Bob Doll, chief equity strategist at BlackRock, recently made
headlines by telling Bloomberg television that the Fed wonât be
launching any new âquantitative easingââQE3 for market
insidersâdue to the recent strength in the U.S. economy.
In Dollâs predictions for 2012, heâs also expecting a rise
in Treasury yields and double-digit gains for U.S. stocks.
On the other hand, Pimcoâs Bill Gross is not only expecting
QE3 this year, heâs saying several more Fed bond-buying programs
are coming down the line as well.
More specifically, Gross is betting heavily on mortgage-backed
securities (MBS), expecting the Fedâs bond purchases will be
focused on MBSs to help the housing market.
In fact, if you look at his flagship Total Return Fundâs
holdings as of Dec. 31, 2011, MBSs accounted for roughly 48 percent
of its weighting. Treasury holdings were also increased to 30
percent by the end of last year, from nil before last summer.
Iâll admit that pitting the two giant asset managers against
each other might be a bit dramatic and mostly media-driven. Still,
it makes for good conversation, especially since Round 1 clearly
went to BlackRock.
Just to recap, last summer, as QE2âthe Fedâs second
bond-buying spreeâwas coming to a close, Rick Rieder,
BlackRockâs chief investment officer of fixed income, made quite
a splash with his bullish outlook on Treasurys. At the time, his
view differed significantly from Gross, who thought Treasurys would
be hit hard once QE2 ended.
We all know what happened next.
Rieder was spot onânot only was there no sell-off in
Treasurys, but the increased volatility and risk-off trading led to
a huge rally in Treasurys. The eight top-performing ETFs last year
were focused on U.S. Treasurys, and thatâs not including
Meanwhile, Grossâs Total Return Fund, which eliminated all
Treasury holdings before the summer of 2011, massively
underperformed its peers, causing Pimcoâs founder and co-chief
investment officer to apologize to his investors.
But even though his flagship fund saw large outflows and took a
confidence beating in 2011, Gross didnât earn the nickname
âBond Kingâ for no reason. With over $244 billion under
management, his Total Return Fund has been around since 1987, and
remains the largest bond fund in the world.
The good news for Gross followers is that Pimco recently
announced that the highly anticipated ETF version of its Total
Return Fund will begin trading on March 1, 2012, under the ticker
For those who want MBS exposure but donât want to wait around
for âTRXTâ to launch, there are a few ETFs out there that
specifically target MBSs as well.
The iShares Barclays MBS Bond Fund (NYSEArca:MBB) is a $4.2
billion fund that holds only investment-grade MBSs and has a
trailing 12-month yield of 3.28 percent.
The Vanguard Mortgage-Backed Securities ETF (NasdaqGM:VMBS) is
another fund that specifically targets MBSs. VMBS is a $150 million
fund thatâs seen some large inflows as a percentage of its assets
over the past few months. It carries a trailing 12-month yield of
Even for those who want more diversified, broad-based exposure
to MBSs, the iShares Barclays Aggregate Bond Fund (NYSEArca:AGG)
and the Vanguard Total Bond Market ETF (NYSEArca:BND) both have
over a quarter of their weightings in MBSs. Both funds track an
aggregate bond index, so they include a mixture of Treasurys, MBSs
and corporate bonds.
On the flip side, investors leaning toward Dollâs outlook on
rising Treasury yields might want to stay away from Treasury funds,
such as the iShares Barclays 20+ Year Treasury Bond Fund
(NYSEArca:TLT), which had spectacular returns in 2011. (It was the
No. 5 fund on the top-returners list last year.)
As for Dollâs U.S. equities call, even if heâs wrong and QE3
is implemented, he probably doesnât have much to sweat about. I
say that because judging by what happened after the Fed announced
QE1 and QE2, equities actually took off.
Of course at the end of the day, no one really knows what the
Fed will do.
Still, itâll be interesting to see if BlackRock gets it right
again, or whether Gross will be right this time around and return
his flagship Total Return Fund back to its glory days.
Disclosure:I am currently long AGG.
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