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Investing score card: Bonds take the lead this quarter as stocks struggle

May 31, 2011 |  6:00 am

Chalk up one for that most basic investment strategy: diversification.

U.S. stocks are on track for their worst monthly drop since last summer, dogged by worries about the economy’s slowdown.

But if you’ve got bonds in your portfolio they’re offsetting some of the equity market’s losses.

With one trading day to go in May, the Dow Jones industrial average is down 2.9% for the month.

Barring a huge rally on Tuesday, May will mark the first monthly loss since November (when the Dow lost 1%) and the biggest decline since August (when the index slumped 4.3%).

The broader Standard & Poor’s 500 index is down 2.4% this month.

Percent Meanwhile, the continuing slide in market yields on U.S. Treasury bonds and other fixed-income securities -- also a reaction to the economy’s weakness as investors seek relative safety -- has pushed up prices of government, municipal and many corporate bonds.

The iShares Barclays 20+Year Treasury Bond exchange-traded fund is up 2.7% in price for the month, through Friday. The Vanguard Total Bond Market Index fund, a popular bond fund in 401(k) accounts, is up 0.9% for the month.

Tax-free municipal bond funds also have posted gains in May as the muni market has bounced back from the steep sell-off of last fall and winter. The Franklin California Tax-Free Income fund, one of the largest muni funds, is up 2.4% in price this month.

Stocks had rallied sharply in the first quarter on optimism about the economy. That optimism also pushed up interest rates, devaluing older fixed-rate bonds and leaving many bond funds in the red in the period.

In the second quarter stock and bond returns have flip-flopped as economic growth has waned.

Still, U.S. stocks’ gains overall year-to-date are well ahead of what most bonds have earned -- though that could change if June brings equity market losses on par with May’s pullback.

Here are total returns in the second quarter and year-to-date, through Friday, for a cross-section of popular bond and stock funds. Total return includes price change and any interest or dividends earned in the period.

BOND FUNDS:

Vanguard Total Bond Market Index......Q2:  +2.5%; YTD:  +2.8%
Franklin California Tax-Free Income.....Q2:  +5.0%; YTD:  +3.3%
Pimco Total Return...............................Q2:  +2.1%; YTD:  +3.3%
DoubleLine Total Return.......................Q2:  +2.7%; YTD:  +5.1%
SPDR Barclays High Yield Bond ETF......Q2:  +1.9%; YTD:  +5.3%
Loomis Sayles Bond...............................Q2:  +3.4%; YTD:  +7.0%

STOCK FUNDS:

Shares MSCI Emerging Mkts. Index ETF...Q2:  -1.9%; YTD:  +0.2%
Growth Fund of America...........................Q2:  -0.1%; YTD:  +5.2%
Vanguard 500 Index.................................Q2:  +0.7%; YTD:  +6.6%
iShares Russell 2,000 Index ETF..............Q2:  -0.6%; YTD:  +7.1%
Dodge & Cox Stock....................................Q2:   +1.7%; YTD  +7.7%
iShares S&P MidCap 400 Index ETF.........Q2:  +0.2%; YTD:  +9.4%

-- Tom Petruno

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