Stocks vs. Bond ETFs: Will History Repeat Itself?

Historically, stocks and exchange traded funds (ETFs) have outperformed Treasuries, but will history continue to repeat itself or will it be broken?

In this corner, we have bonds. In the other, equities. Advocates of both are squaring off:

• Equities have the ability to outperform bonds because they have the ability to double or even triple in price in a short time period.  Advocates of equity, in particular “Wizard of Wharton” Jeremy Siegel, says that the stocks are the wisest asset to hold in order to build decent wealth.
• Advocates of bonds, such as PIMCO’s Bill Gross, say that bonds protect investors from terrible downfalls and that it’s virtually impossible for Treasuries to sink as low as stocks.

To put it into perspective, over the last 40 years large-cap stocks have returned 9.2% annually as compared to 8.5% for long-term government bonds.  If one doesn’t consider the most recent market crash and the dot-com collapse, the gap is even larger.

So will this trend of a bond run-up continue?  We can’t answer that, and there are many who are skeptical that it will. So far for the year, stocks have outperformed Treasuries.  The reason behind this is that Treasury prices are being brought down as a result of the enormous outpouring of new Treasury obligations and that inflation might ensue, states Larry Light for The Wall Street Journal.

• iShares 7-10 Yr Treasury (IEF): down nearly 4.9% year-to-date with a yield of 3.91%

• iShares Barclays 20+ Yr Treasury Bond (TLT): down 17.7% year-to-date with a yield of 4.12%

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