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2012 was the Year of the Bond ETF


Bond ETFs led all asset classes in terms of inflows this year but there are worries investors who have piled into fixed-income funds could get hurt if interest rates finally start rising in 2013.

Taxable bond ETFs listed in the U.S. gathered $48 billion year to date through November to lead the major categories, according to Morningstar.

Bond exchange traded funds have experienced phenomenal growth over the past few years in the wake of the financial crisis with investors putting a premium on safety.

“The bull market for fixed income is over 30 years old, and the current crop of investors may be in for a rude awakening when it finally turns sour,” writes Spencer Jakab for the Wall Street Journal. “There have been bond bear markets before, of course—notably in the 1970s when bonds were dubbed certificates of confiscation—but a drop in values may be much more alarming and easier to act upon today for bond investors who generally own them through mutual or exchange-traded funds.”

Since 2007, bond mutual funds saw their assets swell by $1.7 billion, or 101%, while stock mutual funds have lost $715 billion, or 11%, of their assets under management, Jakab notes. [Navigating 2012’s Twists With Fixed Income ETFs]

However, with the Federal Reserve keeping a lid on interest rates, and Treasury bond yields hovering around historical lows, investors are faced with potential interest rate risks.

Specifically, the current low coupon rates would increase loses if interest rates return to normal. Jakab calculates that a recently issued 10-year Treasury note would depreciate 29% if rates returned to 6% while a 30-year Treasury bond would lose 57%.

The WSJ points out that bond ETFs such as iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) have seen big inflows in recent years along with fixed-income mutual funds.

LQD has had a five-year annualized gain of 8.29% versus 1.05% for the S&P 500. “Just don’t expect that gift to keep on giving,” Jakab writes.

The corporate debt fund is the top selling bond ETF in 2012 with net inflows of $6.9 billion year to date, according to IndexUniverse.

Other bond ETFs include:

  • iShares Barclays 7-10 Year Treasury Bond Fund (IEF) : up 3.7% year-to-date; 1.26% 30-day SEC yield
  • iShares Barclays 20 Year Treasury Bond ETF (TLT) : up 3.3% year-to-date; 2.68% 30-day SEC yield
  • SPDR Barclays Capital High Yield Bond ETF (JNK) : up 13.3% year-to-date; 5.42% 30-day SEC yield
  • PIMCO Total Return Exchange-Traded ETF (BOND) : up10.1% since inception; 2.17% 30-day SEC yield
  • iShares S&P National Municipal Bond ETF (MUB) : up 5.1% year-to-date; 1.51% 30-day SEC yield

For more information on the bonds market, visit our bond ETFs category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own TLT, LQD, JNK and BOND.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.