We’re in the waning days of 2017, with just a few trading sessions left until the ball drops in Times Square. That makes now a great time to look back at the interest rate market, and see which “Bond Market All Stars” delivered strong profits for rate investors.
Turns out the biggest wins came from the high-yield (or “junk”) sector of the bond market, followed closely by ultra-long-term/high-duration bonds. Emerging market and international corporate bonds also did well.
Just take a look at this Best Bond ETFs in 2017 Screener I created using the tools available to Weiss Ratings Platinum subscribers (You can read about the valuable benefits that come with a membership, and get signed up, by clicking here. It lists all ETFs with at least 80% of their assets in bonds and a Weiss Rating of at least “C-” (HOLD). I purposefully eliminated the leveraged products backed by firms like Direxion and ProShares to make it a fair comparison, and sorted the list in descending order by year-to-date total returns.
Topping the list is the iShares International High Yield Bond ETF (HYXU, Rated “C”), with YTD gains of 17.6%. That’s fantastic for an ETF that focuses on bonds, seeing as they historically deliver lower profits than stocks. The $97 million ETF invests in foreign, high-yield bonds. They recently included bonds issued by cable, media, banking, and technology firms based in the U.K., Italy, Japan, and France, among other countries.
Next up are the Vanguard Extended Duration Treasury Index Fund ETF Shares (EDV, Rated “C”) and the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ, Rated “C”). They recently sported YTD gains of 15% and 14%.
These two ETFs invest in so-called zero-coupon U.S. Treasuries. As the name suggests, these securities don’t make traditional interest payments. Instead, they’re sold at a deep price discount up front, and they gradually rise in value as their maturity dates approach. That means you’re earning a phantom yield, or return, over time – just without those periodic cash interest payments.
The thing about funds that invest in zeros is that they have very high “durations,” a key measure of interest rate risk. The higher their duration, the greater their price sensitivity to changes in rates.
That means ETFs like ZROZ and EDV can lose you a ton of money when long-term rates rise, or make you a lot of money when long-term rates fall. Since long-term rates have been falling this year, even as the Federal Reserve has been driving up short-term rates, both funds are near the top of the performance scale for 2017.
Rounding out the top positions are ETFs that invest in foreign bonds, including the SPDR Bloomberg Barclays International Corporate Bond ETF (IBND, Rated “C”) and the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC, Rated “C”). They each generated gains of around 13%, largely because the U.S. dollar spent most of 2017 declining. When foreign currencies climb against the dollar, it drives up the value of those bonds in dollar terms. That gives U.S.-based investors a currency-related performance “kicker.”
What does 2018 hold for these and other bond investments? Only time will tell. But as always, be sure to use our Weiss Ratings tools to vet your bond investments just like you do your stock plays. Or if you want my latest, greatest forecasts on all kinds of high-yield investments (as well as specific BUY and SELL recommendations), check out my High Yield Investing service by clicking here.
Until next time,