Last week the iShares Barclays 20 Year Treasury Stan Luxenberg sent me this note about bond inedex ETFs: " Rob Arnott says these cap-weighted benchmarks make no sense because they give the heaviest weight to issuers that have the most bonds outstanding." So does this mean investors are regaining an appetite for risk, selling off Govies for stock funds?(Ticker: TLT), which tracks longer-dated paper, fell by 4.1% in the week. That amounts to a 500-point plus in the Dow, according to Barron's. Our own
Says Stan, our longtime mutual fund editor: Fundamental bond funds
Rob Arnott has been delivering solid returns with fundamental stock funds. (Arnott runs Research Affiliates, which creates and subadvises fundamental and equal-weight ETFs.) Now he has introduced a fundamental bond fund. Fundamental bond funds could pose a challenge to traditional bond index funds. Traditional bond index funds, such as Vanguard Total Bond Market Index, track cap-weighted benchmarks, such as the Barclays Capital U.S. Aggregate bond index. Arnott says these cap-weighted benchmarks make no sense because they give the heaviest weight to issuers that have the most bonds outstanding. Because Uncle Sam is the biggest issuer around, the Barclays Aggregate index has most of its assets in government bonds. At a time when S&P has downgraded U.S. debt, investors may not want to hold a big slug of Treasuries."
Arnott has been quite the sensation, even gracing the cover of our magazine as one of our Ten to Watch back in 2007. We have written about his case for equal-weighted indexes plenty. We got one of Arnott's subadvised funds pretty correct last year.
Oh, and in rwesponse to my headline? Nah, retail investors continue to sell domestic equity funds in favor of hybrid funds. Here is what theCompany Institute says: "Equity funds had estimated outflows of $126 million for the week, compared to estimated outflows of $2.84 billion in the previous week. Domestic equity funds had estimated outflows of $1.38 billion, while estimated inflows to foreign equity funds were $1.25 billion.