For instance, interest rate increases tend to have a greater negative impact on longer-dated bonds — more precisely, on those with greater “duration,” a measure of a bond’s response to changing rates. This core property of bonds is why long-term Treasuries, often said to be the safest of securities, have been among the hardest hit this year.
For example, since the U.S. and Israeli attack on Iran drove up interest rates in late February, the iShares 20+ Year Treasury Bond E.T.F. — which holds only long-term bonds — has lost more than 8 percent, in total return. In that same period, the Vanguard Total Bond Market Index fund, which contains corporate bonds, in addition to Treasuries, lost “only” about 2 percent.
The Vanguard fund is simple. It tracks the investment-grade benchmark, the Bloomberg U.S. Aggregate Bond Index. But from the performance standpoint, the gap between the Vanguard and iShares fund mainly comes down to duration: The Vanguard broad bond market fund has a duration of about 5.7 years, compared to 14.9 years for the iShares long-term Treasury fund, according to FactSet.
What those numbers mean is that every time rates shift, price changes are magnified in the long-term Treasury fund. So before buying any fund, you may want to check its duration for a clue about how it will behave when interest rates, which you can’t control, start to oscillate. The higher it is, the greater the fund’s price moves when interest rates shift.
Another worthwhile metric is standard deviation, a statistic that tells you how much a fund’s price swings. The iShares fund has a relatively high standard deviation, and from this perspective, it looks much more like a stock fund, in the wildness of its fluctuations, than a core investment-grade bond fund, like the Vanguard Total Bond Market Index Fund.
