Fixed-income ETFs continue to build off 2014's fast start

Fund groups of all stripes did well in the second quarter, despite the U.S. economy facing mixed results.

Jul 22, 2014 @ 7:00 am

By Jeff Tjornehoj

Bond markets continued to build off Q1 2014's fast start, and bond fund groups of all stripes did well; from Treasuries to emerging markets and from corporates to munis—seemingly everyone had a fantastic quarter. All of this came as the U.S. economy faced mixed results in the quarter's data: Q1 GDP growth—revised from minus 1.0% to minus 2.9%—showed that consumer spending had softened (possibly because of unusually severe winter weather) and business inventories were drawn down, also pulling down growth estimates. These factors, as well as a slip in durable goods orders, kept the heat on bond prices. At the same time the consumer confidence survey data from the University of Michigan beat expectations, existing home sales (+4.9%) notched their biggest gain since 2011, and initial jobless claims fell to 312,000 to bring the four-week moving average below pre-recession levels. But the economic data took a backseat to sectarian violence in the Middle East and the stop/start ceasefire efforts in Ukraine, each of which prompted a drive this past quarter to the relative safety of bonds.

The quarter's top bond exchange-traded fund (ETF) was PIMCO 15+ Year US TIPS Index (LTPZ), which enjoyed a double-whammy and jumped 8.1%. Inflation data came in slightly higher than the previous reading (the fourth month inflation estimates had done so), and the yield curve flattened when prices at the long end rose during the Treasury rally. That same rally helped PIMCO 25+ Year Zero Coupon US Treasury Index (ZROZ, +7.9%) and Vanguard Extended Duration Treasury Index (EDV, +7.1) to place second and third in the performance table. However, few investors could tolerate their volatility: ZROZ saw net outflows of $5 million for the quarter, while $230-million EDV could pick up only $13 million of net inflows. Perhaps investors didn't believe lightning could strike twice: ZROZ was the previous quarter's best performer, notching a gain of 14.1%.

At the other end of the Treasury yield curve, $979-million SPDR Barclays 1-3 Month T-Bill (BIL) lost two basis points for the quarter as issuance jumped at the T-bill auctions in May and supply outpaced demand.

Outside the U.S. bond market, emerging-market debt barely edged out developed-market debt. iShares Emerging Markets High Yield Bond (EMHY) rose 6.4% as the U.S. dollar-denominated debt of its top holding (Turkey) continued to bounce back this year. Hard-currency types remained ahead of their local-currency peers during Q2, although local-currency debt asserted itself in June and seemed to have the momentum at the start of Q3. Among the top developed-market debt products, PIMCO Canada Bond Index (CAD, +6.3%) edged out PIMCO Australia Bond Index (AUD, +4.9%).

In terms of volume, investors certainly had a taste for Treasuries and none more so than iShares 20+ Year Treasury Bond (TLT, +5.1%), which saw a daily volume of 7.6 million shares on average. Though hardly the largest bond ETF at just $3.8 billion in assets, it was the quarter's favorite trading asset and well ahead of the next favorite, SPDR Barclays High Yield Bond (JNK, +2.4%).

Finally, the second quarter also had eight new products come to market, with the crown for most successful launch going to iShares Core Total USD Bond Market (IUSB), which at quarter's end could boast the most assets ($25 million) and the second most average daily trading volume (4,200 shares) despite being the last launch of the quarter on June 12.

Jeff Tjornehoj is head of Americas research for Lipper Inc.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Mar 13

Conference

WOMEN to WATCH

InvestmentNews is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

Featured video

Events

Ric Edelman: 3 factors transforming the financial advisory industry

We are at the "knee in the curve" of a transformation of the financial advice industry, according to Ric Edelman. But what's next and how will it shape your practice of the future?

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.

Advisers' biggest fears for 2018

What keeps advisers up at night.

One adviser's story of losing his son to the opioid epidemic

John W. Brower, president and CEO of JW Brower & Associates, shares the story behind his son's death from a heroin overdose and how it inspired him to help others break the cycle of addiction.

Tax reform will boost food, chemicals, rail stocks. Technology? Not so much

Conagra and Berkshire Hathaway are two stocks that should benefit most from changes in the tax code.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print