Bond funds look like the skunks at Wall Street’s garden party this summer. Ben Bernanke’s comments about possibly scaling back the Fed’s mammoth $85 billion-a-month spending spree has spooked stakeholders in all flavors of bond exchange-traded funds. The interest-rate uncertainty drove bond ETFs and mutual funds into the dirt — as is clear from the record $61.7 billion in outflows so far in June, according to TrimTabs Investment Research.
It makes sense when you think about it: When interest rates rise, bond prices usually fall as investors bail on lower-yield debt. Still, despite this mass exodus from bond funds — or perhaps because of it — be mindful of this adage from Warren Buffett: “Uncertainty is the friend of the buyer of long-term values.”
Consider the iShares S&P National AMT-Free Municipal Bond Fund (MUB), which on June 24 was trading nearly 4% below the fund’s net asset value, according to the New York Times’ Dealbook.
Industry gurus like DoubleLine Capital’s Jeffrey Gundlach believe the current bond selloff is a “liquidation cycle” that will end within weeks — once the 10-year Treasury hits 2.75%.
With fear and uncertainty causing many retail investors to bail out of bonds, it soon could be the right time for a value play in various debt-based ETFs. Let’s break down the pros and cons of four different bond ETFs: