No. of Recommendations: 5
Slumming in the Bond ETFs

Slumming (derived from slum) originally referred to a practice, fashionable among certain segments of the middle class in many Western countries, whereby one deliberately patronizes areas or establishments which are populated by, or intended for, people well below one's own socio-economic level, motivated by curiosity or a desire for adventure. Most often these establishments take the form of bars or restaurants in low-income areas.

Getting info on the 50 or so currently-available, bond ETFs isn’t hard to do. Evaluating that info and translating it into profits is, of course, another matter. I’m happy to share the broad outlines of what I’m finding (but not, of course, any proprietary conclusions). So here’s goes.

It makes sense to partition bond ETFs into the same partitions that exist for the underlying and then to discard the ETFs that are redundant. E.g., AGG (whose target index is the Barclays Capital U.S. Aggregate Bond Index) would be benchmarked against LAG (whose target index is also the Barclays Capital U.S. Aggregate Bond Index), and one would be discarded. The same would be done with all of the ETFs. Find those that should wiggle and waggle the same, and then keep only one of them.

But have you ever done a chart overlay of the AGG/LAG pair? Obviously, the two are highly correlated. But LAG is much more volatile. So investing problems arise immediately, because there are other differences between the two as well, just as there are between all of the ETFs: e.g., liquidity, typical ATR, propensity to trend, etc. In other words, an investment plan that simply focuses on trailing track records of best current yields or best total returns isn’t likely to work very well with bond ETFs. Instead, old-fashion Due Diligence of the sort that means reading prospectuses and looking at price charts will have to be employed, so that means can be matched to ends and appropriate choices made as to which funds might be useful to invest in (long or short) and which could be ignored.

What is my list of the bond ETFs that merit attention? That’s something I’d like to know myself, which is why I’ve begun looking at bond ETFs. But until I’ve done a lot more digging, I won’t know the answer to that question, either. But given that PIMCO is rolling out actively-managed bond ETFs, doing some basic homework now might be A Good Thing (AGT). Who knows? PIMCO’s products might be useful. Reputedly, their expense-ratios will undercut Vanguards’, and their fixed-income expertise is manifestly greater. If bought and then exited in timely manner, actively-managed bond ETFs might be an acceptably alternative (on a total returns basis) to holding the underlying. Stranger things have happened.
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