Even after the recent trade-war-induced sell-off, the stock market stands well above its lows from December. The S&P 500 is still up nearly 15% year-to-date, buoyed by a resilient U.S. economy and corporate profits that haven’t been nearly as bad as had been feared only a few months ago.
But as the stock market has sent out optimistic signals about the health of the economy, the bond market has done the exact opposite. Treasury yields are well below the lows they hit at the end of last year, and just this week tumbled to levels not seen in 1 1/2 years.
Lower Yields, High Bond Prices
The two-year yield dipped to as low as 2.14% on Wednesday, while the 10-year yield sagged to 2.36%. For context, the federal funds rate is currently pegged to a range of 2.25-2.5%, meaning that 2’s and 10’s are falling below the Fed’s benchmark rate.
Steeply falling rates are a worrying sign for stock investors, but they are a boon for fixed income investors. After all, bond interest rates and prices move inversely, so lower rates equal higher prices.
That relationship extends to fixed income ETFs also. The $61 billion iShares Core U.S. Aggregate Bond ETF (AGG), which holds U.S. investment-grade bonds, has already returned 3.5% this year. Longer duration bond funds, like the $13 billion iShares 20+ Year Treasury Bond ETF (TLT), have delivered even greater returns: TLT is up 4.7% so far this year.
If rates continue lower—especially if the Fed cuts rates later in the year, as some expect—the run in fixed income ETFs may just be gathering steam.
Here are the best-performing fixed income ETFs so far this year, funds that could continue to outperform if rates head lower from here.
Preferred Stock ETFs Leading
At the top of the fixed income heap for 2019 are preferred stock exchange-traded funds, including the Virtus InfraCap U.S. Preferred Stock ETF (PFFA), the InfraCap REIT Preferred ETF (PFFR), the Innovator S&P Investment Grade Preferred ETF (EPRF) and the VanEck Vectors Preferred Securities ex Financials ETF (PFXF), each up by double-digit percentages this year.
Best-Performing Fixed Income ETFs (excluding leveraged/inverse)
Data measures total returns for the YTD period through May 15
Preferred stocks have characteristics of both equity and debt. They typically offer a sizable dividend that's safer than the dividends of 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.
There are plenty of flavors of preferred stock ETFs, such as those that focus on only one sector like PFFR, or those that exclude a specific sector like VRP, and everything in between. As always, look under the ETF hood to see exactly what exposure you are getting with a fund.
That said, this year has broadly been positive for preferreds as they benefit from a supportive rate environment and a supportive equity environment—the best of both worlds.