Top Performing Fixed Income ETFs

July 03, 2018

2018 hasn't played out exactly the way the experts imagined—it never does—but the consensus has largely been right this year when it comes to fixed income: Interest rates are up and bond prices are down.

To be sure, it hasn't been a straight line to where we are now. There's been a lot of volatility in fixed income this year, just as there has been in the equity markets.

After starting the year at 2.43%, the U.S. 10-year Treasury yield spiked as high as 2.96% in February. Back-to-back stock market corrections in February and March pushed yields down to as low as 2.72%, as investors sought the safety of government bonds (bond prices and yields move inversely).

Then in May, the 10-year yields rebounded and touched a seven-year high around 3.11% once investors refocused their attention on the strong U.S. economy. A few days later, they plunged as low as 2.75% amid Italian political fears; rebounded to 3% when those fears abated; and more recently, are down to 2.84% as U.S.-China trade war fears heat up.

That's a whole lot of volatility, but yields are still up a solid 0.40% from where they started the year. Yields on shorter maturity bonds, like the two-year Treasury, are up even more—0.62%—as the yield curve has flattened.

Not All Down

With interest rates on the rise, it hasn't been a great year to own bonds, or fixed income more generally. On a year-to-date basis, most fixed income ETFs are in the red, including the largest, the $55 billion iShares Core U.S. Aggregate Bond ETF (AGG), down 1.7%

That said, they're not all down. There are more than 120 fixed-income ETFs with gains on the year. Admittedly, that number is inflated by ETFs that short bonds—funds that profit when bond prices fall and rates rise. But among those 120, there are also quite a few that provide vanilla, long exposure to fixed-income securities.

Here are the top-performing fixed-income ETFs of the year.

Shorting Treasurys Pays Off

Unsurprisingly, the very-best-performing fixed-income ETFs are almost all funds that exclusively short bonds. The iPath US Treasury 10-Year Bear ETN (DTYS), the iPath US Treasury Bond Bear ETN (DLBS), the Barclays Inverse U.S. Treasury Composite ETN (TAPR) and the iPath US Treasury 2-Year Bear ETN (DTUS) are the only fixed-income ETFs with double-digit returns this year. Each shorts Treasurys of various maturities.

In total, eight of the top 10 fixed-income ETFs short Treasurys. The only two that don't are the Peritus High Yield ETF (HYLD), with a 5.6% return, and the SPDR Bloomberg Barclays Convertible Securities ETF (CWB), with a 5.5% return.

 

Top Performing Fixed-Income ETFs Of The Year (All-Inclusive)

Ticker Fund YTD Return (%)
DTYS iPath US Treasury 10-Year Bear ETN 20.00
DLBS iPath US Treasury Long Bond Bear ETN 17.10
TAPR Barclays Inverse U.S. Treasury Composite ETN 15.09
DTUS iPath US Treasury 2-Year Bear ETN 11.92
TTT ProShares UltraPro Short 20+ Year Treasury 8.23
TMV Direxion Daily 20+ Year Treasury Bear 3x Shares 7.16
TBT ProShares UltraShort 20+ Year Treasury 5.93
TYO Direxion Daily 7-10 Year Treasury Bear 3x Shares 5.76
HYLD Peritus High Yield ETF 5.63
CWB SPDR Bloomberg Barclays Convertible Securities ETF 5.50

Data measures total returns for the year-to-date period through June 27, 2018

 

What’s Under The Hood

The $176 million HYLD is an actively managed fund that invests primarily in junk bonds and floating-rate loans. HYLD currently has a juicy 30-day SEC yield of 7.7%. HYLD, like many of the fixed-income ETFs that have performed well this year, tends to hold low-duration bonds—those that typically have shorter maturities and aren't as interest rate sensitive. That's helped the fund in an environment of rising interest rates.

Meanwhile, the $4.5 billion CWB takes an entirely different approach by holding a market-value-weighted basket of U.S. convertible bonds. Convertible bonds are hybrid securities that can be exchanged for shares of the issuer's preferred or common stock.

Though CWB currently has a relatively modest 30-day SEC yield of 1.83%, the equity upside component of its convertible bonds has more than made up for that. Nearly 50% of its portfolio is in technology issues, a sector that has performed extremely well this year.

Munis Outperforming

Stripping out inverse ETFs from our list reveals several other interesting fixed-income funds that are outperforming in 2018. A few more convertible bond ETFs make an appearance: the iShares Convertible Bond ETF (ICVT), up 4.9%, and the First Trust SSI Strategic Convertible Securities ETF (FCVT), up 4.5%.

 

Top-Performing Fixed-Income ETFs Of The Year (excluding inverse)

Ticker Fund YTD Return (%)
HYLD Peritus High Yield ETF 5.63
CWB SPDR Bloomberg Barclays Convertible Securities ETF 5.50
ICVT iShares Convertible Bond ETF 4.89
HYND WisdomTree Negative Duration High Yield Bond Fund 4.66
FCVT First Trust SSI Strategic Convertible Securities ETF 4.46
HYMB SPDR Nuveen S&P High Yield Municipal Bond ETF 3.17
SFHY WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond Fund 3.15
HYD VanEck Vectors High-Yield Municipal Index ETF 2.67
SHYD VanEck Vectors Short High-Yield Municipal Index ETF 2.56
KCNY KraneShares E Fund China Commercial Paper ETF 2.30
HYGH iShares Interest Rate Hedged High Yield Bond ETF 2.22
CBON VanEck Vectors ChinaAMC China Bond ETF 2.18
HYIH Xtrackers High Yield Corporate Bond Interest Rate Hedged ETF 2.14
SNLN Highland iBoxx Senior Loan ETF 1.99
FLRT AdvisorShares Pacific Asset Enhanced Floating Rate ETF 1.94

Data measures total returns for the year-to-date period through June 27, 2018

 

Another group that's done well this year: municipal bond ETFs. The SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB), the VanEck Vectors High-Yield Municipal Index ETF (HYD) and the VanEck Vectors Short High-Yield Municipal Index ETF (SHYD) are each up around 3% each so far this year.

According to James Colby, portfolio manager at VanEck, issuance of new muni bonds is down 15-20% year-to-date, while demand has been steady, lending support to the asset class.

HYMB currently has a 30-day SEC yield of 3.83%, but its taxable equivalent yield (based on the highest federal income rate) is 6.47%. Similarly, HYD has a 30-day SEC yield of 3.96% and a taxable equivalent yield of 6.29%.

Solid Returns For Junk Bonds

Along with munis, short-term corporate bond ETFs have also delivered solid returns. The WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond Fund (SFHY) returned 3.2% and currently has a 30-day SEC yield of 4.7%.

SFHY has a relatively low duration of 2, shielding it somewhat from this year's increase in rates.

The Xtrackers High Yield Corporate Bond Interest Rate Hedged ETF (HYIH) similarly holds junk bonds, but to reduce its interest rate risk, it simultaneously shorts Treasury futures of equal duration.

The WisdomTree Negative Duration High Yield Bond Fund (HYND), also among the top performers, takes this strategy a step further by "overhedging" with Treasurys to target a duration of negative 7.

Both HYIH and HYND are essentially pair trades—going long high-yield corporate bonds and going short Treasurys.

China & Floating Rate Bonds

Rounding out the list of top-performing fixed-income ETFs are two China bond ETFs and two floating-rate ETFs.

The KraneShares E Fund China Commercial Paper ETF (KCNY) and the VanEck Vectors ChinaAMC China Bond ETF (CBON) both provide exposure to China's onshore bond market.

The Highland iBoxx Senior Loan ETF (SNLN) and the AdvisorShares Pacific Asset Enhanced Floating Rate ETF (FLRT) hold portfolios of floating-rate bank loans—debt securities whose coupon payments adjust periodically based on market interest rates.

Because their yields adjust, these funds have little to no interest rate risk, but come with added credit risk, as higher rates make it more difficult for borrowers to make interest payments.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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