As we head into Memorial Day, it's a good time to take stock of year-to-date portfolio performance. As you are no doubt aware, the stock market has been rocking ever since the election, but what of bonds? The bond market is magnitudes larger than the stock market, yet the mainstream financial media rarely report on the performance of the bond market's subsectors.
How have bonds done in 2017? Actually, pretty darn well. No, the bond market indices have not kept pace with the raging Nasdaq, but no one expects that. I invest in many different types of fixed-income securities for my clients at Portfolio Guru, LLC and I have learned that capital appreciation is just as important as regular, periodic income. The Nasdaq ETF (QQQ) is yielding a paltry 0.86%, but that doesn't seem to be hurting its performance.
To justify allocating assets to bonds, one must be able to generate capital gains. So far in 2017, that has, without any fanfare, been a good trade.
The following bond-market ETFs are representative, and I present their year-to-date (ytd) performance (share price performance, not total return) but also their current yield.
IShares Barclays 20+ Yr. Treasury (TLT) +3.64% ytd, 2.71% current yield
IShares S&P U.S. Preferred Stock Index Fund (PFF) +5% ytd, 5.61% current yield
IShares iBoxx Investment Grade Corporate Bond (LQD) +2.18% ytd, 3.22% current yield
IShares Barclays 1-3 Yr. Treasury (SHY) +0.15% ytd, +0.75% current yield
IShares iBoxx High Yield Corporate Bond (HYG) +2.27% ytd, current yield 5.09%
Those performance figures show that riskier asset classes (high-yields and preferreds) have outperformed safer bonds, not surprising given the risk-on euphoria of the Trump Jump. That even an economically unattractive security like SHY has produced a capital gain thus far in 2017, though, shows the optimism of the bond market is broad-based.
It is not a wholesale dumping of bonds that is feeding this stock rally. Also, with yields above 5%, PFF and HYG will offer some relative performance if and when the stock market ever stops rising.
That said, I prefer to dig for individual bonds instead of hewing to the indices. The performance of my Real Money Best Idea, Navios Maritime's Preferred Series G (NM-G) -- up more than 400% since I first started buying them in January 2016 -- shows that asymmetric returns are possible by investing in fixed-income securities.
I'm always looking for "the next Navios," and in my RM columns next week I will recommend several beaten-down preferreds that offer opportunity for capital appreciation as well as attractive current yields. In the meantime, though, the steady if not spectacular returns from the bond markets are keeping me from losing my head and jumping into a FOMO (fear of missing out) trade by buying stocks with valuations at 12.5-year highs.