After the slow start to the quarter turned into a rout in August, many investors in fixed-income exchange-traded funds didn't wait to see how it would end.
The $3.6 billion of hope they added to long-term fixed-income ETFs for July was pulled out — and then some — with a net withdrawal of nearly $7.2 billion for August.
For investors who stuck with the program — or were lucky enough to buy on the rumor — two events transpired in September to give the bond market the shot in the arm it craved. More appropriately, these were non-events: Lawrence Summers withdrew his name for consideration as the next Federal Reserve chairman, and the Fed refused to start reducing its bond-buying program, the so-called tapering that has been feared since mid-May.
Bond markets rejoiced at the prospects of more easy money and a voracious Fed appetite for bonds.
High-yield funds quickly won the day: iShares Global ex-USD High Yield Corporate Bond ETF (HYXU) ended the quarter up 7.67% for the best performance overall. With 86% of the portfolio's assets in euro-denominated high-yield bonds, HYXU was rewarded twice: once on the junk bond rally and then on the U.S. dollar decline against the euro, which demonstrated that easy monetary policy is usually bad for a currency.
Unfortunately for most junk bond ETF investors, the success of HYXU went unnoticed. It saw net outflows each month throughout the quarter.
Meanwhile, sector behemoth iShares iBoxx $HY Corporate Bond ETF (HYG) had net inflows of more than $1 billion despite racking up just 2.17% in total-return performance.
The dollar's decline played a significant role in determining the performance ranks of the rest of the group. The U.S. dollar index, which had been on a tear since mid-June, appreciated 3% in just a few weeks to reach a 2013 high of 84.58 on July 9 before sliding 5% and handing U.S. investors in overseas markets a free ride along the way.
Bond ETFs in Lipper's International Income Funds group climbed 3.81% on average, led by PowerShares International Corporate Bond Portfolio (PICB), which turned in a quarterly return of 6.33%. The next best, SPDR Barclays International Corporate Bond ETF (IBND), was up 5.71%.
Far down the list was the group's top flows gainer, the new Vanguard Total International Bond Index ETF (BNDX), which climbed a scant 0.84% during the quarter but still managed to draw $337 million in net inflows. Other groups with solid quarterly performance were global income funds, up 1.97% on average; inflation-protected-bond funds, up 1.24%; and core-plus-bond funds, up 1.18%.
But investors were also feeling conservative if not uncertain during the quarter: The iShares 3-7 Year Treasury Bond ETF (IEI) saw $2.6 billion fill its coffers for July, only to have $2.4 billion removed for August before filling up again with $2.8 billion in net inflows last month. IEI's $3 billion in net inflows were tops among all bond ETFs for the quarter.
The next-highest beneficiaries of new investor money were all low-duration products: the iShares Floating Rate Bond ETF (FLOT), which took in $1.4 billion; the PowerShares Senior Loan Portfolio (BKLN), close behind with $1.3 billion in net inflows; and the Vanguard Short-Term Bond Index ETF (BSV), with $1.1 billion in net inflows.
At the other end of the list was the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) with $2.5 billion in net outflows over the quarter. With assets down to $17 billion, from $25 billion at the start of the year, investors were still fleeing this fund's interest rate risk.
Jeff Tjornehoj is head of Americas research for Lipper Inc.