The Dirty Dozen: 12 Genuinely Awful Investments

I’m usually too geeky to hype any investment as being best or worst of anything. Sometimes, though, even I have to get down, get dirty and use the S-word: Sell. I do that today with the iShares 20+ Year Treasury ETF (TLT) and the PIMCO 25 Year Zero-Coupon US Treasury Index ETF (ZROZ) and 12 similar monstrosities.

My Hate List

Here’s my list of ETFs to avoid.

Table 1

Ticker ETF
DLBL Barclays iPath US Treasury Long Bond
CLY iShares 10 Plus Year Credit Bond ET
TLH iShares 10-20 Year Treasury Bond ET
TLT iShares 20 Plus Year Treasury Bond
ZROZ PIMCO 25 Year Zero Coupon US Treasury
LWC SPDR Barclays Long Term Corporate
TLO SPDR Barclays Long Term Treasury
MBG SPDR Barclays Mortgage Backed Bond
EDV Vanguard Extended Duration ETF
BLV Vanguard Long-Term Bond ETF
VCLT Vanguard Scottsdale Funds LT Corp.
VGLT Vanguard Scottsdale Funds LT Govt.

Why I Hate These ETFs

I hate them because they all appear in a Portfolio123 screen I created to identify fixed-income ETFs with a long-term focus.

That’s all. This has nothing to do with creditworthiness. It’s long-term I hate, and that applies equally to corporate fixed income and Treasuries. (I took a TIPS bond off the list because that has a different set of dynamics. And by the way, this list isn’t exhaustive: It doesn’t include general-purpose ETFs that have multi-term exposure, but you may want to check on how much exposure they have to long-term and sell if it’s heavy.)

I don’t necessarily expect any of the ETFs in Table 1 to post the worst losses around. In fact, I have complete confidence that the world of equities will serve up many ETFs that wind up delivering far worse returns over the next several years.

My problem with fixed income ETFs is one of suitability. If you hold what one person considers a dog of an equity ETF, at least you can presumably make some sort of argument, to yourself even if to nobody else, that things aren’t really so bad for this group, that these stocks are unappreciated or underappreciated.

Long-term fixed income ETFs are different. The probabilities here are hopelessly tilted against you, due not to analytic opinion but basic math. So even if your goal is diversification, or mitigation of volatility, as it so often is for so many who own these ETFs, you have virtually no chance of getting what you ultimately want.

Starting With the Past

One of the reasons I’ve got steam coming out of my eyeballs regarding this topic is a debate I’m having with a Portfolio123 user in that site’s Community; I’ll call him Jack (not his real name). Jack is a bright guy who has had good success in the past using TLT as a hedge vehicle and he continues to favor it. This is why I’ll focus here on TLT, although the same could be said of all the ETFs in Table 1. ZROZ get special mewtion because 25-year zeros . . . oh my. :-(

Indeed, TLT has served Jack and others magnificently in the past. Figure 1 shows a simple 1/2/99-7/11/16 backtest of an ETF portfolio that holds only one security, TLT.

Figure 1 – TLT


Nice! Considering the volatility we’ve seen in equities, you can easily imagine what a wonderful diversifier this has been.

Those who used the iShares 3-7 Year Treasury ETF (IEI) or the iShares 1-3 Year ETF (SHY) also did incredibly well in mitigating volatility, as shown in Figures 2 and 3.

Figure 2 – IEI


Figure 3 – SHY

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Disclosure: None.

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