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.