Own Longer-Dated Bond ETFs

September 14, 2015

Don't Fight The Trend

For a targeted portion of your total portfolio, implement a defined investment process that allows you to stay in sync with the bond market's primary trend—importantly, one that may move you away from the negative impacts of rising interest rates.

Here is how it works:

I have long favored a tactical trend model created by the late great Marty Zweig. Marty looked at data going back to 1967 and established a process that follows five simple steps. Ned Davis, of Ned Davis Research, did some work with Marty on this process in the mid-1980s.

We subsequently recreated the model with the help of our friends at Ned Davis Research. In the upper left section of the following chart, you'll find the rules on how the model works. This is something you can track on your own.

The chart shows the hypothetical performance of the model (the blue Model Equity Line) versus the Barclays Aggregate Total Return Index (the black line). In the bottom right section of the chart, you'll find the annualized performance on "buy" signals versus "sell" signals. The yellow highlighted area reflects the current active "buy" signal (orange arrow).

OwnLongerDatedBondETFs

For a larger view, please click on the image above.

Overall, the Zweig bond model has done a good job at enhancing return and reducing the risks present in rising rate environments. It moved to a "buy" signal on Sept. 9. It's a rules-based way to identify the primary trend. It's signaling that higher rates may be ahead, but note that it's a tactical process and should be followed closely if the trend evidence changes.

You can also click here to see how it works. There are just five simple rules to follow to identify the trend in interest rates.

What ETFs Work Best

Especially for the preretiree and retiree, it's important to have exposure to bonds, but with yields so low, risk is actually elevated. I believe that it's now the time to think more tactically.

An idea on how to implement using ETFs:

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