspired to dive deep into the available landscape of fixed income ETFs for this week’s research note.

1.1 Trillion Served

In the US, there are 424 ETFs focused on fixed income, with assets of about $1.14 Trillion (about 22% of US ETF AUM). This excludes leveraged/inverse, preferred, and allocation ETFs in our Toroso Security Master. The weighted average expense ratio for bond ETFs is only 14.4 bps, which is less than the overall industry, at about 18bps.

Bad Bond Benchmarks

The table above breaks down the assets, listings, and fees of fixed income ETFs by investment approach. Not surprisingly, the bulk of the assets (84.5%) are in traditional market weighted passive ETFs. Think Tank sponsor Jay McAndrew, of Columbia Threadneedle, has often referred to these type of passive funds as “bad bond benchmarks,” because they are structured in a way that overweight the largest issuers of debt. There are two interesting surprises in the table above:

  1. The number of listings is about equal; about one-third of bond ETFs are in each investment approach.
  2. There are almost double the amount of assets in Active Fixed Income when compared to Non-Traditional Passive.
Fixed Income Volatility

Earlier, we asked if bonds are boring. Below, however, we look at the best and worst performing fixed income ETFs in 2021 compared to 2020, and find volatility that is anything but boring. Let’s start with the worst performers:

The above table indicates that most of the worst preforming fixed income ETFs in 2021 are traditional passive, long duration treasury ETFs. The returns in 2020 for these same funds were 17% to 24%. Now let’s look at 2021’s best performers:

The best performers in 2021 are bonds with equity-like characteristics: high yield and convertibles. There are also four active funds that make the list. There are stark differences with approaches, volatility and results when comparing the best and worst performing fixed income ETFs of 2021 and a sign of the times. The fact is that given an almost 40-year bull market for bonds the conditions for a static 60/40 model do not make sense if an investor is looking to bonds for preservation of capital, buying power or cash flow. Our point is that any bond allocation today needs to be reviewed. We expect exciting times in this area for investors and therefore those looking at this allocation need to review how they can be different rather than traditional.

*Past performance is not indicative of future results.


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