Best & Worst Fixed Income ETFs Of The Year

We go over the major trends in fixed-income markets this year and where things stand today.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

When it comes to fixed income, 2016 has been a tale of two halves.

For the first six months of the year, it was straight up for bonds―and straight down for interest rates, which move inversely with bond prices. Those first six months were characterized by a host of concerns: about China, Brexit and low oil prices.

Those worries—together with unprecedented monetary stimulus from the European Central Bank and the Bank of Japan—pushed yields on U.S. Treasurys to record lows, and yields on many bonds in Europe and Japan into negative territory. At one point this year, more than $13 trillion worth of bonds around the world were trading with negative yields.

But just when everyone began to think interest rates could only go down, the bond market reversed.

180 Degree Turn

Starting in July, interest rates started to tick higher slowly. Then in November, they exploded to the upside following the surprise victory of Donald Trump in the U.S. presidential election. Trump's policies of lower taxes and billions of dollars in infrastructure spending may translate into higher economic growth and higher inflation, two factors that tend to drive up interest rates.

Adding more fuel to the interest rate rise, this Wednesday the Federal Reserve hiked its benchmark overnight federal funds rate by 25 basis points―its second increase in the post-financial crisis era―and signaled that three more rate increases could be coming next year.

By the end of the day, the U.S. 10-year Treasury yield was trading as high as 2.59%, up substantially from its lows of 1.32% in July, and even up from where it started the year, at 2.27%.

U.S. 10-Year Treasury Yield

 

Roller-Coaster Ride For Fixed-Income ETFs

For investors in Treasury ETFs, it's been a roller-coaster ride—first with the big rally in bond prices (and decline in yields) and then the big plunge in bond prices (and rise in yields).

A chart of the Pimco 25+ Year Zero Coupon US Treasury Index ETF (ZROZ) tells the tale. With a weighted-average maturity of 27.3 years and no coupon payments, ZROZ is among the most-interest-rate sensitive ETFs on the market. At one point this year, it was up more than 30%. By Wednesday, it was down 1.5% on a year-to-date basis, making it the seventh-worst-performing fixed-income ETF of the year.

YTD Return For ZROZ

The chart for many fixed-income ETFs is similar: a big jump followed by a big swoon. The Vanguard Extended Duration Treasury Index Fund (EDV), which also holds zero coupon bonds, started the year strong but was down 1.5% year-to-date on Dec. 14, making it the eighth-worst-performing fixed-income ETF of 2016.

Even outside of Treasury ETFs, the pattern repeats.

Muni bond funds were up anywhere for 5-8% at their highs, but buckled in the past few months. Muni bonds ETFs are now among the worst-performing fixed-income products of the year, including the VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM), down 1.9%; the Deutsche X-trackers Municipal Infrastructure Revenue Bond ETF (RVNU), down 1.5%; and the VanEck Vectors High-Yield Municipal Index ETF (HYD), down 1.3%.

YTD Returns For ITM, RVNU, HYD

Meanwhile, overseas fixed-income products haven't been immune from this year's volatility. The ProShares German Sovereign/Sub Sovereign ETF (GGOV) shed 1.2% year-to-date, making it the 10th-worst-performing fixed-income exchange-traded fund of the year.

Two China ETFs did even worse. The VanEck Vectors ChinaAMC China Bond ETF (CBON) and the KraneShares E Fund China Commercial Paper ETF (KCNY) lost 5.6% and 4.9%, respectively, making them this year's two worst-performing fixed-income ETFs.

“The [Chinese] bond market is overwhelmed by negative news from all sides, including surging U.S. Treasury yields, continuing regulatory tightening and rising inflation with improved economic fundamentals,” explained a Shanghai-based trader.

 

Junk Bonds' Big Comeback

With all that said, it hasn't been all bad for fixed income this year. While the big gains in many fixed-income ETFs have evaporated, the majority of products are still in the green for 2016. For example, the largest ETF in the space, the iShares Core U.S. Aggregate Bond ETF (AGG), was still up 1.5% as of Wednesday.

YTD Return For AGG

Moreover, there are a few big bright spots in fixed-income this year, such as junk bond ETFs. In fact, 18 of the top 20 fixed-income ETFs of 2016 are U.S. high-yield corporate bond funds. This is a segment of the fixed-income market that's been on a roller coaster of its own.

In January and February, junk bonds tanked amid fears that defaults by energy companies would spike as oil plunged as low as $26/barrel. But when oil prices recovered in the following months, so too did junk bonds.

The largest junk bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), swung from a loss of almost 6% in February to a current gain of 12.2%. Even the recent plunge in Treasurys hasn't affected the recovery in junk bonds. HYG sold off briefly after the election, but quickly snapped back to its highs, pushing the spread between high-yield corporate bonds and Treasurys to an 18-month low.

HYG isn't even the best fixed-income ETF of the year. That title belongs to the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL), which surged 25.1% in the year-to-date period.

YTD Returns For HYG, ANGL

ANGL targets "fallen angels"—bonds that were recently downgraded from investment-grade to junk status. The hope is that the issuing company has merely fallen on temporary tough times, and that the bonds may be upgraded back into investment-grade status down the line. That strategy paid off handsomely in 2016.

ANGL's impressive return easily outpaced other junk bond ETFs, including the second-place ProShares High Yield-Interest Rate Hedged ETF (HYHG), up 16.4% this year. HYHG goes long junk bonds while simultaneously shorting Treasurys of equivalent duration to reduce interest rate risk.

Finally, emerging market bonds were another pocket of the fixed-income universe to perform well in 2016. Among those, the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM) and the iShares Emerging Markets High Yield Bond ETF (EMHY) did the best. Both funds hold dollar-denominated bonds, and gained 14.9% and 13.6%, respectively. 

 

For a full list of this year's best- and worst-performing fixed-income ETFs, see the tables below:

Best-Performing Fixed-Income ETFs Of 2016 (Excluding Leveraged & Inverse)

TickerFundYTD Gain (%)
ANGL VanEck Vectors Fallen Angel High Yield Bond ETF25.15
HYHG ProShares High Yield-Interest Rate Hedged ETF16.37
BSJM Guggenheim BulletShares 2022 High Yield Corporate Bond ETF15.59
HYLDAdvisorShares Peritus High Yield ETF15.09
HYEM VanEck Vectors Emerging Markets High Yield Bond ETF14.90
HYND WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund14.84
HYZD WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund14.54
HYIH Deutsche X-trackers High Yield Corporate Bond - Interest Rate Hedged ETF14.34
HYS PIMCO 0-5 Year High Yield Corporate Bond Index ETF14.02
EMHY iShares Emerging Markets High Yield Bond ETF13.62

 

Worst-Performing Fixed-Income ETFs Of 2016 (Excluding Leveraged & Inverse)

TickerFundYTD Loss (%)
CBON VanEck Vectors ChinaAMC China Bond ETF-5.56
KCNY KraneShares E Fund China Commercial Paper ETF-4.87
PSK SPDR Wells Fargo Preferred Stock ETF-2.10
ITM VanEck Vectors AMT-Free Intermediate Municipal Index ETF-1.90
PICB Powershares International Corporate Bond Portfolio-1.66
RVNUDeutsche X-trackers Municipal Infrastructure Revenue Bond ETF-1.55
ZROZ PIMCO 25+ Year Zero Coupon US Treasury Index ETF-1.54
EDV Vanguard Extended Duration Treasury Index Fund-1.52
HYD VanEck Vectors High-Yield Municipal Index ETF-1.29
GGOV ProShares German Sovereign/Sub-Sovereign ETF-1.24

Data measures total return for the year-to-date period through Dec. 14.

 

Contact Sumit Roy at [email protected]

 

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.