- On "buy" signals, own longer-term bond ETFs such as the iShares Barclays 20+ Year Treasury Bond ETF (TLT | A-85), the Vanguard Total Bond Market ETF (BND | A-94) and/or the iShares Core U.S. Aggregate Bond ETF (AGG | A-98). AGG closely tracks the index used in the Zweig bond model; however, there are many long-term-dated bond ETFs that you can use. Find one that trades commission-free at your custodian.
- On "sell" signals, switch to shorter-term-dated bond ETFs such as the SPDR Barclays 1-3 Month T-Bill ETF (BIL | A-62), the Vanguard Short-Term Bond ETF (BSV | B-69) and the iShares Barclays 1-3 Year Treasury Bond Fund ETF (SHY | A-97). Short-term bond market exposure will perform better when interest rates rise, giving you the opportunity to switch back to long-term exposure—hopefully at a higher yield. Clearly, not every signal will prove correct, and while the strategy doesn't trade too frequently, it is the big downtrends we want to protect against.
Material Risks Quantified
The risk of rising interest rates is material. In the next chart, you can see the impact each 1 percent rise in rates has on both 10-year and 30-year Treasurys. Should rates rise 2 percent, the bonds will decline approximately 16 to 32 percent in value (red circles). Should rates move lower by 1 percent, gains will be approximately 9 and 23 percent (green circles). Today [Sept. 10, 2015] the 10-year Treasury is yielding just 2.22 percent.
For a larger view, please click on the image above.
Note how much greater the loss is when rates rise just 1 percent by comparing a move from 2 percent to 3 percent (-8.58 percent) versus a move from 7 percent to 8 percent (-5.24 percent). Simply, there is more risk to your bond exposure when rates are ultra-low.
Sticking To The Plan
While Wall Street economists missed in 2014, the Zweig bond model remained bullish on longer-term bond ETFs. Of course, there are no guarantees in this business. Not every trade proves to be correct. It is a defined investment process that is systematic, and requires discipline to adhere to the process.
If you choose to follow the Zweig bond model process, or any other process for that matter, there are several important questions to ask yourself:
