Q: In your bond answers you favour XLB.
What are likely scenarios for this ETF if say rates only drop to high 4% and stay there?
What potential upside are we looking at?
What dividend rate should I expect?
What happens if the rates drop at much slower pace?
What are likely scenarios for this ETF if say rates only drop to high 4% and stay there?
What potential upside are we looking at?
What dividend rate should I expect?
What happens if the rates drop at much slower pace?
5i Research Answer:
For increased upside potential in the event of rate stagnation or rate cuts, longer-term bonds will perform relatively better than short to intermediate-term. The majority of XLB's bonds have a maturity of 20+ years, and its effective duration is 15 years. A rough calculation suggests that for every 1% change in interest rates, XLB can theoretically increase by ~15%. This is not a guarantee, of course, however, this is roughly in line with the recent move that has occurred as well.