QE3 Fixed Income Aftermath

So what happens to fixed income after QE3? I thought it would be interesting to look at the max drawdowns versus the current 30-day SEC yields for a select cross-section of the fixed income ETF space for the past 52-weeks. All yields are quite compressed as is expected. Yields are so compressed that only MBB (US agency-based mortgage bonds) has a 30-day SEC yield exceeding the max drawdown. TIPs have negative yield as was true for quite a while now. It seems the contagion of return-free risk has spread to most of the fixed income ETF universe at this point.

Forward Looking

Now that the holidays are over, what is going on in the markets? A couple of European debt auctions went fairly well last week. This does not change the overall long-term picture, but looks like nothing collapsed over the holidays. Moreover, the Iran-Strait of Hormuz situation could have spun out of control early on, but it did not (yet).

I was curious what news items were affecting the companies on my equity watch lists (both long and short). On the growth side of things, the basic materials and energy side lead the market (APA, EOG, ROSE, APC, HAL, NE, MOS, FCX). FCX is up ~6%. The rest are up more than 2% for the most part. HAL is suffering from some headline shock due to its spate with BP (BP is asking HAL to foot the cleanup bill plus lost profits), but the damage is mild since nothing is decided yet.

Social Web IPOs

Looks like Zynga's IPO day didn't start a social web frenzy (down 7.8% as of now). The broad market certainly was no help here. Quite a pattern is forming with Pandora, Groupon, Linkedin, and Renren. None of these led to an unqualified success, and most of them are doing quite poorly especially if one bought at the open of the first day. Those who bought at the IPO price did considerably better for each of those 3 names. Groupon and Pandora debuted last month and in June respectively. Linkedin and Renren debuted in May.

ETF Performance

Comparing ETF performance is actually somewhat tricky, though the issue isn't particular to ETFs. Though the CFA material has whole sections to deal with presentation of performance, there remains many variables. Returns can be annualized (though generally only performance terms 1 year or more should be annualized) or cumulative. The prices used could be bid-ask midpoints at closing (which is the preferred method by ETF issuers) or last trade price (which is the data available to us mere mortals). The performance can be total return (including any distributions such as dividends and capital distributions) or market price return. The cumulative return could end on today or the last business day of the preceding month. Then there is market and NAV performance. All these factors can make a significant difference in the calculated performance numbers, especially over longer periods. For illiquid issues, the bid-ask midpoints and last trade may differ considerably. Yesterday, I collected cumulative returns for IYY (iShares Dow US Broad Index ETF) from a few places:

Schwab Cumulative

Period	Mkt	NAV
1 mo	11.3	11.3
3 mo	-3.3	-3.2
6 mo	-8.0	-8.0
1 yr	-7.8	-7.8

Yahoo "Trailing Returns"

Period	Mkt	NAV
1 mo	11.30	11.33
3 mo	-3.26	-3.17
1 yr	7.76	7.84

iShares Cumulative

Period	Mkt	Total
1 mo	11.31	11.33
3 mo	-3.15	-3.16
6 mo	-7.96	-7.99
1 yr	7.83	7.87

Though the Schwab and Yahoo data are agreement, notice how the iShares reported performances diverges starting from the 3 mos point. In a low yield environment, the difference between -3.26% and -3.15% cumulative market returns is huge. I have not been able to reconcile this discrepancy exactly. It is not merely the $0.262 dividend distribution during the 3-mo period. I think the moral of the story is threefold:

1. take nothing for granted
2. always read the fine print on how performance is calculated
3. try to obtain performance data from multiple sources