Correlation to Stocks - Bond ETF vs. Bond Fund

Do Bond ETFs have higher correlation to stocks compared to Bond Mutual Funds? Or is this just an urban myth?

Got me.

Get the monthly returns on several and do some calculations.

Ha! I’d rather a finance guru come in with a magical answer instead of me doing the grunt work.

there was an article in this months FAJ. tldr - ETF mispricing a function of arbitrage capital availability - which also influences VIX so yea probably not urban myth.

  • edit last months FAJ +/- 10% mispricing…

I’d think that the error would be very small though. Presumably, both the mutual funds and ETFs in question would use similar sampling methodologies to gain market exposure. ETF market value might fluctuate from NAV now and then, but I don’t know if this will noticeably affect long term returns.

The answer is yes and no. BND, the largest core bond ETF has roughly the same correlation as the Barclays Agg Index, which it tracks, to the S&P. I haven’t looked at it in a while, but let’s say it’s around .3. Now take five “core” actively managed mutual funds. All five of them will be different. They’ll have different active share and tracking error. Some will invest in HY while other may not. Whatever.

All of that will cause the correlation to the S&P to be higher or lower than BND. Over the last several years we’ve seen bond managers chasing yield so they’re buying more high yield bonds. High yield bonds are more closely related to stocks than Treasuries, so many core bond funds - today - are more highly correlated to stocks. This isn’t always the case though. If they’re buying more Treasuries and TIPS then the correlation is going to be lower than BND. Several other factors matter. This is just a simplistic explaination.

Once you start talking about nontraditional bond funds and multisector bond funds…things get whacky and each fund is different.