Bond Index Funds in Rising-Rate Environments | Common Sense Investing with Ben Felix | Summary and Q&A

TL;DR

Bond index funds offer long-term positive returns, even during periods of rising interest rates, making them a valuable addition to a balanced portfolio.

Key Insights

• 🫰 Active management in bond funds has not yielded better results compared to passive index funds.
• ☠️ The performance of bond funds is influenced by interest rate increases and the duration of the bond portfolio.
• ✋ Bond index funds recover from short-term declines in prices by rebalancing into higher yielding bonds.
• 🌸 Bonds provide stability in portfolios during down markets, mitigating losses and offering a buffer against stock market volatility.
• 🫰 Bond index funds outperform actively managed bond funds over the long-term.
• ☠️ Lowering the duration of bonds decreases sensitivity to interest rates but also reduces expected returns.
• ☠️ Long-term expected returns of bond index funds are independent of future interest rate scenarios.

Transcript

One of the favourite arguments of active managers and financial advisors selling actively managed mutual funds is that active management will protect you in a down market. Let’s think about this in the context of bond funds. When interest rates go up, bonds will generally fall in price. With interest rates as low as they are now, wouldn’t you be a ... Read More

Questions & Answers

Q: How have actively managed bond funds performed compared to their benchmark indexes?

Over the 15 years ending in 2016, less than 1/3 of U.S. bond funds were able to beat their benchmark index, showcasing the poor performance of active management.

Q: Are bond index funds affected by rising interest rates?

Bond index fund prices may initially decline with rising interest rates, but over time, the fund will recover as it rebalances into new bonds with higher yields.

Q: Can bond index funds offer positive returns during a down market?

Yes, even in bad markets, bonds tend to outperform stocks. In 2008, Canadian bonds posted a positive 6.4% return while Canadian stocks dropped by 33%.

Q: Should investors be concerned about low returns from bond index funds due to low interest rates?

Low interest rates do not diminish the long-term expected returns of bond index funds. They continue to provide positive returns and act as a buffer against market downturns.

Summary & Key Takeaways

• Active management does not guarantee protection in a down market, as actively managed bond funds have performed poorly compared to their benchmark indexes.

• The performance of bond funds is influenced by the magnitude of interest rate increases and the average duration of the bond portfolio.

• Bond index funds, despite short-term declines in prices, have positive long-term expected returns and serve as a buffer against down markets.