New Horizons: Introducing Exchange-Traded Bond Funds
by Albert J. Fredman
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.
Its 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.
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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