Bond ETFs defied pundits in the fourth quarter
Although it took until October for the Fed to wind down its bond buying, markets had a radically different reaction than had been forecast: Bonds rose in value.
Headlines and financial pundits warned investors a year ago that, with the Federal Reserve’s third quantitative-easing program coming to an end in 2014, the long-awaited rise in interest rates was upon us. Although it took until October for the Fed to wind down its bond buying, markets had a radically different reaction than had been forecast: Bonds rose in value.
Not all types of bonds went up, of course. Junk bonds were crushed in the fourth quarter (especially in December) as concerns about a global economic slowdown far outweighed the consequences of ending the Fed stimulus.
For bond exchange-traded-fund investors, the clear winners were products holding long-duration Treasuries, such as Pimco 25+ Year Zero Coupon U.S. Treasury Index (ZROZ), which rocketed 15.0%, and Vanguard Extended Duration Treasury Index (EDV), which barely trailed with a 14.4% return.
Fixed-income ETFs ranked by quarterly returns
| Name/ticker | 3-month return | 1-year return | Net assets ($M) | Expense ratio* | 3-month average daily volume |
|---|---|---|---|---|---|
| PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) | 14.97% | 49.35% | $97.9 | 0.15% | 6,598 |
| Vanguard Extended Duration Treasury Index Fund ETF (EDV) | 14.37% | 45.64% | $487.0 | 0.12% | 91,350 |
| iShares 20+ Year Treasury Bond ETF (TLT) | 9.32% | 27.35% | $6,345.2 | 0.15% | 7,476,868 |
| SPDR Barclays Long Term Treasury ETF (TLO) | 8.57% | 24.87% | $174.5 | 0.14% | 48,803 |
| Vanguard Long-Term Government Bond Index Fund ETF (VGLT) | 8.35% | 25.05% | $170.9 | 0.12% | 39,481 |
| WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) | 6.94% | 11.09% | $334.9 | 0.50% | 202,797 |
| Vanguard Long-Term Bond Index Fund ETF (BLV) | 5.56% | 19.89% | $1,068.5 | 0.10% | 147,305 |
| PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ) | 5.50% | 19.32% | $78.3 | 0.20% | 2,745 |
| PowerShares 1-30 Laddered Treasury Portfolio (PLW) | 5.30% | 14.72% | $294.4 | 0.25% | 37,275 |
| SPDR Nuveen Barclays Build America Bond ETF (BABS) | 5.04% | 20.46% | $119.8 | 0.35% | 5,838 |
| PowerShares DB U.S. Dollar Index Bullish Fund (UUP) | 4.90% | 11.43% | $1,007.0 | 0.75% | 1,772,990 |
| iShares 10-20 Year Treasury Bond ETF (TLH) | 4.82% | 14.42% | $365.8 | 0.15% | 63,652 |
| iShares Core Long-Term USD Bond ETF (ILTB) | 4.81% | 17.83% | $163.1 | 0.12% | 29,827 |
| SPDR Barclays Long Term Corporate Bond ETF (LWC) | 3.99% | 15.61% | $328.1 | 0.15% | 88,260 |
| Market Vectors CEF Municipal Income ETF (XMPT) | 3.95% | 18.53% | $39.3 | 1.65% | 3,730 |
| Vanguard Long-Term Corporate Bond Index Fund ETF (VCLT) | 3.91% | 16.74% | $1,008.8 | 0.12% | 17,817 |
| iShares 10+ Year Credit Bond ETF (CLY) | 3.88% | 15.54% | $689.6 | 0.20% | 21,374 |
| PowerShares Build America Bond Port (BAB) | 3.69% | 15.67% | $725.5 | 0.28% | 124,414 |
| iShares Utilities Bond ETF (AMPS) | 3.37% | 11.11% | $15.5 | 0.30% | 2,081 |
| PIMCO 7-15 Year U.S. Treasury Index ETF (TENZ) | 3.21% | 9.33% | $110.2 | 0.15% | 1,060 |
| iShares 7-10 Year Treasury Bond ETF (IEF) | 3.10% | 8.92% | $7,072.6 | 0.15% | 2,147,857 |
| PowerShares Preferred Portfolio (PGX) | 2.81% | 14.66% | $2,420.0 | 0.50% | 886,050 |
| First Trust Strategic Income ETF (FDIV) | 2.72% | N/A | $20.2 | 0.87% | 1,803 |
| SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) | 2.58% | 16.45% | $356.4 | 0.45% | 12,130 |
| Market Vectors Preferred Secs ex Finls ETF (PFXF) | 2.49% | 14.80% | $205.6 | 0.40% | 64,841 |
| SPDR Wells Fargo Preferred Stock ETF (PSK) | 2.47% | 16.49% | $269.9 | 0.45% | 29,226 |
| Vanguard Total International Bond Index Fund;ETF (BNDX) | 2.46% | 8.81% | $2,996.0 | 0.20% | 556,418 |
| Market Vectors Long Municipal Index ETF (MLN) | 2.45% | 15.72% | $93.9 | 0.24% | 38,509 |
| Deutsche X-trackers Solactive Inv Gr Sub Debt ETF (SUBD) | 2.41% | N/A | $12.7 | 0.45% | 2,619 |
| Guggenheim BulletShares 2023 Corporate Bond ETF (BSCN) | 2.38% | N/A | $9.1 | 0.24% | 3,967 |
| Guggenheim BulletShares 2024 Corporate Bond ETF (BSCO) | 2.31% | N/A | $15.2 | 0.24% | 14,498 |
| iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD) | 2.11% | 8.57% | $19,310.8 | 0.15% | 2,036,708 |
| PowerShares National AMT-Free Municipal Bond Ptf (PZA) | 2.07% | 14.15% | $796.2 | 0.28% | 211,141 |
| First Trust Managed Municipal ETF (FMB) | 2.06% | N/A | $20.6 | 0.65% | 7,666 |
| iShares US Preferred Stock ETF (PFF) | 2.02% | 13.45% | $11,636.7 | 0.47% | 2,014,991 |
| iShares Aaa – A Rated Corporate Bond ETF (QLTA) | 2.01% | 6.51% | $418.8 | 0.15% | 28,849 |
| Market Vectors High-Yield Municipal Index ETF (HYD) | 1.99% | 13.83% | $1,445.6 | 0.35% | 350,122 |
| PIMCO Total Return Active Exchange-Traded Fund (BOND) | 1.96% | 6.87% | $2,367.2 | 0.55% | 331,718 |
| iShares Core US Treasury Bond ETF (GOVT) | 1.91% | 4.99% | $261.7 | 0.15% | 110,439 |
| Vanguard Intermediate-Term Bond Index Fund;ETF (BIV) | 1.87% | 6.99% | $4,858.1 | 0.10% | 341,164 |
As of Dec. 31. Excludes leveraged and inverse funds, and exchange-traded notes. *Most recently reported net prospectus expense ratio. N/A=Not available
Source: Lipper, a Thomson Reuters company
Over all, ETFs in Lipper’s U.S. Treasury funds classification enjoyed a quarterly return of 5.4% on average; related products with short durations, such as Pimco 3-7 Year U.S. Treasury Index (FIVZ) and iShares 3-7 Year Treasury Bond (IEI), squeaked out returns closer to 1% as the short end of the yield curve was pressured by concerns about the timing of expected Fed rate raises in 2015.
(More: BlackRock attracts record flow in 4Q amid ETF demand, Pimco turmoil)
Fixed-income ETFs with the largest inflows
| Name/ticker | 3-month estimated net flows | 3-month return | 1-year return | Net assets ($M) | Expense ratio* |
|---|---|---|---|---|---|
| iShares Core US Aggregate Bond ETF (AGG) | $4,084.07 | 1.82% | 6.04% | $23,250.1 | 0.08% |
| Vanguard Total Bond Market Index Fund ETF (BND) | $2,894.62 | 1.75% | 5.96% | $26,041.4 | 0.08% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | $2,118.23 | -0.42% | 2.00% | $14,380.1 | 0.50% |
| iShares 7-10 Year Treasury Bond ETF (IEF) | $2,004.71 | 3.10% | 8.92% | $7,072.6 | 0.15% |
| iShares 20+ Year Treasury Bond ETF (TLT) | $1,892.68 | 9.32% | 27.35% | $6,345.2 | 0.15% |
| iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD) | $1,619.15 | 2.11% | 8.57% | $19,310.8 | 0.15% |
| SPDR Barclays High Yield Bond ETF (JNK) | $1,108.86 | -1.66% | 1.15% | $9,655.9 | 0.40% |
| iShares US Preferred Stock ETF (PFF) | $1,101.92 | 2.02% | 13.45% | $11,636.7 | 0.47% |
| Vanguard Total International Bond Index Fund ETF (BNDX) | $915.87 | 2.46% | 8.81% | $2,996.0 | 0.20% |
| iShares Short Treasury Bond ETF (SHV) | $760.97 | -0.03% | 0.00% | $3,108.6 | 0.15% |
| Vanguard Short-Term Bond Index Fund;ETF (BSV) | $679.72 | 0.37% | 1.32% | $15,655.2 | 0.10% |
| Vanguard Intermediate-Term Bond Index Fund ETF (BIV) | $614.70 | 1.87% | 6.99% | $4,858.1 | 0.10% |
| iShares MBS ETF (MBB) | $523.05 | 1.82% | 6.16% | $6,914.8 | 0.27% |
| Vanguard Short-Term Corporate Bond Index Fund ETF (VCSH) | $493.02 | 0.29% | 1.96% | $9,156.1 | 0.12% |
| iShares 3-7 Year Treasury Bond ETF (IEI) | $473.87 | 1.31% | 3.14% | $3,925.4 | 0.15% |
As of Dec. 31. Excludes leveraged and inverse funds, and exchange-traded notes. *Most recently reported net prospectus expense ratio.
Source: Lipper, a Thomson Reuters company
At the other end of the performance tables, the quarter’s worst return (-13.7%) was turned in by the actively managed $748 million Peritus High Yield (HYLD). High-yield funds struggled mightily as lower oil prices suggested a weaker global economy ahead and thus a diminished appetite for risk-taking. The woes in Peritus High Yield were exceptional though; the average ETF in Lipper’s High Yield Funds classification was down only 2.1% for the fourth quarter. The group’s better-known products, including the $14.4 billion iShares iBoxx $ High Yield Corporate Bond (HYG) and the $9.7 billion SPDR Barclays High Yield Bond (JNK) beat the average, down only 0.4% and 1.7%, respectively.
Fixed-income ETFs with the largest outflows
| Name/ticker | 3-month estimated net flows | 3-month return | 1-year return | Net assets ($M) | Expense ratio* |
|---|---|---|---|---|---|
| PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS) | -$944.11 | -0.42% | 0.50% | $2,893.9 | 0.55% |
| PowerShares Senior Loan Portfolio (BKLN) | -$721.79 | -0.45% | 0.73% | $5,710.7 | 0.65% |
| PIMCO Total Return Active Exchange-Traded Fund (BOND) | -$671.57 | 1.96% | 6.87% | $2,367.2 | 0.55% |
| iShares 1-3 Year Credit Bond ETF (CSJ) | -$383.62 | 0.05% | 0.74% | $10,967.0 | 0.20% |
| iShares Floating Rate Bond ETF (FLOT) | -$277.89 | -0.25% | 0.30% | $3,763.7 | 0.20% |
| SPDR Barclays International Treasury Bond ETF (BWX) | -$226.25 | -2.83% | -2.49% | $1,922.9 | 0.50% |
| Guggenheim Enhanced Short Duration ETF (GSY) | -$222.97 | 0.16% | 0.77% | $494.2 | 0.30% |
| Peritus High Yield ETF (HYLD) | -$221.26 | -13.73% | -11.62% | $433.5 | 1.18% |
| iShares TIPS Bond ETF (TIP) | -$149.90 | -0.08% | 3.49% | $12,277.0 | 0.20% |
| WisdomTree Emerging Markets Local Debt Fund (ELD) | -$133.94 | -5.56% | -5.44% | $605.0 | 0.55% |
| iShares 1-3 Year Treasury Bond ETF (SHY) | -$125.01 | 0.14% | 0.48% | $8,111.3 | 0.15% |
| SPDR DB Intl Govt Inflation-Protected Bond ETF (WIP) | -$110.47 | -2.48% | -0.37% | $760.5 | 0.50% |
| Guggenheim CurrencyShares Euro Trust (FXE) | -$97.59 | -4.32% | -12.53% | $113.2 | 0.40% |
| PIMCO Broad US TIPS Index Exchange-Traded Fund (TIPZ) | -$76.99 | 0.22% | 4.38% | $47.2 | 0.20% |
| PIMCO Investment Grade Corporate Bond Index ETF (CORP) | -$68.76 | 1.82% | 7.78% | $172.5 | 0.20% |
As of Dec. 31. Excludes leveraged and inverse funds, and exchange-traded notes. *Most recently reported net prospectus expense ratio.
Source: Lipper, a Thomson Reuters company
The worst group performance was turned in by the emerging-markets local-currency debt funds classification, which lost an average of 4.3% for the quarter. Not only riskier assets but risky currencies were falling out of favor. As a result, investors in these funds were hit a second time, with the U.S. dollar’s climb of about 5% against a basket of global currencies.
Investors were most attracted to diversified,investment grade bond ETFs in the fourth quarter, with iShares Core U.S. Aggregate Bond (AGG) taking the flows crown with an estimated $4.1 billion of net inflows. Vanguard Total Bond Market Index Fund (BND) took in almost $2.9 billion. Both funds are in Lipper’s Core Bond Funds classification, which had total net inflows of about $9.3 billion. The next-highest inflows went to U.S. Treasury funds, which had the quarter’s best performance and, not surprisingly, attracted a solid $4.8 billion. The quarter’s biggest surprise might have been the $2.5 billion investors pumped into High Yield Funds during a tumultuous period.
Newly-launched fixed-income ETFs ranked by average daily volume during Q4 2014
| Name/ticker | Classification | 3-month average daily volume | Expense ratio* |
|---|---|---|---|
| Vident Core U.S. Bond Strategy (VBND) | Core bond | 160,274 | 0.45% |
| Fidelity Total Bond ETF (FBND) | Core bond | 12,000 | 0.45% |
| Fidelity Limited Term Bond ETF (FLTB) | Short-Intmdt Investment Grade Debt Funds | 6,595 | 0.45% |
| Fidelity Corporate Bond ETF (FCOR) | Corporate debt funds BBB-Rated | 6,383 | 0.45% |
| FlexShares Credit-Scored US Corp Bond Index Fund (SKOR) | Corporate debt funds BBB-rated | 728 | 0.22% |
| iShares iBonds Dec 2020 Corporate ETF (IBDL) | Short investment grade debt | 504 | 0.10% |
| First Trust Emerging Markets Local Currency Bond ETF (FEMB) | Emerging markets local currency debt | 382 | 0.85% |
| First Trust Low Duration Mortgage Opportunities ETF (LMBS) | U.S. mortgage | 266 | 0.65% |
As of Dec. 31. Excludes leveraged and inverse funds, and exchange-traded notes. *Most recently reported net prospectus expense ratio.
Source: Lipper, a Thomson Reuters company
One-year anniversary fixed-income ETFs
| Name/ticker | 3-month average daily volume | 3-month return | 1-year return | Net assets ($M) | Expense ratio* |
|---|---|---|---|---|---|
| WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) | 202,797 | 6.94% | 11.09% | $334.9 | 0.50% |
| ALPS RiverFront Strategic Income (RIGS) | 82,613 | 1.40% | 3.08% | $361.9 | 0.22% |
| iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) | 41,703 | -0.55% | 0.50% | $106.4 | 0.50% |
| WisdomTree BofA Merrill Lynch HY Bond Zero Duration (HYZD) | 18,845 | -0.69% | -0.47% | $19.3 | 0.43% |
| ProShares Investment Grade-Interest Rate Hdg ETF (IGHG) | 17,057 | -1.95% | -1.92% | $100.5 | 0.30% |
| WisdomTree BofA Merrill Lynch HY Bond Neg Duration (HYND) | 9,284 | -4.57% | -11.10% | $6.5 | 0.48% |
| WisdomTree Barclays U.S. Aggregate Bond Negative Dur (AGND) | 8,560 | -3.10% | -8.12% | $27.2 | 0.28% |
| SPDR SSgA Ultra Short Term Bond ETF (ULST) | 8,278 | -0.07% | 0.28% | $16.0 | 0.20% |
| iShares 0-5 Year Invest Grade Corporate Bond ETF (SLQD) | 7,729 | 0.24% | 1.36% | $30.1 | 0.15% |
| WisdomTree Barclays U.S. Aggregate Bd Zero Dur (AGZD) | 7,080 | -0.34% | 0.13% | $64.2 | 0.23% |
| iShares Liquidity Income ETF (ICSH) | 5,139 | 0.04% | 0.43% | $15.0 | 0.18% |
| Franklin Short Duration U.S. Government ETF (FTSD) | 1,669 | -0.02% | 0.59% | $27.4 | 0.30% |
| ProShares Short Term USD Emerging Markets Bond ETF (EMSH) | 955 | -4.41% | -2.72% | $7.5 | 0.50% |
| WisdomTree Japan Interest Rate Strategy Fund (JGBB) | 903 | 1.17% | -0.29% | $4.9 | 0.50% |
As of Dec. 31. Excludes leveraged and inverse funds, and exchange-traded notes. *Most recently reported net prospectus expense ratio.
Source: Lipper, a Thomson Reuters company
Jeff Tjornehoj is head of Americas research for Lipper Inc.
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