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Ben Felix - Bond Index Funds in Rising-Rate Environments | Common Sense Investing with Ben Felix

Thumbnail of the video “Ben Felix - Bond Index Funds in Rising-Rate Environments | Common Sense Investing with Ben Felix”
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Author: Ben Felix
Categories: Personal Finance
Tags: finance
Views: 2 · Last viewed: 2026-10-16 10:04 UTC

Short Summary

Main recommendation: Keep bond index funds rather than switching to actively managed bond funds, even when interest rates are low or rising, because bond index funds are expected to deliver positive long-term returns and bonds serve as a buffer in down markets. The video argues that rising rates cause short-term price declines, but index rebalancing into higher-yielding bonds should eventually lead to recovery.

Key Points

  • Active bond funds have underperformed: over the 15 years ending in 2016, less than one-third of U.S. bond funds beat their benchmark index.
  • Duration drives rate sensitivity: a bond fund with 5-year average duration would be expected to drop about 5% if rates rise 1%, and longer-duration bonds carry higher expected returns along with greater sensitivity.
  • Rebalancing supports long-run returns: index funds sell bonds that no longer meet criteria and buy new bonds at higher current rates, so losses from rising rates are expected to be recovered over time.
  • Bonds are a crash buffer: a bad year for bonds is far less severe than a bad year for stocks.
  • Shortening duration is a trade-off: reducing duration lowers rate sensitivity but also lowers expected returns.

Details Worth Noting

  • Concrete instructions: Keep bond index funds in the bond portion of your portfolio rather than replacing them with actively managed bond funds, and avoid reacting to short-term price declines when rates rise. If you want less rate sensitivity, you can reduce the average duration of your bond holdings, but accept that expected returns will also fall. Keep bonds in place as a buffer against down markets unless you have a very high tolerance for volatility.
  • The Barclays Capital US Aggregate Bond Index, used as an example, includes only bonds with at least one year remaining until maturity and typically rebalances monthly.
  • Historical examples cited: the FTSE TMX Canada Universe bond index posted its worst 12 months, a negative 7.90%, from July 1982 to June 1983, while the S&P/TSX Composite fell almost 40% over that period. In 2008, Canadian stocks dropped 33% while Canadian bonds gained 6.4%.
  • The video notes that realizing expected bond returns will almost always involve periods of volatility, so short-term losses do not mean bonds have stopped doing their job.
  • The speaker, Ben Felix of PWL Capital, presents these as expectations and historical examples rather than guarantees.

Bottom Line

Rising rates may cause short-term bond losses, but the video argues that low-cost bond index funds remain a sound long-term holding that can recover through rebalancing, while bonds still provide protection when stocks fall sharply.