Bonds have two price components, yield and response of price to prevailing interest rates. How much of a return premium should investors in bonds expect? How can investors enhance this premium? These blog entries examine investing in bonds.
“Exploiting the Presidential Cycle and Party in Power” summarizes strategies that hold small stocks (large stocks or bonds) when Democrats (Republicans) hold the U.S. presidency. How has this strategy performed in recent years? To investigate, we consider three strategy alternatives using exchange-traded funds (ETF):
D-IWM:R-SPY: hold iShares Russell 2000 (IWM) when Democrats hold the presidency and SPDR S&P 500 (SPY) when Republicans hold it.
D-IWM:R-IEF: hold IWM when Democrats hold the presidency and iShares 7-10 Year Treasury Bond (IEF) when Republicans hold it.
We use calendar years to determine party holding the presidency. As benchmarks, we consider buying and holding each of SPY, IWM, LQD or IEF and annually rebalanced portfolios of 60% SPY and 40% LQD (60 SPY-40 LQD) or 60% SPY and 40% IEF (60 SPY-40 IEF). We consider as performance metrics: average annual excess return (relative to the yield on 1-year U.S. Treasury notes at the beginning of each year); standard deviation of annual excess returns; annual Sharpe ratio; compound annual growth rate (CAGR); and, maximum annual drawdown (annual MaxDD). We assume portfolio switching/rebalancing frictions are negligible. Except for CAGR, computations are for full calendar years only. Using monthly dividend-adjusted closing prices for the specified ETFs during July 2002 (limited by LQD and IEF) through December 2025, we find that:
How do exchange-traded-funds (ETF) focused on Treasury Inflation-Protected Securities (TIPS) perform? To investigate, we consider ten of the largest TIP ETFs, all currently available, as follows:
Do target retirement date funds, offering glidepaths that shift asset allocations away from equities and toward bonds as target dates approach, safely generate attractive returns? To investigate, we consider seven such mutual funds offered by Vanguard, as follows:
We consider as benchmarks SPDR S&P 500 ETF Trust (SPY), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and both 80-20 and 60-40 monthly rebalanced SPY-LQD combinations. We look at monthly and annual return statistics, including compound annual growth rate (CAGR) and maximum drawdown (MaxDD). Using monthly total returns for SPY, LQD, three target retirement date funds since October 2003 and four target retirement date funds since June 2006 (limited by Vanguard inception dates), all through September 2025, we find that:
50-50 Best Value – EW Top 2: SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 2 (aggressive value and somewhat aggressive momentum).
50-50 Best Value – EW Top 3: SACEVS Best Value paired with SACEMS EW Top 3 (aggressive value and diversified momentum).
50-50 Weighted – EW Top 3: SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).
We consider as a benchmark a simple technical strategy (SPY:SMA10) that holds SPDR S&P 500 ETF Trust (SPY) when the S&P 500 Index is above its 10-month simple moving average and 3-month U.S. Treasury bills (Cash, or T-bills) when below. We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS, SACEMS, SPY and T-bills during July 2006 through August 2025, we find that:Keep Reading
Does the ICE BofAML MOVE Index, the implied volatility of U.S. Treasuries as derived from options on U.S. Treasuries with maturities 2, 5, 10 and 30 years, usefully predict U.S. stock market and U.S. Treasury bond returns? To investigate, we perform two sets of calculations using SPDR S&P 500 ETF (SPY) as a proxy for the U.S. stock market and iShares 20+ Year Treasury Bond ETF (TLT) as a proxy for U.S. Treasury bonds:
Lead-lag analyses using correlations between end-of-month MOVE Index or change in MOVE Index and monthly SPY or TLT returns.
Average next-month SPY or TLT returns by ranked fifth (quintile) of end-of-month MOVE Index or change in MOVE Index.
Using end-month MOVE Index levels and monthly dividend-adjusted SPY and TLT data during November 2002 (limited by MOVE Index data) through August 2025, we find that:Keep Reading
How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR and look at lead-lag relationships between change in EFFR and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:
Using end-of-month EFFR and dividend-adjusted prices for the 10 ETFs during December 2007 (limited by EMB) through July 2025, we find that:Keep Reading
Do exchange-traded funds (ETF) that hold convertible corporate bonds offer attractive performance? To investigate, we compare performance statistics for the following four convertible bond ETFs, all currently available, to those for a monthly rebalanced 60%-40% combination of SPDR S&P 500 ETF Trust (SPY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD):
We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted returns for all specified ETFs since inceptions and for SPY and LQD over matched sample periods through July 2025, we find that:Keep Reading
How should global investors assess country sovereign bond and equity risks? In his July 2025 paper entitled “Country Risk: Determinants, Measures and Implications – The 2025 Edition”, Aswath Damodaran examines country risk from multiple perspectives. To estimate a country risk premium, he considers direct and indirect measures of country government bond risk and country equity risk. Based on a variety of sources and methods, he concludes that:Keep Reading
How much should investors who hold a conventionally diversified portfolio (stocks and bonds) be willing to pay for and an additional equity or bond fund that outperforms its benchmark (provides alpha)? In their May 2025 paper entitled “How Much Should You Pay for Alpha? Measuring the Value of Active Management with Utility Calculations”, Andrew Ang and Debarshi Basu estimate the amount an investor is willing to pay for access to an active equity or bond mutual fund, starting from an optimal stocks-bonds portfolio. Specifically, they:
Empirically estimate investor risk aversion for a given stocks-bonds base portfolio, focusing on a 60-40 S&P 500 Total Return Index-Bloomberg US Aggregate Bond Index portfolio.
Add one of 1,203 active U.S. large-capitalization mutual funds in the Morningstar database or one of 47 fixed income mutual funds in the Morningstar Core Plus US bond category to the base portfolio.
For each added fund, compute the utility benefit (certainty equivalent or willingness-to-pay) of adding it.
For robustness, they repeat this analysis for different stocks-bonds base portfolios and different assumptions about equity-bond correlations. Using monthly returns for the selected indexes and mutual funds during January 2016 to December 2024, they find that:Keep Reading
Should investors expect a negative correlation between stock market and bond market returns? In his February 2025 paper entitled “Rethinking the Stock-Bond Correlation”, Thierry Roncalli examines the stocks-bond return correlation from theoretical and empirical perspectives, employing a 4-year rolling window of monthly returns for the latter. Using both long-term and recent returns, he finds that:Keep Reading
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