Best Performing Fixed Income ETFs 2Q 2019

Even after the recent trade-war-induced sell-off, the stock market stands well above its lows from December. The S&P 500 is still up nearly 15% year-to-date, buoyed by a resilient U.S. economy and corporate profits that haven’t been nearly as bad as had been feared only a few months ago.

But as the stock market has sent out optimistic signals about the health of the economy, the bond market has done the exact opposite. Treasury yields are well below the lows they hit at the end of last year, and just this week tumbled to levels not seen in 1 1/2 years.

Lower Yields, High Bond Prices

The two-year yield dipped to as low as 2.14% on Wednesday, while the 10-year yield sagged to 2.36%. For context, the federal funds rate is currently pegged to a range of 2.25-2.5%, meaning that 2’s and 10’s are falling below the Fed’s benchmark rate.

Steeply falling rates are a worrying sign for stock investors, but they are a boon for fixed income investors. After all, bond interest rates and prices move inversely, so lower rates equal higher prices.

That relationship extends to fixed income ETFs also. The $61 billion iShares Core U.S. Aggregate Bond ETF (AGG), which holds U.S. investment-grade bonds, has already returned 3.5% this year. Longer duration bond funds, like the $13 billion iShares 20+ Year Treasury Bond ETF (TLT), have delivered even greater returns: TLT is up 4.7% so far this year.

If rates continue lower—especially if the Fed cuts rates later in the year, as some expect—the run in fixed income ETFs may just be gathering steam.

Here are the best-performing fixed income ETFs so far this year, funds that could continue to outperform if rates head lower from here.

Preferred Stock ETFs Leading

At the top of the fixed income heap for 2019 are preferred stock exchange-traded funds, including the Virtus InfraCap U.S. Preferred Stock ETF (PFFA), the InfraCap REIT Preferred ETF (PFFR), the Innovator S&P Investment Grade Preferred ETF (EPRF) and the VanEck Vectors Preferred Securities ex Financials ETF (PFXF), each up by double-digit percentages this year.
 

Best-Performing Fixed Income ETFs (excluding leveraged/inverse)

Data measures total returns for the YTD period through May 15
 

Preferred stocks have characteristics of both equity and debt. They typically offer a sizable dividend that's safer than the dividends of a company's common stock, but not as safe as the interest payments on a company's bonds. Additionally, preferred stock can sometimes be converted into common stock.

Preferreds are essentially a way to capture higher yields than corporate bonds, but with higher risk if the company faces hard times.

There are plenty of flavors of preferred stock ETFs, such as those that focus on only one sector like PFFR, or those that exclude a specific sector like VRP, and everything in between. As always, look under the ETF hood to see exactly what exposure you are getting with a fund.

That said, this year has broadly been positive for preferreds as they benefit from a supportive rate environment and a supportive equity environment—the best of both worlds.

Convertible Securities Climb With Stocks

Another group of fixed income funds getting the best of both worlds are convertible securities ETFs. The SPDR Bloomberg Barclays Convertible Securities ETF (CWB), the First Trust SSI Strategic Convertible Securities ETF (FCVT) and the iShares Convertible Bond ETF (ICVT) are each up 10% or more this year.

Convertible securities are typically bonds that can be exchanged for common stock or preferred stock. Convertible securities usually have lower yields than their vanilla counterparts, but their advantage is that they can be converted into equity at a specified price. That allows investors in convertible securities to share in a stock’s upside, while limiting downside if things go wrong. With stocks swinging upward in 2019, convertibles have rallied in tandem.

Fallen Angels Rise

Hybrid securities like preferreds and convertibles aren’t the only fixed income ETFs surging this year. High yield corporate bonds are also moving up.

The iShares Fallen Angels USD Bond ETF (FALN), the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) and the Invesco BulletShares 2026 High Yield Corporate Bond ETF (BSJQ) all made the top-performers list.

Junk bonds, as high yield bonds are also known, climbed this year as investors grew more optimistic about the health of the U.S. economy. A more robust economy translates into fewer defaults for the least creditworthy companies.

The “fallen angel” ETFs, FALN and ANGL, have done particularly well by holding bonds of issuers that have recently been downgraded from investment grade to junk—essentially the highest-rated junk bonds on the market.

Long Duration Corporates

Investors haven’t had to wade into junk bonds to get solid returns in corporate bonds this year. ETFs that hold long term investment-grade corporate bonds, like the iShares 10+ Year Investment Grade Corporate Bond ETF (LLQD) and the Vanguard Long-Term Corporate Bond ETF (VCLT) delivered returns in excess of 8.5% so far in 2019.

Though investment-grade bond ETFs typically yield less than their high yield counterparts, investors can make up for that with longer duration. That’s what LLQD and VCLT offer.

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