Bond ETFs took hit in 2Q; TIPS bore the brunt

In the scramble for cover after speculation mounted as to when the Federal Reserve would begin tapering its bond-buying program, most bond exchange-traded funds posted losses in the second quarter — but none were abandoned as abruptly as inflation-protected products.

The hardest hit of these portfolios, the $105 million Pimco 15+ Year U.S. TIPS Index (LTPZ), lost 12.5% as it was squeezed by higher long-term interest rates. The yield on the benchmark 10-year Treasury note rose from 1.66% at the beginning of May to 2.6% near the end of June.

At the top end of the performance table was WisdomTree Chinese Yuan Fund (CYB), a $229 million currency fund that advanced 1.25% as the value of the U.S. dollar slid against its major trading partner. With just four bond ETFs able to compile total returns in excess of 1% for the quarter, the opportunities for success were quite limited.

The high-yield market has been a tough row to hoe lately. Both SPDR Barclays High Yield Bond ETF (JNK) and iShares’ iBoxx $ High Yield Corporate Bond ETF (HYG) lost money in the second quarter, and investors responded by yanking $3.7 billion in combined assets from the funds. Issuance of junk bond debt fell to $13.8 billion in June, from $46.8 billion for May, as investors begged off interest-rate risk in a rising-rate environment.

Bank loan products remained popular: PowerShares’ Senior Loan Portfolio (BKLN) and iShares’ Floating Rate Bond (FLOT) continued to rake in cash — about $1.6 billion for BKLN and $1.1 billion for FLOT.

Jeff Tjornehoj is head of Americas research for Lipper Inc.