The fixed income world was out of investors’ favor in 2013 on heightened concerns over the Fed tapering and the resultant increase in interest rates that led to rising yields, and in turn, hurt bond prices.
Yields on 10-year Treasury bonds reached the highest level since July 2011 to above the 3% threshold (read: 3 ETFs for Rising Interest Rates).
Further, the ‘Great Rotation’ from bonds to stocks right from the beginning of the year on the improving U.S. economy made bond investing less compelling. As such, the 2013 bond market is set for the first annual loss in five years with huge outflows, breaking the previous record of $62.5 billion in fund outflows in 1994.
Despite the unfavorable conditions, several corners of the bond market are still unscathed and garnered investor interest in terms of asset under management. Below, we have highlighted three such bond ETFs of 2013 that have become popular for either their juicy yields or interest rate protection (read: Which ETFs Were Popular in 2013?).
As the trends continue and QE3 tapering picks up speed, these could be interesting picks for 2014 too:
PowerShares Senior Loan ETF (BKLN)
This fund offers protection from rising interest rates by tracking the S&P/LSTA U.S. Leveraged Loan 100 Index. BKLN has been the top bond asset gatherers in 2013 with a $4.85 billion asset gain. This has propelled the total asset base to $6.4 billion. Expense ratio came in at 0.66%.
The product holds 140 bonds having maturities of less than 10 years. With the average days to reset being just over 21, interest rate risk is negligible. The fund focuses on non-investment corporate bonds that have credit ratings of BBB or lower.
Though senior loans account for a hefty 91% of the assets, high yield securities make up for the remaining portion in the basket (read: Senior Loan ETFs: The Best Bet for Rising Rates?).
The fund was up nearly 4% in 2013 and has a 4.13% 30-Day SEC Yield, which is well above the S&P 500 yield of 1.78%.
Vanguard Short-Term Bond ETF (BSV)
This ETF follows the Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index, holding 1,783 bonds in its basket. It targets the short end of the yield curve with average maturity and duration of 2.7 years each, suggesting lower interest rate and default risks (see: Total Bond Market ETFs here).
In terms of credit quality, U.S. government bonds make up for 70% of the assets while investment-grade corporate debt accounts for the rest. The fund gathered $4.77 billion in 2013, sending its AUM to over $13.9 billion and charging a low fee of 10 bps a year.
BSV is down marginally 0.16% for the previous year, and 30-Day SEC yield is lower at 0.76%.
iShares Floating Rate Note ETF (FLOT)
This fund gained immense popularity with net capital inflow of $3.07 billion due to its variable coupon payments, which is poised to be less impacted by rising interest rates. FLOT tracks the Barclays US Floating Rate Note less than 5 Years Index with average maturity of 1.70 years and effective duration of 0.13 years.
Holding 348 notes, the product charges 20 bps in annual fees and has AUM of nearly $3.5 billion. As far as credit risk is concerned, the ETF can be considered a relatively safe option for investors as the fund focuses on higher quality notes.
The fund added 0.63% in 2013 and has a 30-Day SEC yield of 0.33% (read: 3 Best Dividend ETFs of 2013).
Though overall bond investing has been terrible for most investors, the above outlined products could be appealing in 2014 with lower risk. This is especially true given their downside protection to the rising rates or attractive yields, particularly in the tapering world of 2014.
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