BND Vanguard Total Bond Market

As bond yields rise, investors are finally seeing some losses in their fixed income holdings. This is probably quite the shock to most investors as it signals the end of the nearly 30 year bull market in fixed income.

Thanks to this, many are exiting fixed income securities entirely and are putting their capital to work in stocks or even commodities instead. This is leading to huge outflows for many of the top bond products out there, including arguably the most famous, the PIMCO Total Return Fund (PTTRX).

The enormous bond fund, which has over a quarter trillion in assets under management, has been losing assets for four straight months now, with the outflows picking up as of late. Outflows are moving out at a rate of at least $7.5 billion for each of the past three months, putting the total YTD outflows at $23.2 billion for the benchmark product (see all the Total Bond Market ETFs).

Trend Across the Board?

Clearly, investors are pulling out of the product to a decent degree, and this is followed up by bond outflows in a number of other key mutual funds and popular ETFs lately. However, it is worth noting that for the ETF form of the PIMCO Total Return product, outflows really haven’t been that bad this summer.

The PIMCO Total Return ETF (BOND) has actually seen outflows of just $73 million in the past month, and roughly a quarter billion since the quarter began. Furthermore, the ETF has actually added about half a billion in assets so far in 2013, going against the trend both in the broad space and in terms of its counterpart mutual fund product as well (read Forget BOND, Focus on These Junk Bond ETFs Instead).

Granted, BOND has just a fraction of the assets that PTTRX has—just over $4 billion—but it still suggests that there is a bit of a divergence developing between the two key products lately. This is surprising since BOND has a higher expense ratio than PTTRX, though the performances of the two could be a clue for why the ETF hasn’t been abandoned yet.

Performance

In terms of YTD performance, BOND has clearly outperformed its mutual fund counterpart (by roughly 100 basis points), though both are posting a loss in year-to-date time frames. And in shorter time frames, this trend continues as both in the trailing three and one month periods BOND has beaten out PTTRX.

If that wasn’t enough, BOND is still holding its ground when compared to other popular bond ETFs in terms of trailing one year performances. If investors compare BOND to AGG and BND, two of the most popular total bond market ETFs out there, the PIMCO product is a clear winner.



The ETF has lost just half a percent in the trailing one year time frame, compared to 3% losses for both AGG and BND in the same period. While BOND has certainly faced more turbulence lately, it is still maintaining a degree of outperformance, though it looks to be more volatile in the months ahead (also read 3 ETFs for Rising Interest Rates).

Bottom Line

Given this performance though, it is easy to see why investors haven’t abandoned BOND the same way that they have PTTRX lately. The product has held up remarkably well, and it is still outperforming a number of other bond products too.

While this might seem strange since BOND is supposed to implement the same strategies and techniques as its mutual fund counterpart, it is important to remember that due to some regulatory issues, it can’t use derivatives as PTTRX does.

So it is possible that some of the swaps and other derivative instruments that have been utilized in PTTRX have actually dragged down the return as of late, and could be at least part of the reason for the relative underperformance (see 3 Important Questions to Ask About Your ETF Portfolio).

Lastly, just because investors have started to give up on the mutual fund version of the total return strategy, it doesn’t mean that the ETF has been experiencing the same issues. The ETF has actually been holding up quite well, so don’t write off this version of the total return fund just yet.

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ISHARS-BR AG BD (AGG): ETF Research Reports
 
VANGD-TOT BOND (BND): ETF Research Reports
 
PIMCO-TOT RETRN (BOND): ETF Research Reports
 
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