Evidence continues to mount: bond funds are a much better deal for those who sell them than for those who own them. It also tells us that a simple alternative— purchase of a 5 year Treasury note— will be a better deal for most investors, particularly those who are retired and use the income rather than reinvest it.
Let’s examine the most recent evidence.
In each of the 5 year periods ending in last six months, purchase of a 5 year Treasury has done better than an index of 20 major government securities funds. Indeed, the 5 year Treasury ranked first in two periods, second in three periods, and third in one period. During the entire period, one fund, Vanguard GNMA, beat the return of a 5 year treasury 4 times and another fund beat it once, American Century GNMA. None of the other eighteen funds in the index beat the 5-year Treasury.
A 5 Year Treasury Beats the Government Funds, Again, Again, and Again
| 5 Yr. Period ending | T-Note Rank
(of 20) |
5 Yr. Treasury | Index Return |
| March, 2000 | 2 | 6.86% | 5.57% |
| February, 2000 | 1 | 7.05% | 5.60% |
| January, 2000 | 1 | 7.37% | 5.69% |
| December, 1999 | 2 | 7.76% | 6.25% |
| November, 1999 | 3 | 7.78% | 6.50% |
| October, 1999 | 2 | 7.72% | 6.38% |
Source: Morningstar Principia Pro
To be sure, this was an unusually good period for the 5-Year Treasury. In the proceeding 6 periods it ranked from 2nd place to as low at 6th place. Further back, there have been a few periods in which a 5-year Treasury note actually failed to beat the index.
How many?
Well, I’ve done this research now for a total of 88 five-year periods beginning in January 1988. In that time, the Treasury Note has trailed the index only 14 times. In other words, a 5-Year Treasury beat the government funds index 84 percent of the time. Skeptical readers can visit my website, www.scottburns.com, and check out the “government funds” section which now has a history of 48 consecutive rankings of the 5-Year Treasury versus the index of 20 government funds.
With statistics like that some people might wonder if the index is a “stacked deck”— a selection of 20 government funds with inferior records. In fact, the funds in the index were selected for their size and are a pretty good cross section of load and no-load funds. If anything, the funds as a group are somewhat better than average.
One indication is a single, appalling fact: in the 5 year period ending March 31, only 35 of 461 government funds with 5 year histories offered load-adjusted returns of 6.86 percent— the return of a 5 year Treasury over the period. In other words, 92.4 percent of all government funds were inferior to a 5 year Treasury Note. If we restrict the list to Intermediate-term government funds, i.e. to funds with a similar maturity, the record is even worse. A 5-year Treasury did better than 96.4 percent of all 302 intermediate government funds.
What if we spread the net to ALL bond funds?
There, the managers and fund companies look a trifle better. Of some 1,290 fixed income funds with 5-year track records, 282 offered a higher load adjusted return than a 5-year Treasury note. That’s nearly 22 percent. To get that 1 in 5 chance of beating a Treasury note, however, you had to take the higher risks in emerging market bond funds, international bond funds, junk bond funds, or long term government funds.
What does it all mean?
Try these broad-brush conclusions:
- Most fixed income funds have no reason for to exist. They provide no real benefit to the consumer. They provide great income to their fund company, sales force, and marketing department.
- If you are retired and are making fixed income investments, you’ll do best by keeping it simple. Buy 5 year Treasuries in a ladder or shop for higher yield CDs. Most of the time you’ll be in the top 25 percent of investors— or better— and have less risk.
- If you’re looking for sources of information and advice, start asking for comparisons that go beyond lists of “the 10 best funds.” Much of what we read in newspapers and magazines is useless or misleading, as is much of the mutual fund searching done by advisors who specialize in mutual funds, because it makes no reference to competing alternatives.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Karolina Grabowska
(c) Scott Burns, 2022