Top Fixed Income ETFs For Returns & Yields

June 08, 2016

Despite all the talk about Fed rate hikes, it's still hard to come by yield for U.S. investors. The U.S. 10-year yield remains exceptionally low—around 1.70%—with no signs of an imminent rise.

Some believe rates will stay low for the foreseeable future due to demographics, weak economic growth, tepid inflation and easy monetary policies around the world. If that's the case, investors may have to be more creative, or take on more risk, to get higher returns from their fixed-income investments.

Plethora Of Fixed-Income ETFs

In the ETF world, fixed income is an area that is growing rapidly. There are currently 309 exchange-traded funds listed in the ETF.com fixed-income channel, each targeting a different segment of the enormous market.

Returns for the various products have varied greatly. Some funds promise high yields, but deliver poor overall returns. Others are under the radar, but manage to deliver exceptional returns year after year.

Here we take a look at some of the most consistent fixed-income products that have delivered strong returns and look poised to continue to do so.

Fallen Angels

At a time when junk bond ETFs broadly have performed quite poorly, the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL | C-51) stands out, with a three-year return of nearly 20%. Compare that with the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68), which has only seen a 7.6% return in the period.

3-Year Returns For ANGL, HYG

 

ANGL targets "fallen angels," or 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.

This strategy of buying falling angels has outperformed not only in the last three years, but over longer time periods—10 and even 20 years.

ANGL has a hefty 30-day SEC yield of 6.44% that is comparable to that of the broad-based HYG, but with the benefit of a higher-quality portfolio of bonds. The “30-day SEC yield” is the yield earned by the average investor during the most recent 30-day period.

High-Yield Munis

Municipal bonds ETFs are among the safest investments in the world. While not considered "risk free" like Treasurys, local government debt in the U.S. has historically had very low default rates. According to Moody's, the default rate for muni bonds was around 0.03% during the past five years, and only 0.01% in the 30 years before that.

Even for municipal bonds at the riskier end of the spectrum, the default rates are significantly lower than for corporate bonds. According to Nuveen Investments, the 10-year default rate for muni bonds rated Ba was 3.53% compared with 19.27% for corporate bonds rated Ba.

Amid this backdrop, ETFs like the SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB | C-59) have performed quite well. HYMB and the competing VanEck Vectors High-Yield Municipal Index ETF (HYD | C-59) gained 19.3% and 15.3%, respectively, in the past three years.

 

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