Bond funds slump amid global crises and Fed inaction

OCT 18, 2015

By Jeff Tjornehoj and InvestmentNews Data

At the time of our last quarterly review, the Greek debt crisis was front and center, spinning off volatility and vitriol as creditors and debtors slugged it out for supremacy. Unfortunately, concern for Greece wasn't all investors had on their minds this past quarter: a slowdown in China has sent shockwaves through emerging markets and threatens the growth of our global economy. Since the financial crisis, Chinese authorities have been congratulated for steering the world's second-largest economy through various setbacks while maintaining at least 7% annual growth.

Fixed income ETFs ranked by Q3 returns

Name/ticker	3-month return	1-year return	Net assets ($M)	Expense ratio*	3-month average daily volume
Vanguard Extended Duration Treasury Index Fund ETF (EDV)	8.37%	11.69%	$371.0	0.12%	58,490
PIMCO 25+ Year Zero Coupon US Treasury Index ETF (ZROZ)	8.18%	11.36%	$189.2	0.15%	6,084
Vanguard Long-Term Government Bond Idx Fund ETF (VGLT)	5.38%	8.57%	$282.9	0.12%	38,460
iShares 20+ Year Treasury Bond ETF (TLT)	5.29%	9.02%	$6,407.1	0.15%	9,235,936
SPDR Barclays Long Term Treasury ETF (TLO)	5.03%	8.66%	$279.0	0.10%	84,542
Market Vectors CEF Municipal Income ETF (XMPT)	3.66%	5.76%	$50.1	1.43%	2,151
iShares 10-20 Year Treasury Bond ETF (TLH)	3.50%	7.65%	$507.7	0.15%	55,261
PowerShares 1-30 Laddered Treasury Portfolio (PLW)	3.50%	6.73%	$274.0	0.25%	86,167
iShares 7-10 Year Treasury Bond ETF (IEF)	2.96%	6.14%	$8,882.0	0.15%	1,805,048
WisdomTree Bloomberg US Dollar Bullish Fund (USDU)	2.56%	13.95%	$351.1	0.50%	138,479
Deutsche X-trackers Municipal Infr Revenue Bond ETF (RVNU)	2.43%	3.01%	$21.9	0.30%	1,347
Vanguard Long-Term Bond Index Fund ETF (BLV)	2.30%	2.98%	$1,745.1	0.10%	226,736
Market Vectors Intermediate Municipal Index ETF (ITM)	2.23%	3.07%	$1,172.7	0.24%	269,675
SPDR Nuveen Barclays California Municipal Bond ETF (CXA)	2.23%	3.51%	$93.7	0.20%	15,589
SPDR Nuveen Barclays New York Municipal Bond ETF (INY)	2.16%	3.28%	$28.1	0.20%	3,088
Market Vectors Long Municipal Index ETF (MLN)	2.14%	3.82%	$102.8	0.24%	29,414
SPDR Nuveen Barclays Municipal Bond ETF (TFI)	2.12%	2.96%	$1,485.7	0.23%	409,901
SPDR Wells Fargo Preferred Stock ETF (PSK)	2.09%	6.40%	$279.2	0.45%	113,506
Guggenheim CurrencyShares Japanese Yen Trust (FXY)	2.07%	-8.77%	$145.8	0.40%	116,495
Vanguard Intermediate-Term Govt Bd Idx Fund ETF (VGIT)	2.01%	4.47%	$425.6	0.12%	54,070
Schwab Intermediate-Term U.S. Treasury ETF (SCHR)	1.92%	4.55%	$424.9	0.09%	9,795
PowerShares Build America Bond Port (BAB)	1.84%	3.80%	$659.2	0.27%	96,332
SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)	1.84%	4.08%	$356.5	0.45%	9,813
PowerShares California AMT-Free Municipal Bond Ptf (PWZ)	1.82%	3.38%	$108.0	0.28%	17,505
Market Vectors High-Yield Municipal Index ETF (HYD)	1.82%	4.65%	$1,539.6	0.35%	327,394
PowerShares National AMT-Free Municipal Bond Ptf (PZA)	1.79%	3.90%	$883.8	0.28%	155,494
iShares California AMT-Free Muni Bond ETF (CMF)	1.78%	3.04%	$415.3	0.25%	16,934
iShares Core U.S. Treasury Bond ETF (GOVT)	1.73%	3.65%	$1,475.7	0.15%	262,602
Vanguard Intermediate-Term Bond Index Fund ETF (BIV)	1.72%	4.12%	$6,852.6	0.10%	478,846
PowerShares Preferred Portfolio (PGX)	1.72%	6.82%	$2,843.9	0.50%	997,796
iShares 3-7 Year Treasury Bond ETF (IEI)	1.65%	4.17%	$6,142.6	0.15%	424,705
iShares Core 10+ Year USD Bond ETF (ILTB)	1.63%	2.47%	$119.5	0.12%	18,466
SPDR Nuveen Barclays Build America Bond ETF (BABS)	1.62%	3.24%	$48.3	0.35%	2,715
ProShares Short Term USD Emerging Markets Bond ETF (EMSH)	1.61%	0.75%	$7.6	0.50%	580
iShares National AMT-Free Muni Bond ETF (MUB)	1.59%	2.53%	$5,320.6	0.25%	260,878
PowerShares New York AMT-Free Municipal Bond Ptf (PZT)	1.59%	2.57%	$50.5	0.28%	4,580
iShares New York AMT-Free Muni Bond ETF (NYF)	1.54%	2.75%	$182.9	0.25%	5,464
iShares CMBS ETF (CMBS)	1.45%	3.34%	$188.6	0.25%	24,553
Columbia Intermediate Municipal Bond ETF (GMMB)	1.42%	2.00%	$5.3	0.42%	45
Vanguard Total International Bond Index Fund ETF (BNDX)	1.42%	3.06%	$3,897.6	0.19%	835,886

But those kudos ceased this past quarter when attempts to deflate a stock market bubble (brought on by excessive leverage by retail investors) led to plunging stock prices and a ham-handed currency devaluation that rocked world markets. China's third-quarter GDP is likely to come in below 7% (estimates range from 6.2% to 6.8%) as depressed commodity prices provide a forward-looking view of Chinese activity. But across the Pacific, the Federal Reserve's decision not to raise rates confused and annoyed many investors who had figured recent volatility was proximately caused by expectations of higher rates immediately ahead. Despite unemployment falling to 5.1% by August, the Fed refused to budge, generally citing too-low inflation at home and the unfolding situation in China as reasons to hold the line one more time. Against that backdrop most fixed- income exchange-traded products took a mulligan for the quarter, slumping 0.99% on average.

Fixed income ETFs with the largest Q3 inflows

Name/ticker	3-month estimated net flows ($M)	3-month return	1-year return	Net assets ($M)	Expense ratio*
iShares 1-3 Year Treasury Bond ETF (SHY)	$4,173.89	0.29%	1.05%	$13,111.1	0.15%
iShares 7-10 Year Treasury Bond ETF (IEF)	$2,420.38	2.96%	6.14%	$8,882.0	0.15%
iShares Short Treasury Bond ETF (SHV)	$1,874.77	0.03%	0.05%	$4,015.3	0.15%
SPDR Barclays 1-3 Month T-Bill ETF (BIL)	$1,663.37	-0.03%	-0.12%	$3,066.1	0.14%
iShares 20+ Year Treasury Bond ETF (TLT)	$1,623.32	5.29%	9.02%	$6,407.1	0.15%
iShares Core US Aggregate Bond ETF (AGG)	$1,472.68	1.22%	2.95%	$26,596.8	0.08%
iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD)	$1,147.16	0.78%	1.42%	$22,035.7	0.15%
iShares 3-7 Year Treasury Bond ETF (IEI)	$1,136.96	1.65%	4.17%	$6,142.6	0.15%
Pimco Enhanced Short Maturity Active Exch Tr (MINT)	$771.19	-0.15%	0.32%	$4,299.0	0.35%
iShares Floating Rate Bond ETF (FLOT)	$698.16	-0.28%	-0.25%	$3,761.5	0.20%
iShares Short Maturity Bond ETF (NEAR)	$643.32	0.17%	0.65%	$1,634.4	0.25%
Vanguard Intermediate-Term Bond Index Fund;ETF (BIV)	$555.30	1.72%	4.12%	$6,852.6	0.10%
iShares US Preferred Stock ETF (PFF)	$516.14	-0.19%	3.61%	$13,407.8	0.47%
iShares MBS ETF (MBB)	$513.18	1.23%	3.33%	$7,571.4	0.29%
SPDR DoubleLine Total Return Tactical ETF (TOTL)	$435.60	0.80%	N/A	$1,181.4	0.55%
Vanguard Long-Term Bond Index Fund ETF (BLV)	$347.52	2.30%	2.98%	N/A	0.10%
Vanguard Total International Bond Index Fund ETF (BNDX)	$321.31	1.42%	3.06%	N/A	0.19%
iShares 0-5 Year High Yield Corporate Bond ETF (SHYG)	$312.11	-4.32%	-2.92%	$824.0	0.30%
iShares National AMT-Free Muni Bond ETF (MUB)	$294.47	1.59%	2.53%	$5,320.6	0.25%
Schwab Short-Term U.S. Treasury ETF (SCHO)	$276.47	0.29%	1.09%	$1,125.0	0.08%

A renewed interest in safer assets supported Treasury-related products, and they dominated the top of the performance tables. The quarter's top performer, Vanguard Extended Duration Treasury Index Fund ETF shares (EDV), hit the upper deck with an 8.37% quarterly gain. Not far behind, Pimco's 25+ Year Zero Coupon U.S. Treasury Index (ZROZ) gained 8.18%. The largest Treasury product, the $6.4 billion iShares 20+ Year Treasury Bond (TLT), gained 5.29% and was the fourth-best performer for the quarter.

Bond ETFs with the largest Q3 outflows

Name/ticker	3-month estimated net flows ($M)	3-month return	1-year return	Net assets ($M)	Expense ratio*
SPDR Barclays Short Term High Yield Bond ETF (SJNK)	-$687.74	-5.43%	-5.17%	$3,317.8	0.40%
iShares JPMorgan USD Emerging Markets Bond ETF (EMB)	-$645.22	-2.07%	-1.57%	$4,434.5	0.40%
Vanguard Total Bond Market Index Fund ETF (BND)	-$563.38	1.26%	2.80%	$26,802.3	0.07%
PowerShares Senior Loan Portfolio (BKLN)	-$536.93	-2.31%	-1.63%	$4,707.9	0.65%
Pimco 0-5 Year High Yield Corporate Bond Index ETF (HYS)	-$447.58	-4.16%	-3.35%	$2,223.0	0.55%
Guggenheim Invest BulletShares 2015 HY Corp Bond ETF (BSJF)	-$195.68	-0.23%	1.26%	$516.1	0.44%
PowerShares DB U.S. Dollar Index Bullish Fund (UUP)	-$180.69	0.48%	9.93%	$1,040.3	0.75%
Guggenheim CurrencyShares Euro Trust (FXE)	-$136.06	0.03%	-12.11%	$268.1	0.40%
SPDR Barclays Long Term Corporate Bond ETF (LWC)	-$119.75	1.11%	0.15%	$218.6	0.12%
PowerShares 1-30 Laddered Treasury Portfolio (PLW)	-$99.83	3.50%	6.73%	$274.0	0.25%
iShares Core U.S. Credit Bond ETF (CRED)	-$97.79	0.51%	1.30%	$791.0	0.15%
Fidelity Limited Term Bond ETF (FLTB)	-$92.71	0.33%	N/A	$50.0	0.45%
iShares Intermediate Credit Bond ETF (CIU)	-$86.21	0.48%	1.92%	$6,137.9	0.20%
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)	-$78.65	-5.30%	-4.43%	$12,694.6	0.50%
iShares Baa Ba Rated Corporate Bond ETF (QLTB)	-$76.62	-0.94%	-0.39%	$55.1	0.30%
FlexShares iBoxx 3-Year Target Duration TIPS Index (TDTT)	-$74.92	-0.77%	-1.38%	$2,041.0	0.20%
SPDR Barclays Short Term Corporate Bond ETF (SCPB)	-$73.15	0.25%	1.02%	$3,912.6	0.12%
iShares International Preferred Stock ETF (IPFF)	-$67.64	-16.17%	-27.79%	$32.8	0.55%
iShares Emerging Markets High Yield Bond ETF (EMHY)	-$64.98	-4.25%	-5.01%	$162.4	0.50%
Peritus High Yield ETF (HYLD)	-$63.03	-6.37%	-18.87%	$284.1	1.18%

At the other end of the spectrum, anything emerging-markets-related almost certainly declined in value. The lowest performer, WisdomTree's Brazilian Real Strategy Fund (BZF), returned -19.71% as economic turmoil continued to thrash Brazil's currency and sent the real from 3.11 per USD to 4.06 per USD for the quarter. Funds in Lipper's Emerging Markets Local Currency Debt Funds classification showed the worst average decline (-8%). Bond ETP investors flocked to Treasury-related funds, pouring almost $4.2 billion net into iShares 1-3 Year Treasury Bond (SHY) and $2.4 billion net into iShares 7-10 Year Treasury Bond (IEF) for the quarter's top flow gainers. In fact, the five top inflows recipients were all Treasury-related; in sixth place, the popular iShares Core U.S. Aggregate Bond (AGG) took in a net $1.5 billion to send its assets up to $26.6 billion.

Newly-launched fixed income ETFs ranked by average daily volume

Name/ticker	Classification	3-month average daily volume	Expense ratio*
ETFis Virtus Newfleet Multi-Sector Uncons Bond (NFLT)	Alternative Credit Focus Funds	169,966	0.80%
Vanguard Tax-Exempt Bond Index Fund ETF (VTEB)	General and Insured Municipal Debt Funds	40,188	0.12%
iShares Interest Rate Hedged 10+Year Credit Bd ETF (CLYH)	Core Bond Funds	38,731	0.30%
iShares iBonds Dec 2021 AMT-Free Muni Bond ETF (IBMJ)	Intermediate Municipal Debt Funds	12,654	0.18%
iShares iBonds Dec 2022 AMT-Free Muni Bond ETF (IBMK)	Intermediate Municipal Debt Funds	9,076	0.18%
WisdomTree Barclays U.S. Aggregate Bd Enh Yield (AGGY)	Corporate Debt Funds BBB-Rated	2,648	0.12%
iShares Currency Hedge Global ex USD Hi Yld Bd ETF (HHYX)	Alternative Currency Strategies Funds	1,943	0.43%
FlexShares Credit-Scored U.S. Long Corp Bd Index Fund (LKOR)	Core Bond Funds	933	0.22%
iShares Interest Rate Hedged Emerging Mkts Bond ETF (EMBH)	Emerging Mrkts Hard Currency Debt Funds	758	0.50%

Given the sorry state of returns in emerging markets during the quarter, one might have expected a flood of outflows, but that didn't seem to be the case: the Emerging Markets Local Currency Debt Funds group had net outflows of just $138 million for Q3, and the Hard Currency Debt group had net outflows of $562 million. Investors did exhibit more concern about High Yield Funds, yanking $1.2 billion net from that group for the quarter, leaving it with $36.8 billion in assets.

One-year anniversary fixed income ETFs

Name/ticker	3-month average daily volume	3-month return	1-year return	Net assets ($M)	Expense ratio*
First Trust Enhanced Short Maturity ETF (FTSM)	308,193	-0.08%	0.33%	$170.7	0.25%
Guggenheim BulletShares 2024 Corporate Bond ETF (BSCO)	14,387	0.94%	3.10%	$48.1	0.24%
iShares iBonds Sep 2020 AMT-Free Muni Bond ETF (IBMI)	13,553	1.31%	2.58%	$53.5	0.18%
Guggenheim BulletShares 2023 Corporate Bond ETF (BSCN)	10,789	0.70%	3.26%	$27.2	0.24%
Guggenheim Invest BulletShares 2022 HY Corp Bond ETF (BSJM)	9,569	-4.49%	-2.61%	$16.3	0.42%
Guggenheim Invest BulletShares 2021 HY Corp Bond ETF (BSJL)	9,112	-3.52%	-1.59%	$23.5	0.42%
FlexShares Disciplined Duration MBS Index Fund (MBSD)	4,417	0.54%	2.21%	$21.2	0.20%
First Trust Strategic Income ETF (FDIV)	2,731	-3.61%	-2.58%	$18.6	0.90%
PowerShares LadderRite 0-5 Year Corporate Bond Ptf (LDRI)	2,391	0.57%	1.67%	$5.0	0.22%
ProShares CDS North American HY Credit ETF (TYTE)	1,601	-3.69%	-4.51%	$3.8	0.50%

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

New products hitting the market this past quarter included two more alternative-minimum-tax-free muni bond funds from iShares, two interest rate-hedged funds (also from iShares), and Vanguard's Tax-Exempt Bond Index Fund (VTEB). Jeff Tjornehoj is head of Americas Research at Lipper.

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Bond funds slump amid global crises and Fed inaction

Fixed income ETFs ranked by Q3 returns

Fixed income ETFs with the largest Q3 inflows

Bond ETFs with the largest Q3 outflows

Newly-launched fixed income ETFs ranked by average daily volume

One-year anniversary fixed income ETFs

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