It seems almost petty to say the performance of bond exchange-traded funds lately has been disappointing.
But wasn’t the whole pitch for diversification with stocks and bonds that when the stock markets zig, bonds zag? It hasn’t really happened in the recent stock market sell-off. ETFs holding bonds have done light years better than equity funds, but they’ve still lost a bit of ground.
Globeinvestor.com shows that one of the more popular broad market bond ETFs declined by 4.3 per cent over the month to March 16, while a sibling stock ETF tracking the S&P/TSX Composite Index plunged by 30.5 per cent.
These are just price changes – interest payments on bonds and dividends on stocks offset the declines a bit. But you still get the idea – the bond ETF was down when investors might reasonably have expected better.
Daniel Straus, head of ETF research and strategy at National Bank Financial, said bond ETFs have been whipsawed by extreme levels of volatility in financial markets.
“As the stock market sell-off was beginning, the bond market reacted with a massive spike upwards,” Mr. Straus said. “But that itself might have been an overreaction. Bonds were pushed to prices that, even in the worst case scenario, made no sense. What we’ve had is something of a snapback.”
For now, this volatility has superseded the usual relationship between stocks and bonds (when stocks fall, bonds rise). But Mr. Straus said he still believes bond ETFs are an effective way to hedge a portfolio against the risk of a stock market decline.
“It’s important for investors when they look at returns from bond ETFs to not be disappointed in short-term movements,” he said. “Over the course of a sell-off, your bond ETF may be merely flat. That’s not a disappointing outcome when the stock market is dropping by something 20 per cent or more. The bond ETF is still doing its job of providing some balance.”
Broad market bond ETFs tend to have roughly 30 per cent of their holdings in corporate issues, which are less resilient in troubled times than government bonds. You can get more of that resilience from an all-government bond ETF, but Mr. Straus believes the broad market bond ETF is the way to go for long-term investors willing to hold through up and down cycles.