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)
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.