I own BND in an attempt to hedge my portfolio against my stock ETF declines, based off of the Bogleheads philosophy. I've noticed that with this ETF, over the relative long term, I've made but modest gains (compared to stock ETFs) during "good times", and still lost along with the stock ETFs during "bad times" (see the linked chart).

Is the advice I've followed antiquated? Is there any point in holding a bond ETF or mutual fund these days?

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    If your bond ETF doesn't provide (anything) in the way you thought it would, do you really see more than two possibilities? One being that the deal was fraudulent; the other that you misunderstood the details of what you bought? Commented Nov 25, 2023 at 22:00
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    @RobbieGoodwin the third possibility is obviously bad luck. Even a 95% good investment can fail and can lead one to doubt the quality of the Investment if it fails immediately after investing for the first time.
    – Falco
    Commented Nov 27, 2023 at 13:00
  • @Falco That's true, and how could it apply when the Question is not 'Why did my bond fail (at all)?' but rather 'Why doesn't it provide a hedge against stock indexes in the way I thought it would?' Commented Nov 27, 2023 at 20:44

4 Answers 4


I read an article about this very issue in January 2023, and I saved the graphic that illustrates the historical relationship between the S&P 500 as an indicator for equities and the 10-year U.S. Treasury bond as an indicator for bonds. Source: Deutsche Bank


As the scatter graph clearly shows, the most common outcome in a given year falls in the upper right quadrant, where both equities and bonds post gains.

The next most common outcome is the lower right quadrant where equities lose but bonds gain. There's your "hedge".

The third most common outcome is the upper left quadrant where equities gain but bonds lose. Not so bad because the percentage gain in equities typically exceeds the loss in bonds.

The least common outcome, the one that you experienced, is where both equities and bonds lose for the year. And the year 2022 was, as you see, a complete outlier in this 150-year time span.

If you play the percentages based on history, your "hedge" philosophy is not bad as it reduces risk. But occasionally you get burned, as in 2022.

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    One can also look at the scatter plot and see that there is essentially no correlation between equity and bond performance. This means that on average, bonds provide a reasonable hedge for equity. The chance that bonds lose is essentially independent of the chance that equity loses. An even better hedge would have a strong negative correlation but I don't think such an investment exists.
    – quarague
    Commented Nov 26, 2023 at 10:52
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    @quarague And also you wouldn't really want to invest into something that declines in value whenever the stock market rises.
    – jgosar
    Commented Nov 27, 2023 at 10:41
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    @jgosar Being anti-correlated doesn't necessarily mean that one asset always goes down when the other goes up. Consider two hypothetical investments, A and B, that both have a median return of 5% and are perfectly anti-correlated. When A returns its median of 5%, so does B. When A returns slightly above the median, B is slightly below, but there is a range where B is still positive. For A very much above the median, B has negative returns, but in all cases A's positive return is larger than B's negative return. This portfolio (if it existed) would always have positive returns.
    – Nobody
    Commented Nov 27, 2023 at 15:30

For perfectly hedged investments the investments would be perfectly anti-correlated, i.e. if the value of investment A goes down, the value of investment B goes up an equivalent amount, and visa versa. The purpose of a hedge is not to maximize gain, but to avoid risk, i.e. lock in a certain return.

There is a casual common wisdom that stock returns and bond returns are somewhat anti-correlated: bonds have to be cheaper when the stock market is doing well and visa versa. This is roughly true much of the time, but there seem to be periods when the stock market and bond market are correlated rather than anti-correlated, that is bonds and stock can both be down or up at the same time. If that's the case owning bonds won't act as a hedge against stock market declines. Folks argue that has exactly been the case for the last few years.

Is it true? Will it continue to be true? Shrug. You pay your money and you takes your chances.

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    “Owning bonds won’t act as a hedge”. Or owning bond funds? Especially if you keep the bonds until maturity…
    – RonJohn
    Commented Nov 25, 2023 at 7:39
  • The question referred to funds, and the link I included is referring to the bond market which is not really reflective of buying and holding. My wild, ignorant guess is that the return on bonds held to maturity is weakly correlated to the stock market at the time of redemption. I'm guessing that during economic crisis like 2008, stocks fall and bonds fall as companies go bankrupt, and only pay some fraction of their nominal value. Commented Nov 26, 2023 at 17:38

The concept of using bonds as a hedge against stock market declines is based on observations during periods where interest rates are relatively stable. A common theory is that when the market turns against stocks, the money from that sell off will be used to buy bonds, increasing the demand for bonds. In addition, it's often the case that market downturns come during periods of low growth and therefore lower interest rates. Lower interest rates on new bonds issuances increase the value of older issuances of bonds that pay higher interest rates.

Recent events, however, do not fit into that model. The extremely low interest rates for debt that were in place since the great recession resulted in a lot of money going into the stock market and increasing valuations. Bonds were unappealing due to the very low rate of return.

When the fed increased rates drastically it took some of the wind out of the sails of the stock market. It also crushed the value of existing bonds. The former should be fairly intuitive: less 'cheap' money for people to put into stocks. The latter is simply related to the fact that new bonds are being issued at higher rates so the existing bonds price must fall in order to produce an equivalent yield. That is, loosely, if you have a bond that yields 1% and a new bond with equivalent risk pays 5%, no one will pay you face value for that 1% bond. It will be discounted to the point that it yields 5%.

Will the historical relationship between the stock market and the bond market revert back to the previous trend? That's a matter of much speculation. It might if interest rates (and inflation) stabilize. There are also a lot more types of investments than in the past, so the expected flow of money from stocks into bonds when the market is down may not be as clear-cut in the future. For example, the private credit market which is an alternative to publicly traded corporate bonds has grown immensely.

The above is a story based on theory and interpretations of data. As with any investment theory, you should be careful about believing a story too much. In particular, try to understand the assumptions that investment theories are based on so that you can reevaluate if those assumptions do not hold.


Is the advice I've followed antiquated? Is there any point in holding a bond ETF or mutual fund these days?

Find or create a long term chart of your two securities and eyeball the correlation or lack thereof.

You can also use a Comparative Relative Strength indicator to visualize this relationship. Fidelity offers this explanation.

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    The problem with “in the long term” is that it only works if you have investments from when you’re young. Otherwise, there’s only middle and short term left before you need to start cashing out.
    – RonJohn
    Commented Nov 25, 2023 at 7:42
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    Past performances is not a particularly strong indicator of future performance.
    – Tim
    Commented Nov 25, 2023 at 17:12
  • @Tim: That statement holds double if--as is often the case today--market decisions are based upon past performance. In many kinds of markets, the greater the fraction of participants "bet" on a particular outcome, the more dilluted any "winnings" will be, and the bigger the potential upside for anyone betting against them.
    – supercat
    Commented Nov 25, 2023 at 19:32
  • @RonJohn - One uses a long term chart to determine how good the correlation is. Most hedging is not long term where long term is defined as being "young". Commented Nov 26, 2023 at 23:27
  • @supercat - In volatile down trending periods, the number of participants has no dilutive effect (see the GFC or the 2020 Covid drop). If anything, they accelerate the drop. Commented Nov 26, 2023 at 23:29

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