3. SPDR Nuveen Barclays Build America Bond ETF (BABS | C-99)
Total return: +15.09 percent; Effective duration: 12.48 years
BABS invests in the Build America bonds (BABs), which are essentially municipal bonds subsidized by the U.S. government.
The muni space benefited in the first half from a decline in default rates, and record low issuance. This created steady demand, but constrained supply, net-net pushing up prices and driving performance.
Unlike its conventional muni counterparts, BABs generally have longer maturities and durations, and are noncallable. You can read more about that in a blog I recently wrote, Build America Muni Bond ETFs Hot For Now, to get a better understanding of BABs.
The ETF BABS, in particular, serves up the longest duration among the three ETFs that cover the space. Therefore, it is not surprising it is the best performer of the bunch so far.
Long Duration But Super-Charged
The top two bond ETF performers so far this year both hunt in the Separate Trading of Registered Interest and Principal of Securities (STRIPS) space, taking duration exposure to the extreme.
You can read more about that in another blog I recently wrote, Think Twice About These 2 Bond ETFs for insight on STRIPS and the mechanics of zero-coupon Treasury ETFs. The gist here is that because of these mechanics, it makes sense that they benefited the most from a decline in long-term yields.