Bond ETFs suffer through a disappointing quarter

Fixed income funds suffer as investors see the Federal Reserve getting closer to raising rates

AUG 03, 2015

By Bloomberg

Given a scenario in which Greece stepped closer to a euro exit, Puerto Rico's governor announced that his island cannot possibly pay its debt, and stocks in one very large country (China) violently spiraled lower, one might have thought Treasuries would rally from all that chaos. Instead, Treasury activity implied that each of those events would have a limited effect on global wealth, at least for the time being. China, for example, saw the Shanghai Composite rise almost 60% so far this year (despite lackluster fundamentals), so the recent selloff was not all that surprising. No, Treasury-related funds suffered through a disappointing quarter because investors believe the Federal Reserve is getting closer to raising the Fed funds rate in September.

Bond ETFs ranked by quarterly returns

Name/ticker	3-month return	1-year return	Net assets ($M)	Expense ratio*	3-month average daily volume
WisdomTree Brazilian Real Strategy Fund (BZF)	5.86%	-21.26%	$15.3	0.45%	16,906
Guggenheim CurrencyShares British Pound Strlng Tr (FXB)	5.86%	-8.32%	$38.6	0.40%	28,084
Market Vectors Emg Mkts High Yield Bd ETF (HYEM)	4.89%	-1.82%	$412.3	0.40%	194,655
ProShares 30 Year TIPS/TSY Spread (RINF)	4.28%	-12.13%	$4.7	0.75%	14,093
WisdomTree BofA Merrill Lynch HY Bd Neg Duration (HYND)	4.10%	-4.83%	$10.9	0.48%	5,375
Guggenheim CurrencyShares Swedish Krona Trust (FXS)	3.64%	-19.95%	$23.8	0.40%	579
Guggenheim CurrencyShares Swiss Franc Trust (FXF)	3.63%	-5.73%	$166.3	0.40%	9,484
Guggenheim CurrencyShares Euro Trust (FXE)	3.59%	-19.01%	$404.8	0.40%	890,326
ProShares Short Term USD Emerging Markets Bond ETF (EMSH)	3.31%	-2.71%	$7.6	0.50%	794
Market Vectors International High Yield Bond ETF (IHY)	2.97%	-7.57%	$167.1	0.40%	45,887
PowerShares Chinese Yuan Dim Sum Bond Portfolio (DSUM)	2.38%	2.87%	$124.8	0.45%	7,673
iShares Global ex USD High Yield Corp Bond ETF (HYXU)	2.34%	-17.04%	$239.4	0.40%	20,846
Market Vectors ChinaAMC China Bond ETF (CBON)	2.22%	N/A	$30.0	0.50%	20,345
iShares Emerging Markets High Yield Bond ETF (EMHY)	2.13%	-3.79%	$239.4	0.50%	79,756
WisdomTree Barclays US Aggregate Bd Negative Dur (AGND)	2.13%	-3.53%	$36.3	0.28%	11,239
iShares 1-3 Yr International Treasury Bond ETF (ISHG)	2.08%	-16.76%	$147.7	0.35%	12,257
PowerShares Global Short Term High Yield Bond Ptf (PGHY)	1.83%	-1.03%	$28.3	0.35%	5,793
Guggenheim CurrencyShares Singapore Dollar Trust (FXSG)	1.78%	-7.76%	$3.7	0.40%	810
WisdomTree Emerging Markets Corporate Bond Fund (EMCB)	1.43%	-2.34%	$94.0	0.60%	4,199
Guggenheim CurrencyShares Canadian Dollar Trust (FXC)	1.42%	-14.61%	$219.0	0.40%	52,879
SPDR Barclays Short Term Intl Treasury Bond ETF (BWZ)	1.37%	-15.67%	$199.6	0.35%	105,092
Deutsche X-trackers Emerg Markets Bond - IR Hdg ETF (EMIH)	1.34%	N/A	$6.2	0.50%	234
SPDR Barclays International High Yield Bond ETF (IJNK)	1.30%	-8.88%	$25.0	0.40%	2,781
WisdomTree Commodity Currency Strategy Fund (CCX)	1.28%	-17.56%	$6.8	0.55%	742
PowerShares Fundmntl Emerg Mkts Local Debt Ptf (PFEM)	1.21%	-11.83%	$4.6	0.50%	805
ProShares German Sovereign/Sub-Sovereign ETF (GGOV)	1.09%	-16.90%	$3.6	0.45%	1,604
WisdomTree Chinese Yuan Strategy Fund (CYB)	0.98%	3.03%	$113.1	0.45%	26,408
Guggenheim Invest BulletShares 2019 HY Corp Bd ETF (BSJJ)	0.96%	-0.93%	$150.4	0.43%	28,918
Guggenheim CurrencyShares Australian Dollar Trust (FXA)	0.96%	-17.18%	$200.0	0.40%	50,308
iShares Emerging Markets Corporate Bond ETF (CEMB)	0.83%	-0.87%	$34.6	0.50%	8,072
SPDR BofA Merrill Lynch Emerging Mkts Corp Bd ETF (EMCD)	0.82%	-0.36%	$20.4	0.50%	7,414
Guggenheim Invest BulletShares 2017 HY Corp Bd ETF (BSJH)	0.81%	-0.18%	$534.6	0.43%	117,482
SPDR Barclays International Corporate Bond ETF (IBND)	0.77%	-16.03%	$191.2	0.50%	6,174
Guggenheim Invest BulletShares 2018 HY Corp Bd ETF (BSJI)	0.74%	-0.83%	$420.9	0.44%	93,959
Guggenheim Invest BulletShares 2016 HY Corp Bd ETF (BSJG)	0.69%	-0.13%	$793.2	0.44%	104,320
WisdomTree Emerging Currency Strategy Fund (CEW)	0.67%	-11.30%	$71.3	0.55%	15,085
FlexShares iBoxx 3-Year Target Duration TIPS Index (TDTT)	0.66%	-2.12%	$2,132.3	0.20%	8,189
SPDR Blackstone/GSO Senior Loan ETF (SRLN)	0.64%	2.38%	$671.8	0.70%	103,247
Guggenheim Invest BulletShares 2020 HY Corp Bd ETF (BSJK)	0.63%	-0.03%	$73.3	0.43%	16,583
First Trust Tactical High Yield ETF (HYLS)	0.63%	0.92%	$469.7	1.29%	44,530

Leading up to quarter-end, William Dudley (president of the Federal Reserve Bank of New York) said recent wage gains and growing household spending had assuaged some of his concerns about America's jobs market. Other governors voiced similar support for a possible rate hike before year-end, although no one sounded completely sure it would be done. Most bond exchange-traded products (ETPs) had modest positive returns for April (0.45% on average) before slumping a bit for May (-0.37%) and again for June (-0.68%). The quarter's top performer was technically not a bond fund, but that didn't stop WisdomTree Brazilian Real Strategy Fund (BZF) from surging 5.86% as the real bounced back against the dollar. The top-performing bond ETP was Market Vectors Emerging Markets High Yield Bond (HYEM); its 4.89% return was the result of both a dollar sell-off as well as tumbling yields on Petróleos de Venezuela (PDVSA) paper, which fell from a high of 54.0% in January to 13.5% at the end of June as an imminent default failed to materialize. The darling of the past few quarters, PIMCO 25+ Year Zero Coupon US Treasury Index (ZROZ), found itself at the bottom of the pile this time, falling 15.8% for Q2.

Bond ETFs with the largest inflows

Name/ticker	3-month estimated net flows ($M)	3-month return	1-year return	Net assets ($M)	Expense ratio*
iShares Core US Aggregate Bond ETF (AGG)	$1,500.22	-1.72%	1.87%	$24,966.0	0.08%
iShares 1-3 Year Treasury Bond ETF (SHY)	$1,180.06	0.10%	0.79%	$8,917.2	0.15%
iShares TIPS Bond ETF (TIP)	$933.95	-1.12%	-1.88%	$13,746.6	0.20%
iShares JPMorgan USD Emerging Markets Bond ETF (EMB)	$818.32	-0.89%	-0.59%	$5,227.7	0.40%
Vanguard Mortgage-Backed Secs Idx Fund ETF (VMBS)	$559.21	-0.72%	2.16%	$1,469.1	0.12%
iShares 3-7 Year Treasury Bond ETF (IEI)	$543.13	-0.59%	2.34%	$4,932.4	0.15%
SPDR DoubleLine Total Return Tactical ETF (TOTL)	$521.62	-0.43%	N/A	$746.5	0.55%
Vanguard Total Bond Market Index Fund ETF (BND)	$521.45	-1.85%	1.72%	$26,989.0	0.07%
Vanguard Short-Term Corporate Bond Idx Fund ETF (VCSH)	$520.41	-0.21%	1.17%	$10,347.2	0.12%
Vanguard Intermediate-Term Bond Index Fund ETF (BIV)	$408.04	-1.89%	2.41%	$5,992.6	0.10%
iShares National AMT-Free Muni Bond ETF (MUB)	$405.03	-1.06%	2.41%	$4,977.6	0.25%
iShares Short Maturity Bond ETF (NEAR)	$358.31	0.15%	0.54%	$991.6	0.25%
iShares US Preferred Stock ETF (PFF)	$341.50	-0.98%	4.27%	$13,103.1	0.47%
Vanguard Intermediate-Term Corp Bond Idx Fund ETF (VCIT)	$339.09	-2.16%	1.80%	$5,375.5	0.12%
Vanguard Short-Term Bond Index Fund ETF (BSV)	$328.59	-0.06%	1.19%	$16,346.9	0.10%
iShares 0-5 Year High Yield Corporate Bond ETF (SHYG)	$317.79	0.32%	-0.16%	$557.2	0.30%
Market Vectors Emerging Mkts Local Currency Bd ETF (EMLC)	$286.23	-0.93%	-15.03%	$1,309.4	0.47%
iShares Core US Treasury Bond ETF (GOVT)	$252.35	-1.59%	2.24%	$1,284.9	0.15%
SPDR Barclays Intermediate Term Corporate Bond ETF (ITR)	$206.40	-1.11%	1.34%	$752.6	0.12%
Schwab US Aggregate Bond ETF (SCHZ)	$189.31	-1.68%	1.88%	$1,624.3	0.05%

The dollar's weakness played an obvious role in determining the quarter's top performers. Currency plays such as BZF and Guggenheim CurrencyShares British Pound Sterling (FXB, +5.86%) floated to the top, while similar products such as Guggenheim CurrencyShares Swedish Krona (FXS, +3.64%) and Guggenheim CurrencyShares Swiss Franc (FXF, +3.63%) weren't too far behind. The next best performing Lipper classification, High Yield Funds, was led by HYEM and WisdomTree BofA Merrill Lynch HY Bond Negative Duration (HYND, +4.10%). With just $11 million in assets, HYND wasn't on the radar of most high-yield bond fund investors, but the $13.7-billion industry behemoth iShares iBoxx $ High Yield Corporate Bond (HYG, -0.72%) certainly was; its modest loss helped capped a tough quarter for the fund, which also led the way for outflows as investors pulled a net $2.7 billion from it.

Bond ETFs with the largest outflows

Name/ticker	3-month estimated net flows ($M)	3-month return	1-year return	Net assets ($M)	Expense ratio*
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)	-$2,751.3	-0.73%	-1.58%	$13,666.3	0.50%
iShares Short Treasury Bond ETF (SHV)	-$2,646.41	0.01%	0.03%	$2,139.4	0.15%
SPDR Barclays High Yield Bond ETF (JNK)	-$1,496.04	-0.71%	-2.51%	$9,720.5	0.40%
iShares 20+ Year Treasury Bond ETF (TLT)	-$1,399.85	-9.09%	6.60%	$4,555.4	0.15%
First Trust Enhanced Short Maturity ETF (FTSM)	-$832.30	0.03%	N/A	$131.9	0.25%
iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD)	-$461.96	-3.88%	0.54%	$20,906.1	0.15%
SPDR Barclays Short Term High Yield Bond ETF (SJNK)	-$297.07	0.22%	-1.73%	$4,266.2	0.40%
iShares Floating Rate Bond ETF (FLOT)	-$288.74	0.08%	0.20%	$3,078.2	0.20%
Vanguard Long-Term Corporate Bond Idx Fund ETF (VCLT)	-$241.69	-7.61%	-0.42%	$945.3	0.12%
SPDR Barclays International Treasury Bond ETF (BWX)	-$216.19	-1.57%	-13.02%	$1,449.8	0.50%
Vanguard Total International Bond Index Fund ETF (BNDX)	-$189.85	-2.94%	3.51%	$3,266.2	0.19%
SPDR Barclays Long Term Treasury ETF (TLO)	-$139.94	-8.31%	6.19%	$164.5	0.10%
iShares Core US Credit Bond ETF (CRED)	-$132.28	-2.95%	0.72%	$891.2	0.15%
Guggenheim Invest BulletShares 2015 HY Corp Bond ETF (BSJF)	-$123.24	0.39%	0.83%	$715.9	0.44%
PIMCO Enhanced Short Maturity Active Exch Tr (MINT)	-$120.46	0.18%	0.61%	$3,543.1	0.35%
iShares 10+ Year Credit Bond ETF (CLY)	-$96.06	-7.28%	-1.04%	$744.3	0.20%
SPDR Barclays Short Term Intl Treasury Bond ETF (BWZ)	-$92.25	1.37%	-15.67%	$199.6	0.35%
iShares Core 10+ Year USD Bond ETF (ILTB)	-$86.92	-7.05%	1.53%	$133.7	0.12%
iShares 7-10 Year Treasury Bond ETF (IEF)	-$82.40	-2.45%	3.55%	$6,279.3	0.15%
Guggenheim Invest BulletShares 2015 Corp Bd ETF (BSCF)	-$78.19	0.07%	0.27%	$433.1	0.25%

And HYG was far from alone when it came to outflows: investors soured on iShares Short Treasury Bond (SHV, -$2.6 billion) as well as on the second biggest high-yield ETP, SPDR Barclays High Yield Bond (JNK, -$1.5 billion). But overall, investors added a net $1.6 billion to bond ETPs for the quarter, showing that despite higher odds of a near-term rate hike by the Fed, they have no intention of kicking fixed income products to the curb.

One-year anniversary bond ETFs, ranked by Q2 2015 daily trading volume

Name/ticker	3-month average daily volume	3-month return	1-year return	Net assets ($M)	Expense ratio*
iShares Core Total USD Bond Market ETF (IUSB)	16,594	-1.45%	1.63%	$394.8	0.15%
iShares Interest Rate Hedged High Yield Bond ETF (HYGH)	4,204	-0.26%	-3.66%	$105.8	0.55%
First Trust Managed Municipal ETF (FMB)	3,727	-0.88%	4.70%	$25.5	0.65%
iShares iBonds Dec 2018 Corporate ETF (IBDH)	3,195	-0.06%	1.70%	$32.6	0.10%
iShares Yield Optimized Bond ETF (BYLD)	2,148	-1.42%	0.92%	$11.2	0.28%
iShares iBonds Dec 2016 Corporate ETF (IBDF)	2,001	0.17%	0.80%	$25.0	0.10%
iShares Interest Rate Hedged Corproate Bond ETF (LQDH)	1,478	-1.20%	-2.87%	$23.6	0.25%
Deutsche X-trackers Solactive Inv Gr Sub Debt ETF (SUBD)	219	-3.36%	1.79%	$6.2	0.45%

Yet, if there was some trepidation out there, it may have been from the ETP sponsors: with just two new products hitting the shelves during Q2 (not including exchange-traded notes or leveraged/inverse products), new product development in the fixed income ETP space was at a nadir. Given investors' lack of fear, maybe it was the right time to launch a Greece-Puerto Rico bond ETP?

Newly-launched bond ETFs, ranked by Q2 2015 daily trading volume

Name/ticker	Classification	3-month average daily volume	Expense ratio*
PowerShares Europe Currency Hedged Low Vol Ptf (FXEU)	Alternative Currency Strategies Funds	62,328	0.25%
WisdomTree Western Asset Unconstrained Bond Fund (UBND)	Alternative Credit Focus Funds	4,048	0.55%

As of June 30. Excludes leveraged and inverse funds, and exchange traded notes. *Most recently reported net prospectus expense ratio. Source: Lipper, a Thomson Reuters company

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Bond ETFs suffer through a disappointing quarter

Bond ETFs ranked by quarterly returns

Bond ETFs with the largest inflows

Bond ETFs with the largest outflows

One-year anniversary bond ETFs, ranked by Q2 2015 daily trading volume

Newly-launched bond ETFs, ranked by Q2 2015 daily trading volume

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