Tag: yield curve

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How ETFs responded to tariffs in the news

Recent news about U.S. tariffs has impacted ETFs representing several asset classes. This post discusses both positive and negative market effects. We close with some historical perspectives to help ETF investors make educated decisions that are best for their situation.

Broad-based ETF recent performance

To see how recent tariff news has impacted several broad-based ETFs, we considered the following list.

  1. iShares Core S&P 500 ETF (ticker: IVV)
  2. iShares Core Total US Bond (ticker: AGG)
  3. SPDR 1-3 Month T-Bill ETF (ticker: BIL)
  4. iShares Barclays Long-Term Treasury (ticker: TLT)
  5. iShares MSCI EAFE (ticker: EFA)

The first ETF on this list tracks large-cap U.S. stocks. The second one follows intermediate-term U.S. treasuries and investment-grade corporate bonds. The third and fourth ETFs in our list consist entirely of short and long-term U.S. treasuries, respectively. The fifth and last ETF is an international stock ETF composed of “…developed-market securities based in Europe, Australia and the Far East“. The image above shows the total return of these ETFs for 2025.

Stock ETFs and tariffs

The sharpest downturns in the prices of ETFs due to recent announcements on tariffs appear to be in domestic and international stocks. However, since international stocks started the year stronger, they are currently at a small loss for the year. On the contrary, domestic stocks have produced a more significant negative return so far this year.

Bond ETFs and tariffs

Bond markets are typically less volatile than the stock market. In particular, short-term treasury bills returns largely follow the federal funds rate, as shown by the ticker BIL. But intermediate and long-term bond fund prices appear to have benefitted from the selloff in stocks, likely in a “flight to safety“. While investors holding bond ETFs now benefit from higher prices, yields on the underlying bonds are decreasing. If the yields decrease significantly enough, an inverted yield curve may result, which could be a sign of an economic recession. Time will tell if the leading indications of the market foreshadow such an economic downturn.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

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Risk-seeking investors and the first quarter of 2021

There was plenty of risk-seeking in the first quarter of 2021. So, how did the stock and bond market respond?

A Unique Quarter

This recent Wall Street Journal article summarized this first quarter well. The author identified the following contributors to recent market behavior due to risk-seeking investors.

  1. Meme stocks
  2. Interest rates
  3. Tech rotation

Meme stocks and the Fear Of Missing Out (FOMO)

The most popular “meme” stock was GameStop Corp. for risk-seeking investors. But, what is a meme stock? This source describes it as a stock that exhibits rapid price growth that is popular among millennials. Meme stocks can also be categorized by high volatility, fueled by the so-called Fear Of Missing Out (FOMO) and panic selling. Time will tell if this category of stocks becomes more formalized, as many in the workforce return to their offices, thereby limiting their trading time. Of course, the effect of social media on stock trading isn’t likely to go away anytime soon.

A new trend in interest rates?

The other big news in the first quarter was the increase in interest rates. Long-term bond yields increased in February and March, after starting the year at 0.917%.

U.S. 10 Year Treasury Note Yield in First Quarter of 2021. Source: MarketWatch.com
U.S. 10 Year Treasury Note Yield in First Quarter of 2021. Source: MarketWatch.com

By the end of the first quarter of 2021, the U.S. 10 Year Treasury Note yield rose to 1.745%. As we wrote about before, the price of a bond decreases when yields rise. Consequently, the iShares Core Total US Bond ETF fell, to a year-to-date loss of 3.4%.

Total Return of iShares Core Total US Bond ETF, First Quarter of 2021. Source: ETFReplay.com
Total Return of iShares Core Total US Bond ETF, First Quarter of 2021. Source: ETFReplay.com

Tech Rotation

The first quarter was also characterized by about a 5% return difference between the Dow and Nasdaq indices. For instance, Exxon Mobil Corp. is up 35% this year, while Amazon and Apple have lost 5% and 7.9%, respectively. Of course, no one knows if this rotation out of tech and into energy is a new trend or just a reaction to markets anticipating a future with more energy consumption due to increased commuting. But, these recent changes have been incorporated into our portfolio construction process to produce an update to our free and premium portfolios. We encourage you to log in to see how these ETF portfolios changed due to the latest market dynamics.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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ETF Investments and inverted yield curves

In this post, I discuss a very popular topic in the financial news recently. The term “inverted yield curve” has come up quite a bit. Many consider it as a good indicator of a recession. So here, I will review the fundamentals on what a yield curve is. Then, I’ll comment on its relevance to ETF investors.

The Yield Curve

The yield curve visualizes U.S. treasury bond yields at various times to maturity. As of August 20, 2019, the yield curve looked like this.

Yield curve on August 20, 2019. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Yield curve on August 20, 2019. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

I’ve highlighted with asterisks (*) the yield on the two and ten year treasuries. So, these bond maturities had yields of 1.50% and 1.55%. These two maturities are often picked to represent short-term vs. long-term investments in U.S. treasury bonds. That spread, or difference in yields, is 0.05% as of August 20, 2019. Of course, if we chose “short-term” as 1 year, then indeed we would have an inverted yield curve with a spread of -0.17%. In any case, the two-to-ten year spread is very small, as compared to what has been seen so far in 2019.

Spread between two and ten year U.S. treasury bonds. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
Spread between two and ten year U.S. treasury bonds. source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019

What does a smaller (or negative) spread mean?

The general argument is that demand for longer term bonds is growing as investors flee the volatility of the stock market. This flight to bonds, or preferably bond ETFs, does seem to be prudent, particularly for investors with high concentrations of stock investments seeking to better manage stock market risk. So, I would argue that, if you have a well diversified portfolio of stocks and bonds, one can largely ignore all this discussion of the inverted yield curve. Instead, investors should focus on their own risk tolerance and long-term goals, as all markets correct themselves from time to time.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.