New Horizons: Introducing Exchange-Traded Bond Funds

by Albert J. Fredman

New Horizons: Introducing Exchange Traded Bond Funds Splash image

From the time the bull market in equities ended in March 2000 to September 2002, the Lehman Brothers aggregate bond index climbed 29% while the Wilshire 5000 equity index tumbled 44% (returns cover the period 3/31/00 to 9/30/02). Treasury notes and bonds fared well because low inflation and a weak economy enabled the Federal Reserve to lower interest rates substantially, causing fixed-income securities to appreciate. In addition, uncertain times prompted the stampede to quality by investors seeking a safe haven.

ItÂ’s not difficult to see why bonds became the asset class of choice. Bond funds drew billions of dollars of investor money out of equity funds last year.

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Going forward, the so-called equity premium (the excess of equity market returns above default-free Treasury rates) is likely to be far more modest over the next 10 years or so than its long-term average of about 7%.

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