Inflation Fund With 1.8% Gain Led Bond ETFs in September

CPII was top bond ETF as long term fixed income funds sunk amid high rates.

In September, long-duration bond exchange-traded funds were hammered as rates rose and default rates stayed low, helping ETFs that invested in more marginal borrowers. 

The best-performing bond fund was the Ionic Inflation Protection ETF (CPII), which returned 1.8%, while the worst-performer was the iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ), which lost -11%. The funds were ranked according to one-month trailing total return as of Sept. 29. Inverse funds, leveraged funds and funds that do not trade in the U.S. were excluded.  

The stock market, measured by the SPDR S&P 500 ETF Trust (SPY) lost 4.8% over the same period, while the benchmark iShares Core U.S. Aggregate Bond ETF (AGG), lost 3.7%. 

The worst performers were all long-duration bond funds as long term interest rates, represented by the yield on 30-year Treasuries, rose 12% over the month to 4.7%, the highest level in more than a decade. As yields rise, bond prices fall. The winners were a mix of ETFs meant to hedge against rises in interest rate and inflation and collateralized loan obligation funds, which benefitted from low default rates. 

“We’ve seen what duration risk has done in the past couple of years. It’s been pretty painful for investors,” said Doug Fincher, portfolio manager of CPII, in an interview.
 

Best Performing Bond ETFs

Funds That Ride the Rising Tide 

September’s top performer, CPII, has three different ways to generate returns. It uses derivatives that pay out if inflation is high or rising, derivatives that pay out on high or rising rates and treasury inflation-protected securities, treasuries that hedge against inflation. 

Currently, even though inflation is lower, CPII has been doing well because of its interest-rate derivatives, which are currently generating about 70% of its gains according to Fincher. He believes these will serve the fund well going forward as interest rates stay “higher for longer.” 

Worst Performing Bond ETFs

Loan Defaults Still Low 

According to the New York Federal Reserve, the overall delinquency rate on U.S. debt was 2.7%, slightly higher than in 2022, but still down by over 40% compared to the rate before the Covid pandemic.  

While this figure is imprecise when looking at any particular corner of the credit market, it is broadly bullish for more marginal types of credit, such as those that are part of CLOs and senior loan funds.  
 
Besides the Panagram BBB-B CLO ETF (CLOZ), the top 10 best-performing bond funds in September included two other CLO ETFs, the Panagram AAA CLO ETF and the Janus Henderson B-BBB CLO ETF (JBBB), as well as the Virtus Seix Senior Loan ETF (SEIX). 

Contact Gabe Alpert at [email protected]