PETDX is one of my larger holdings with at over 10% of my portfolio. I started buying it two years ago and it has performed very well. It is a difficult fund for many to understand since its list of holdings is usually all Treasuries. But is uses its cash to buy Treasuries or other fixed income assets and then that, in turn, is used as collateral to buy derivatives that track the Dow Jones US Select REIT index. That index is composed of equity REITS with a lot of commercial REITS, but with very little agency backed mortgage REIT exposure. I follow that index then to monitor PETDX. Like a lot of PIMCO mutual funds it usually pays out high dividends and capital gains and is best placed in a Roth, if possible. I have mine in both a Roth and a regular IRA.
I also own REIT stocks with RSO and NCT. RSO has a higher yield than NCT but NCT has outperformed with appreciation and its total return is higher. Neither is invested significantly in residential mortgage backed securities. RSO gets a bad rap, but it has paid a "meaningful" dividend quarterly all through the worst of the recession. It has a reduced dividend from 2008, but it still yields +14%. I have a lot of confidence in management and in their model. Same for NCT.
If you're interested in healthcare you might look at Schwab's own Healthcare Fund - SWHFX. It had a nice end of the year cap gain. It has performed well and has very low expenses.
For healthcare REITS you might check: http://www.wikinvest.com/industry/Healthcare_REITs
I watch HCP and MPW.

Reply to @bee: I believe sales of municipal bond fund shares are subject to capital gains tax (or loss), just like sales of any other mutual fund. Only the interest income (distributions) from municipal bonds are tax exempt.

Thanks Ted,
USAA has three flavors of national munis...USSTX (Short), USATX (Intermediate), and USTEX (Long)...They are available through Vanguard brokerage NTF. They also have a fund USBLX, USAA Growth and Tax Strategy, which blends munis for tax purposes with growth companies (like Apple) for capital appreciation.
One could do this themselves by pairing a growth fund like USNQX (Nasdaq Index) with one of these three munis.
The chart below attempts to illustrate the strategy. As the growth fund (USNQX) outperforms USTEX profits would be taken. When the growth fund (USNQX) underperforms the bond fund, (USTEX) would be sold and DCA back into the growth fund (USNQX). Also, on a periodic basis the Muni Bond fund can be sold to provide tax free income.
I Like to position my growth funds in my Roth account to avoid LT and ST capital gains taxes when USNQX is periodically sold. I take distributions from my Roth account when my taxable account needs replenishing. These distributions are considered tax free so long as one follows the IRS guidelines for Roth distibutions. I try to keep the taxable account funded to provide 6 months of income needs. This taxable account can also buy (DCA) into any new growth funds during the next tax year. These growth funds can later be rolled over into the Roth account "in kind" as a Roth contribution for that tax year. Since these growth shares are not sold but rather "rolled over" "in kind", there is no taxable event. Know your Roth contribution limits.

Good article & provocative. But, remember that while investors were "loosing out" on $200 Billion in stock gains, many were doing quite well riding the bond market higher. Ted appreciates more than most that hindsight is always 20-20. Yes - we'd all like to load up on equities at March '09 prices. But (as I think Anna suggests), the future looks a lot less certain when you're sitting up to your armpits in mud than three years later after a shower and shave.
A related point: As humans we gravitate to what's worked lately. I suppose our caveman ancestors who ventured off in a different direction in search of food probably didn't fare too well. In '08 & early '09 what seemed to work was dumping equities and running to cash or Treasuries. Remember the cry as we bailed out of equities? "Last one out please turn off the lights!" Those slow to bail paid a hefty price. Human nature hasn't changed much since than. So, as interest rates hover near zero, "investors" continue to pile into bond funds driving prices even higher. This won't end well - for most anyway. (Last one out please turn off the lights:-)

I liked your question enough to post it (as recommended by others)...hope you are O.K. with the imposition. I am also very curious what other see as investment prospects over the next 1-3 years.
I am in the camp that bonds continue to provide capital appreciation through most of 2013 with the belief that there's still a lot of deleveraging that needs to happen. 30 Year treasuries move from 2.8% to 2%...the 10 year treasury moves to 1%. This equates to a 10 percent capital appreciation on say BTTRX (American Century Zero Coupon Bond Fund 2025). I still like PONDX and use it's performance as a chart tool to chart other funds I hold.
Thinking positively, I believe job growth will continue to be muted as we put on a new pair of "tax pants" that will feel a lot tighter than the wardrobe we've been wearing for the last ten years. Eventually, the government will take some of this "tax revenue" and redirect it back into the economy with the intention of growing jobs by incentifying Infrastructure (Construction), Manufacturing, Energy, and Education. Our country's new found energy sources will play a big part in our economic turnaround and I believe benefits will be felt in US manufacturing and chemical production sectors due to lower input costs. Many of these jobs will not require a college degrees, but instead, highly competitive technical training which the government will incentify the training costs. Germany and Japan will colaborate with the US in the quest to develop lean manufacturing plants (energy efficient, environmentally friendly, and highly technical) that will be a model for the world...probably already in place in China except for the environmentally friendly piece.
I see these dynamics as being good for all investments across the board which will pull investors out of bonds and into equities...but income investors will have to see it gain momentum first...eventually providing enough growth to raise interest rates. All this may be in the 3-10 years time frame. Buy dividend paying Global equities (Global Equity Funds) on market pull backs.
In the meantime, be patient...wait for buying opportunities and hold your "sleep buddy" investments...investment party yet to be announced.

Thank you sir, my pleasure. Yes, I agree, there is a very broad mix in the batch analyzed.
Honestly, I'm just scratching a itch started by MJG...hopefully, will not fuss it too much and trust further due diligence will come from the very capable readers on this site.
I actually prefer the broader, more actively allocated funds, like WBMIX. Attracted I'm sure to the risk management enabled by the wider discretion you mention in both manager and method...at least in principle. Similarly for risk parity funds like AQRIX.
I think just about all of us here on MFO are into the WHO part, individual manager and firm. It is appealing to me to see funds like T. Rowe Price Capital Appreciation PRWCX endure a good manager departure, like Richard Howard, but the fund seems to be doing quite well now under David Giroux. On the other hand, Fidelity Magellan FMAGX has never really regained its stride after the legendary Peter Lynch departed. In fact, I do not think it has performed well in the last 15 years, yet it retains $14B AUM.

Like, David, I am also concerned with the prospects for the traditional bond fund. I would prefer the managers have a pretty wide latitude in what they invest. For that reason, we use OSTIX, BSIIX, and LSBRX as core holds in most accounts. We have owned OSTIX almost since its beginning, and have never been disappointed in Carl Kaufman's efforts. Rick Reider's team at BlackRock is continuing to keep durations super low, but still turning out strong numbers. And Loomis just keeps going. Its potential volatility is a concern, but until rates start moving up (and maybe even when they do), the flexible mandate of this fund provides a pretty good base. We allocate 50% of bond holdings to specific foreign bond funds, and we continue to employ TGBAX, GSDIX, and GIMDX.
As for dividend income stock funds, we are starting to use GSRLX, a new Goldman fund run by a talented subadvisor group Dividend Assets Capital out of South Carolina. We are cautious about owning stocks that pay the highest dividend yields, since their prices have been bid up pretty high. But GSRLX and TIBIX are attractive since they look for GROWING dividends. GSRLX offers a chunk of MLPs, which is a plus.
And you might also look at PAUIX, which has had a very good dividend yield, currently at more than 4%.

Since the article touched upon numerous Emerging Market ETF recommendations - I thought I'd throw out there an interesting new ETF --- FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE)
Currently the ETF holds 1,699 stocks and so it is very diversified from a stock exposure perspective. Market Cap Exposure...
Large-cap: 45.25% | Mid-cap: 19.18% | Small-cap: 32.03% | Micro-cap: 3.54%

FlexShares® Morningstar Emerging Market Factor Tilt Index ETF seeks to enhance exposure to developing market stocks by tilting the portfolio toward the long-term growth potential of the small cap and value segments. It seeks to provide investors with an emerging market equity option that helps to meet their longer term capital appreciation needs. Designed to replace traditional market-weighted emerging market equity products, the Fund applies a tilt to smaller cap and value stocks using a multi-factor modeling approach that attempts to enhance portfolio risk/return characteristics. Realized capital gains and income dividends are anticipated to be declared and paid at least annually.

Fact Sheet:
http://www-ac.northerntrust.com/content//media/attachment/data/white_paper/1209/document/tlte_factsheet.pdf?1356493091219
=====
EGShares also added an interesting Emerging Markets ETF --- EGShares Emerging Markets Core ETF (EMCR).

The EGShares Emerging Markets Core exchange-traded fund (ETF) seeks investment results that correspond to the price and yield performance of the S&P Emerging Markets Core Index. The S&P Emerging Markets Core Index is a modified equally-weighted index designed to measure the market performance of up to 116 leading companies that S&P Dow Jones Indices determines to be representative of all industries domiciled in emerging market countries, using a rules-based methodology.

Fact Sheet:
http://emergingglobaladvisors.com/pdf/literature/FactSheet/EMCR_Fact_Sheet.pdf
Insights:
http://emergingglobaladvisors.com/pdf/articles/Industry Diversification in EM Core Holdings -- A Different Index Choice.pdf

Many EM investors have country and
industry concentrations because they use
conventional benchmarks as investment
portfolios.
We chose the S&P Emerging Markets
Core Index because it is designed to:
• Diversify industry exposure by reducing
concentration in legacy frontier market
sectors
• Tap into available liquidity to gain
exposure to potentially emerging
industries
• Reduce more mature economy
exposure, broadening EM country
diversification
• Serve as an investment index rather
than a benchmark

Hi again, Slick!
In January, we'll publish a list of fund profiles sorted by style. You might find some of the smaller or newer funds of interest.
In general, I'm a bit concerned about the prospects for longer-term investment grade bonds - we're at the tail end of a thirty year rally with real yields at or below zero. That tends to make me a bit skeptical of bond or hybrid funds and especially those staying close to a standard benchmark allocation. And I'm a bit concerned with small caps whose greatest gains tend to occur when we're coming out of recession and interest rates are dropping. GMO projects small caps and almost all bonds for negative real returns over the next 5-7 years.
In the hybrid realm:
1. I could imagine a buy-write or covered call fund as an alternative to a traditional stock/bond hybrid. Instead of relying on bonds for income, these funds can generate 1.5 - 2% per month in income from selling calls. I recently profile RiverNorth Dynamic Buy-Write and I'll update Bridgeway Managed Volatility (formerly Bridgeway Balanced) for January. Likewise, a good long/short fund (there aren't many) would give you the risk/return profile that hybrids have traditionally achieved without the risk of a bond bubble.
2. I'd certainly look at funds with a fair degree of flexibility and a strong track record. Osterweis Strategic Investment is a blend of Osterweis Income and Osterweis. And I do own T Rowe Price Spectrum Income, which Sven endorses and which can hold 15-20% in dividend-paying stocks.
3. I wouldn't rule out an emerging markets hybrid fund. GMO likes the prospects of both e.m. stocks and bonds. Fido just launched one (Total Emerging Markets) and the closed-end First Trust/Aberdeen Emerging Opportunities has a long, strong record.
In the income realm:
1. as a cash management option, I've been using RiverPark Short Term High Yield. It's structured to return 3-4% above a money market with very low volatility.
2. I might consider registering for my January conference call with Teresa Kong, manager of Matthews Asia Strategic Income. She's sharp, Matthews is first rate, and it would seriously diversify a domestic bond portfolio.
3. In the world of bond funds, Osterweis Income is distinguished and the new Scout Unconstrained Bond draws on the skills of one of Morningstar's Fixed-Income Manager of the Year nominees. They've got a really solid record. RiverNorth is about to launch a collaboration with OakTree (first-tier institutional bond guys who also run Vanguard Convertibles), focused on high income.
In the small cap world:
1. Aston River Road Independent Value and Pinnacle Value are managers with a distaste for over-priced stocks and an eye for value; over time, they tend to hold a lot of cash when they can't find stocks priced to produce "absolute returns."
2. for solid, unspectacular performance, I'd think about Mairs and Power Small Cap, at least in part because M&P have such a record for solid performance without drama.
3. finally, I would at least look at the Grandeur Peaks Global folks. They once ran the Wasatch global small cap operation and have now gone independent.
Nothing against the suggestions that the folks raised above, I'm just not as familiar with them and thought I might flag a few ideas.
Take great care,
David

I will second the choice of PGDPX. It's a well diversified dividend income fund holding every thing from EM bonds to Global equities, mlp's and more. Go to the Principlefunds.com website if interested. Fairly young fund, but good record so far. But I am biased having 10% in the fund.
I still like ARIVX for small cap only because conservative and capital protection is what I wanted. The 1year under performance will come with the decision to own this manager's skills. The total returns in 3-5-10 years is what I'm hoping for.

Reply to @msf: As a long-time American Funds holder I surely agree that their fixed income offerings are really sub-par. However they do have a number of fairly decent equity funds (if you can purchase without the load), some of which are referenced in the article.
YTD their "New Economy" fund has returned 23.8%, Smallcap World Fund 21%, and Capital World Growth and Income is at 19.2%, all with reasonable ERs.

Reply to @hank: I share your disappointment with most financial reporting (and unfortunately, most "reporting" in general). Though this article was somewhat short on details, I did not find it quite as weak as so many others that seem to be written to fill column space.
The writer does point out that there has been a general movement from large cap equity to bonds, and from actively managed funds to index funds (including ETFs). He does not talk about how AF's bond funds in particular are doing because the article is about equity funds. He does point out that while there was this trend out of LC equity, it was particularly pronounced with AF, and goes on to describe how AF equity funds differ from those in other families.
In doing so, he talks about AF's equity funds' relatively poor performance, which has since improved. (He does not note that AF's bond funds's performance has been even worse, as that would not explain the outflow from their equity funds; it would only go to explain why AF's bond funds did not benefit from the equity outflow.) He describes AF's conservative nature, and highlights a particular bad move by AF (holding lots of financials). What he doesn't make clear is that many other families (though far from all) made the same misstep in 2008.
The article does not go into nearly as much depth as the M* article I linked to (below) about how Capital Research is changing the way its managers and analysts work on the equity side. But it is not completely lacking in observations about the funds' management style or AF's relative performance. I don't think I'd throw lump it together with so many articles that deserve excoriation.

A difference between American Funds bond funds and equity funds is that, while much of the money in the bond funds is in Class A shares as you note, that's not necessarily the case for the equity funds.
See, e.g. the SAI for Bond Fund of America (I assume that's the fund you're talking about; the only other fund that meets your load/ER specs is US Government Securities). The vast majority is in class A ($23.7B), with class C having $2.5B, and class F-1 having $1.5B. None of the many other classes has over $1B in investment.
In contrast, consider EuroPacific Growth. While a good chunk of its moneys are in Class A ($31.4B), there's a bigger chunk in the no load classes F-1 ($7.4B), F-2 ($6.0B), R4 ($12.5B), R5 ($14.0B), R6 ($17.6B).
People are not flocking to AF's bond funds, I suspect because they're lousy. The fund you referenced (actually both of the funds meeting your specs) rates only 2*; Bond Fund of America has performed in the bottom decile over the past five years. (Note, this seems strange to me, since it was not in the bottom decile for any of the past dozen years, but that's what M* reports.) The average AF taxable bond fund rates only 2.4 stars.
Capital Group is working to overhaul its fixed income group and the focus of its fixed income funds, as M* has reported. Also reported by Reuters and others. Confirmation that performance is a major issue with these funds.

http://news.morningstar.com/articlenet/article.aspx?id=578169
* Hartford Capital Appreciation Adds Comanagers
* Federated to make changes to its equity fund lineup
* Eaton Vance Atlanta Capital SMID-Cap to close to new investors
* ING Small Company Reopens
* Aston Fires Subadvisor Veredus
* IShares Altering Benchmark Indexes for 11 Country-Specific ETFs

Mark,
I can certainly buy TFSHX in my 403b account (similar to 401k for educators). Not many people expect these funds, or any other alternatives, to outperform stocks over the long run. The main reason to add them to a portfolio is the same as with bonds: Each of the sources of your gains or losses experiences some kind of Brownian motion (stochastic jumps). If all of them jump in the same direction, it can be pretty scary. Bonds and stocks often jump in different directions at different times. The same is with other alternative investments. If they work well, they can make the ride more smooth. Like salt and pepper, they should be only a small part of your portfolio. But they may improve the taste.

Ten, fifteen year out, returns on bonds aren't going to look great. But it really all depends on what you're comfortable holding. It also depends on how much money you have, because series I bonds are much more attractive than treasuries, but you can only invest relatively small quantities. Same thing with FDIC insured accounts, but the limits are much higher.
Before you sell all your bonds, look at what long duration treasuries have done in the last couple of years. They've done really, really well during a period of time when everyone said interest rates were going to rise. Is that going to continue? Probably not, but who knows.
I'd keep in mind two things, one if you already hold a position, changes in the price don't change the income stream you get, simply the mark to market value which only matters if you sell. Two, if you reinvest at least part of the yield, falling prices makes you money because your prospective rate of return is higher.
Do you need to sell capital to pay for current or future expenses? Yeah, then it might make sense to sell bonds in leu of equity right now. Otherwise what are you going to do with the money? Cash isn't super different than a bond, arbitrage or "alternatives" are basically scams, and equity is a different beast all together.

Here's the link to a recording of the ARLSX call. We'll host it (and several neat new features) on-site in January.
Quick highlights:
1. they believe they can outperform the stock market by 200 bps/year over a full market cycle. Measuring peak to peak or trough to trough, both profit and stock market cycles average 5.3 years, so they think that's a reasonable time-frame for judging them.
2. they believe they can keep beta at 0.3 to 0.5. They have a discipline for reducing market exposure when their long portfolio exceeds 80% of fair value. The alarms rang in September, they reduce expose and so their beta is now at 0.34, near their low.
3. risk management is more important than return management, so all three of their disciplines are risk-tuned. The long portfolio, 15-30 industry leaders selling at a discount of at least 20% to fair value, tend to be low-beta stocks. Even so their longs have outperformed the market by 9%.
4. River Road is committed to keeping the fund open for at least 8 years. It's got $8 million in asset, the e.r. is capped at 1.7% but it costs around 8% to run. The president of River Road said that they anticipated slow asset growth and budgeted for it in their planning with Aston.
5. The fund might be considered an equity substitute. Their research suggests that a 30/30/40 allocation (long, long/short, bonds) has much higher alpha than a 60/40 portfolio.
An interesting contrast with RiverPark, where Mitch Rubin wants to "play offense" with both parts of the portfolio. Here the strategy seems to hinge on capital preservation: money that you don't lose in a downturn is available to compound for you during the up-cycle.
Negotiating now with Matthews about talking with Teresa Kong (MAINX) in January. They've agreed and we need to arrange date and time. The good folks at Seafarer are on-board to celebrate their first birthday with us in February. Still thinking about ultra-focused folks (RiverPark Wedgewood, Bretton, maybe Cook & Bynum) thereafter.
For what interest it holds,
David

A lite-hearted view of the current (well kinda current since 2010) thoughts regarding bond bubbles. This write is very much off-the-cuff, and in a poking fun, as well as more serious considerations and is by no means in any form of completeness; and may be considered an addendum to the Funds Boat.
Rip it, tear it and shread it as needed. We'll all learn something.
"Investors on the quest for yield along with safety are also plowing capital into investment-grade corporate securities, but only about 6.3% of respondents believe that these markets are overbought. About one in six respondents stated that more than one of the fixed-income markets is in bubble territory and a whopping one-fifth believe that all of the markets listed are price rich. In an uncertain macro-environment world where global central banks seem willing to underwrite anxieties, the end of fixed-income bubble markets seems far off."
This note, is from this article, CFA Institute.
Bad plan of the Week?
On Wednesday, the Fed announced another round of easing and said it's going to keep interest rates near zero until the nation's unemployment rate drops below 6.5 percent or inflation tops 2.5 percent.
Okay, my inflation adjusted 2 cents worth.....and then I'll attempt to keep my mouth shut about this until 2013.
---The easy part, bond prices in some sectors will stay near flat for the next year, some sectors will move either up or down in price !
1. So, the Fed. actually placed a plan with numbers, around which, one may do a pole dance. Who is going to play this game? The big money houses? Who is going to complain about whether the numbers (unemployment/C.P.I.) are real? And, Mr. Bernanke indicated that, every month, the Fed would purchase $40 billion worth of mortgage-backed securities (continued) and another $45 billion in long-term Treasuries. After awhile this is really big money, as the central bank will effectively be electronically printing over $1 trillion next year in order to buy more government bonds. Geez, an investor should be able to make a buck somewhere with this kind of action backing a plan.
2. Hey, what if the "new normal" unemployment rate, reported in fully accurate numbers, will not see the happy side of below 7% for years to come. One has to figure that inflation might ring the Fed. target bell first, eh?
3. Inflation, well except if the official CPI can't move past 2.5% (or projected, as per the Fed. statement). Then what?
Does this spell deflation or just a tiny bit of growth?
4. Perhaps growth is not going to be what it has been in the past 50 years. What if the developed countries have a Japanese moment, for a few decades? Opps, that could also be a problem for the lesser developed countries, too.
5. Perhaps a trend will find its place in the U.S. general populus of re-gifting, and when that does not clean out enough of the clutter in the households, the majority of them will have yard and garage sales in 2013. This action could actually stall sales at QVC, HSN, Amazon, various t.v. sell everything channels will begin to fail, numerous dollar stores and WalMart, too. GDP would drop 1%. And don't forget the ongoing action in the various blackmarket sectors of this country; or the kinder word of barter. Past whatever name for this activity, is no tax revenue.
6. And holy poof. The country needs tax revenue from somewhere; 'cause the outtie numbers are much too big relative to the innie numbers and gets into that debt thing-a-ma-bob. The "great debate", eh?
7. I sometimes wonder about generations of investors, the books that have been written and the charts and graphs that shape so much of what so many attempt to perform with investments in the equity sectors. It still is an equity-centric world; and I do believe that some of these folks get really upset about and with the fits and starts in equity sectors; and that some of the bond folks, while walking down a street, stop at the equity store; open the front door and yell inside, "Hey, we make money, too!; and if it wasn't for the bonds issued, your equity companies would not have a good life."
'Course, in the end; if and when some bond prices tumble off of a cliff and into the sea, for what reason, will be the question?
Must be growth somewhere pushing up the demand for money in other sectors; as within the next two years at the most, anyone and his brother's company will have been able to borrow (bond issues) as much cheap money as they could ever need for decades to come. Corporate bond issues will likely continue to fall from the sky for the next year, so that companies may take advantage of cheap money. Hopefully, they will have a good reason to raise the cash.
Perhaps the next big upmove will be in equities, for real reasons; and not because bonds are too expensive OR that the big money needs to go play in another arena for a short bit of time to reap the profits.
What would be the ramifications into some equity sectors, if some bond sectors had strong and sustained yield increases over a period of six months?
What about the much discussed contrary indicator? If so many are viewing bonds as over-priced; may this not be a contrary indicator? Are bonds over-priced for a good reason?
'Course, low yields today have the good and bad edge sides of the interest rate blade, eh?
Individuals with good credit scores may obtain low rate financing for homes, autos and related.
The other side of the blade for individuals who have some form of invested monies; but who are also risk intolerant suffer from near zero returns on capital via CD's and related. Another related area, but is seldom noted are monies invested by legal entities as cities, municipalities and/or townships who must keep money at the ready for budget needs. These accounts are generally parked in some form of demand account with local banks. These accounts currently may only provide for a .10% yield on the monies.
Will the U.S. and global consumers find room for spending in their budgets going forward; and therefore promote grow with companies, who will in turn, hire more employees? And what are all of the global boomers going to do with their monies?
The central bankers may yet "lead" this house back to some of its investing roots in equities. We're gonna have to find a balance somewhere.
Respectfully,
Catch

Reply to @wsanders: Not much of a correction? Maybe not in the open end high yield muni funds which are but 1% off their recent all time highs. But in HYD I would call a sudden 4.8% decline off all time highs and wiping out all the price gains since July a correction. Even more so since it's a plodding bond instrument. Again, one reason why I abhor ETFs. They can go to a discount to NAV like HYD in the blink of an eye and wipe out months and months of price gains. Maybe this is all unfounded worries about the taxation of munis and HYD will go right back to their highs. But in the meantime, I could never live with a 4.8% drawdown in any of my bond positions.
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=hyd&insttype=&freq=&show=&x=28&y=15