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5 Best Bond ETFs of 2017

Sanghamitra Saha

The Fed may have enacted three rate hikes this year but geopolitics and mixed U.S. economic readings have kept U.S. Treasury yields at check. U.S. benchmark Treasury bond yields have hovered in the range of 2.05% to 2.62% this year (as of Dec 27, 2017), with an average of 2.33%.

Trump’s policy uncertainty in the middle of the year and Fed minutes, which showed policymakers’ suspicion about subdued inflation, probably led to this move in the fixed income market. Though the economy picked up pace in the fourth quarter, President Trump passed the tax reform agenda and the Fed enacted its final hike, average bond yields (2.37%) did not shoot up materially. 

This was because, with Fed officials sticking to their outlook for three more rate hikes in 2018 despite speeding economic growth, there is no spark in the guidance either. In fact, an air of dovishness was prevalent. The median Fed funds rate for this year and the next were unchanged (read: ETF Winners & Losers Post Partly Dovish Fed Meet).

As a result, bond funds returned decently in 2017. PIMCO 25+ Year Zero Coupon US Treasury ETF ZROZ returned about 12% this year against 19.6% returns in SPDR S&P 500 ETF SPY.

However, there are several international bond ETFs that offered great returns during this time frame. Since most of the developed economies are still practicing a low interest rate policy, international bonds got a chance to roar even higher. Against this backdrop, below we highlight a few top-performing bond ETFs.

iShares International High Yield Bond ETF HYXU – Up 17.8%

The underlying Markit iBoxx Global Developed Markets ex-US High Yield Index is a rules-based one, consisting of high yield corporate bonds denominated in Euros, British pounds sterling and Canadian dollars. The index is designed to provide a broad representation of the global ex-U.S. dollar high yield corporate bond market. The fund charges 40 bps in fees.

SPDR Bloomberg Barclays International Corp Bond ETF IBND – Up 13.5%

The 618-security fund looks to provide broad exposure to the global investment grade, fixed rate, fixed income corporate markets outside the United States. The fund charges 50 bps in fees. Average maturity in years is 6.61, while adjusted duration is 5.82 years. 

PowerShares International Corp Bond ETF PICB – Up 11.3%

The underlying index measures the performance of investment grade corporate bonds issued by non-U.S. issuers. The 411-stock fund charges 50 bps in fees. Years to Maturity of the fund is 9.32 and effective duration is 7.31 years.

SPDR Bloomberg Barclays Emerging Markets Local Bond ETF EBND – Up 11.1%

The underlying index – the Bloomberg Barclays EM Local Currency Government Diversified Index – is designed to measure the performance of the fixed-rate local currency sovereign debt of emerging market countries. The fund looks to offer exposure to fixed-rate local currency sovereign debt of emerging market countries. It charges 40 bps in fees. Average maturity of the fund is 7.36 years and adjusted duration is 5.29 years.

VanEck Vectors JP Morgan EM Local Bond ETF EMLC – Up 7.5%

The fund comprises 266 bonds issued by emerging market governments and denominated in the local currency of the issuer. The fund charges 44 bps in fees. Years to Maturity of the fund is 7.65 and effective duration is 5.10 years. The fund yields about 5.34% annually (as of Dec 27, 2017) (read: EM ETFs: What You Need to Know Before Investing).