'Bond ETFs Are Too Volatile,' Said No One….Until Now

'Bond ETFs Are Too Volatile,' Said No One….Until Now

TLT is only one part of the new fixed-income ETF market.

Reviewed by: etf.com Staff
Edited by: Mark Nacinovich

Once upon a time, bonds were the investments that financial advisors could count on to be akin to the one child who never gets into trouble. 

With such a large portion of the wealth-management business particularly focused on serving the needs of those who have made money and want to keep it in retirement, bonds were “old reliable.”  

That’s hardly the case anymore, because lately they have been acting like stocks with above-average dividends. And as dividend investors know, even while that regular income continues to hit your account, the stock price can suffer significant declines at times.

Even when a company is doing well and spinning out consistent dividend payments or even increasing dividends, it is still a stock. And when the stock market gets angry, the tickers and fundamentals may not matter. 2022 was like that, as was 2008.  

But experiencing that type of income with volatility trade-off is a new reality for investors and advisors who tap certain parts of the bond market via exchange-traded funds. Because unless you were actively investing in the 1970s, you probably haven’t seen what we are witnessing right now.  

Bond ETFs and TLT Volatility 

Here are some specifics to quantify this feast-or-famine situation that suddenly includes bond ETFs as well as equity funds. I looked at one-year standard deviations of a handful of popular bond ETFs to see if that classic measure of price fluctuation told the same story as the way this change in the bond market feels. I looked back at the past 10 years and compared their most recent 12 months with their past decade in terms of volatility (via standard deviation). This quick little study delivered. 

Starting with the new “cool kid” of the bond ETF world, the iShares 20+ Year Treasury Bond ETF (TLT) has been about 25% more volatile than usual, with a standard deviation of 15.5% versus a longer-term average of 12.2%. If we focused the study on time frames shorter than 12 months, it would be an even bigger number. TLT has whipsawed 10% in both directions in a single one-month period this year. That’s highly unusual, other than times when the market panics into all things U.S. Treasury, such as when the pandemic hit. But it is happening this year, too. 

Looking along the Treasury yield curve, a pair of ETFs that tracks shorter-term maturities, the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 3-7 Year Treasury Bond ETF (IEI), have seen their volatility jump by 40% and 60%, respectively. And the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD), which tracks corporate bonds rated BBB or higher, has posted a 9.4% standard deviation in the past 12 months versus its long-term average of 6.9%.  

Bond ETFs' Volatility Like 'Junk'

It’s as if high-quality bonds now think they are high yield (i.e. junk bonds), which are notoriously volatile and more closely resemble stock price movements at times. So it is ironic that the iShares iBoxx USD High Yield Corporate Bond ETF (HYG) hasn't experienced a volatility uptick over the past 12 months—in fact, just the opposite has occurred. Its 10-year average is 6.8%, and the most recent 12-month mark was just 6.4%. 

These numbers tell a clear story, which confirms what investors and investment advisors are seeing and feeling (and have been for over a year now). Except for high-yield bonds, bonds are behaving more wildly than we are used to. IEF has been more volatile than HYG in this most recent period. It is like a role reversal of sorts. 

This all means that we must account for what bonds have become in this era of zero rates followed by 11 rate hikes. This is not your parents’ bond market, and it may not be for a while.  

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.