Treasury Bond ETFs Are Sinking: Where to Turn

With both bonds and stocks falling, advisors may turn to ETFs to weather the storm.

Reviewed by: Staff
Edited by: Mark Nacinovich

Is it a market of stocks or a stock market? That classic Wall Street saying observes that at some points in the market cycle, investing in individual stocks or sectors wins out over “owning the market.” 

In the current environment, however, investment advisors and self-directed investors may be looking at both routes and getting the same answer: Good luck finding something that can go up for more than a few weeks at a time. 

Furthermore, bonds (other than very short-term ones like Treasury bills) haven’t been the oasis investors have experienced. When interest rates were suppressed lower for so many years, bonds offered very little positive return. But so far in 2023, and after a drubbing in 2022, bonds are a sea of red. 

Two Sinking Treasury Bond ETFs

Consider the iShares 3-7 Year Treasury Bond ETF (IEI). Despite avoiding lower-quality fixed and an effective duration of only 4.4 years, long-term holders of IEI are facing a possible third consecutive year of negative returns. Its 2021 total return was -2.5%, and last year, it cratered by 9.5%, a historically high decline for a high-quality, lower-maturity bond portfolio. IEI is down 0.5% through more than nine months of 2023. 

And as a classic comedian might say, “If you think that’s bad, you should see the other guy!” In this case, the other is longer-term bond ETFs like the Vanguard Long-Term Treasury ETF (VGLT), which is down 36.5% since the start of last year. So, while T-bills are a decent hiding spot for now, rates can fall as fast as they rose, should the economy fall into recession and the Federal Reserve cuts rates. 

Stagnant S&P 500 Stocks 

Bonds are not what they used to be, and stocks are in a state of stagnation, at best. The average S&P 500 stock is about flat this year, despite the heroics of the “Magnificent Seven” mega-cap equities. That follows a 11.6% decline last year, based on the performance of the Invesco S&P 500 Equal Weight ETF (RSP).  

The stock and bond markets have fallen together for the first time since the 1970s. Investment advisors and their clients may be asking if all the rigors spent hyper-analyzing the markets from every angle is overdoing it, at least during this segment of the market cycle. 

There are more than 3,000 ETFs, featuring so many ways to segment the stock and bond markets. That is one of their chief benefits to long-term investors. The current environment, however, may prompt some to seek a simpler way. 

Like those who follow the “Paleo Diet,” which is based on eating the foods humans might have during the Paleolithic Era (over a million years ago), investors might look at where things stand and decide not to do so much hunting and gathering of investments, because so many are highly correlated. That’s where some ETFs do a nice job of keeping it simple, without falling into the trap of being “long-term investments” which some advisors and investors translate to “big losses on the way to eventual gains.” 

One ETF to Consider 

The $80 million Mindful Conservative ETF (MFUL) is just short of two years old and is an ETF that owns other exchange-traded funds, but with an overriding risk-management mandate. About half its current portfolio is allocated to T-bills, while 25% each is allocated to equities and bonds, all through a basket of 15 ETF holdings. 

Another way advisors can approach the current environment more simply is to break portfolio management down to “offense” and “defense” using one or two ETFs for each segment. For instance, one equity ETF and one T-bill ETF, rotated as the advisor/allocator sees fit. Simple, but perhaps effective for some clients.  

Investing has grown more complex. That’s a double-edged sword. For advisors who want to KISS (keep it simple, silly), a Paleo approach to investing might just taste OK for a while. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.