Top Performing Fixed Income ETFs

July 26, 2017

The bull market in bonds just won't quit. Every year in recent memory, the majority of analysts have predicted the end of the rally in bonds, and every year they've been proven wrong.

It's completely understandable why analysts have been so off the mark. You'd be hard pressed to find anyone who could have predicted that eight years into an economic expansionwith the U.S. jobless rate at 16-year lows, and stock prices at record highs bonds would be doing so well and interest rates would be so low (bond prices and interest rates move inversely).

Especially this yearafter the Federal Reserve hiked its benchmark federal funds rate three times in six monthsany reasonable model would have forecasted lower bond prices. But of course, those models would be wrong.

Fixed-income securities across the board are up this year, including the widely followed U.S. 10-year Treasury yield, which saw its yield drop from 2.44% at the start of the year to 2.25% currently.

Likewise, fixed-income ETFs of all stripes are up this year. The largest of the bunch, the iShares Core U.S. Aggregate Bond ETF (AGG), has returned 2.9% so far in 2017. That's not a bad return for seven months, but there are several ETFs that have done even better, including a handful that are up double-digit percentages. Here we take a look at some of those.

Preferred Stock Recovery

Easily taking the mantle as the No. 1 fixed-income security of 2017 is the iShares International Preferred Stock ETF (IPFF), which is up 20% for the year.

Preferred stocks have characteristics of both equity and debt. They typically offer a sizable dividend that's safer than the dividends on a company's common stock, but not as safe as the interest payments on a company's bonds. Additionally, preferred stock can sometimes be converted into common stock.

Preferreds are essentially a way to capture higher yields than corporate bonds, but with higher risk if the company faces hard times.

As its name suggests, IPFF, with $82 million in assets and a 0.55% expense ratio, holds non-U.S. preferred stocks, the vast majority of which are issued by companies in Canada (80%), and to a lesser extent, the U.K. (10%).

The fund's distribution yield is currently 4.35%, meaning that most of this year's 20% gains for the ETF have come from price appreciation.

IPFF has a large exposure to Canadian bank and energy companies, which hurt the fund between mid-2014 and early 2016 when oil prices were crashing (the fund dropped nearly 50% from peak to trough). This year, that trend reversed, as energy prices stabilized.

 

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