The third quarter of 2011, and the entire year in general has provided a market climate that was difficult to navigate to say the least.  This can be illustrated by looking at the asset class differentials over the last decade or so, as well as so far in 2011.  The differentials between the best and worst performing areas within a universe is now narrow.  When there is a small range of performance within an asset class (or even among asset classes), the market is said to be leaderless.  To show this concept, we compiled some data.  First, we looked within the asset classes over the course of the past 10 years to see what the average spread tends to be.  Historically speaking, US Equities, International Equities and Commodities all have wide average dispersions, greater than 100%.  Fixed Income and Foreign Currencies tend to trade within a more narrow range by nature.  Interestingly, so far in 2011, all of the asset classes are demonstrating differentials that are about half of where they typically stand.  International Equities have felt this phenomenon to the highest degree, as its average spread is around 120%, and so far in 2011 it is just 40%.  The only exception has been Fixed Income.  In fact, due to a huge rally in Long Term Treasuries, the differential within this asset class for 2011 is almost double its historical average of about 30%.

The recent asset class differential study prompted us to take a closer look at the best and worst performing Fixed Income funds over the last few years, especially as we have witnessed the Fixed Income ETF universe grow rapidly, providing more ways for investors to garner exposure to almost all corners of the Fixed Income world.  Yet, when we look back through the years, we find that there have only been a handful of funds making the "best" and the "worst" categories during the respective years.  The "protagonists" have typically been International Bond Funds or bonds that are extremely sensitive to interest rates, such as Zero Coupons.  Not surprisingly, the year that saw the largest differential between best and worst took place in 2008 when we saw a differential of 116.07% as the PIMCO 25+ Year Zero Coupon US Treasury ETF (ZROZ) was up 70.07% while the SPDR Barclays Capital International Corporate Bond ETF (IBND) was down -37.00%.  This year we find the Fixed Income asset class producing a differential just below the average differential over the last 5 years, but well above the average differential for the last 10 years.  Right now the PIMCO 25+ Year Zero Coupon US Treasury ETF (ZROZ) is up 41.51% while the SPDR Barclays Capital Convertible Bond ETF (CWB) is down -9.87%, creating a differential of 51.38%.