Best and Worst Performing Bond ETFs of August 2023

Rising long-term rates hammered long-duration bond ETFs in August, while hopeful signals from the Federal Reserve boosted lower-rated collateralized loan obligation and senior loan exchange-traded funds.  

The FolioBeyond Alternative Income & Interest Rate Hedge ETF (RISR) was the best-performing bond ETF in August with a return of 2.3%, while the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (ZROZ) was the worst with a decline of 5.2%, according to etf.com data. Inverse ETFs, leveraged ETFs and ETFs with less than $50 million in assets under management weren’t included in the data. 

Long-term interest rates climbed in August after Fed Chairman Jerome Powell said that the central bank is no longer forecasting a recession and that inflation could be curbed without widespread job losses. Powell’s remarks helped shorter-duration bond funds, high-yield CLOs and senior loans—all of which are recession sensitive—and hurt longer-duration bond funds. 

The longer a bond fund’s duration, the more sensitive it is to interest rate changes, according to Peter Baden, chief investment officer of Genoa Asset Management. 

Best Performing Bond ETFs of August 2023

Worst Performing Bond ETFs of August 2023

  
Income-Only Bonds Fare Well 

Recession fears have depressed long-term interest rates, because the Fed will often lower rates during a recession. Investors crowd into longer-term bonds to lock in the resulting high yields, and the high demand then pushes those yields down. 

RISR’s success in August had a lot to do with its makeup, which makes it relatively resistant to rising rates. RISR invests in income-only bonds, which pay interest but no principle, making their effective duration very short.  

On the other hand, ZROZ and the second-worst performing ETF, the iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ), are long-duration funds that invest in strip bonds, magnifying the already long duration of the fund. The bonds offer repayment of the principle only at the very end of the bond’s duration, with no income in the meantime, making the funds susceptible to rising rates. 

Soft Landing Boosts CLOs, Senior Loans 

The strong performance of senior-loan ETFs and ETFs that hold CLOs of lower credit quality was due to their vulnerability to recessions, which makes their borrowers more likely to default.  

Baden says that lower-rated CLOs and senior loans were “hammered” earlier in the year because of fears of a recession, but the funds have risen since then on the belief that inflation can be lowered without a recession.  
  
Contact Gabe Alpert at [email protected]