While tapering speculations have dominated the markets in recent months, the Fed has made it quite clear that quantitative easing is not going away just yet. In its press conference on Wednesday, the central bank stated that it will continue its massive bond-buying purchases for the time being, but that tapering may begin sometime later this year. And while equities have taken several hits from Fed commentaries in 2013, no corner of the market has been impacted as much as fixed income [see Single Country ETFs: Everything Investors Need To Know].
Since the inception of the Fed’s unprecedented monetary stimulus measures, the bond market has essentially been “rigged.” Put into the mix the slew of easing policies from around the globe, and the market becomes even more saturated with “pegged” rates and yield curves that seemingly defy logic. As a result, fundamentals no longer drive these securities (though this argument could be made for nearly every asset class), leaving investors struggling to capture meaningful returns and yield from the fixed income component of their portfolios.
To put things in perspective, we take a look at the best and worst bond ETF performers year-to-date (data as of 6/19/2013):
“Steepener”, Convertible, and Active High Yield Bond ETF Come
Out On Top
US Treasury Steepener ETN (STPP, C), Up 8.6%
The biggest winner so far this year, this ETN is designed to capture returns that are potentially available from a “steepening” or “flattening” of the U.S. Treasury yield curve. Since January, the yield curve has managed to steepen quite a bit, allowing this fund to deliver somewhat meaningful returns.
SPDR Barclays Capital Convertible Bond ETF (CWB, B+), Up 7.5%
This ETF offers exposure to convertible bonds, which are bonds that can be exchanged at the option of the holder, for a specific number of shares of the issuer’s preferred stock or common stock [see Better-Than-AGG Total Bond Market ETFdb Portfolio].
Peritus High Yield ETF (HYLD, B), Up 4.8%
This investor favorite is an actively managed fund that seeks to capture the high levels of current income in the junk bond space, while at the same time looking to mitigate downside risks.
TIPS, Emerging Market and Australia Bond ETF Continue To Struggle
15+ Year U.S. TIPS Index Fund (LTPZ, C+), Down 14.4%
The biggest loser so far this year, this fund tracks an index of U.S. Treasury Inflation Protected Securities that have maturities greater than or equal to 15 years. Investing in TIPS has been a poor strategy in recent years, so it is no surprise that this fund has done so poorly.
Emerging Markets Sovereign Debt Portfolio (PCY, A+), Down 10.0%
This fund invests in dollar-denominated government bonds issued by more than 20 emerging market economies. Overall this year, emerging market investments (both stocks and bonds) have faltered [see 5 ETFs To Buy Before The Fed Cuts QE].
Australia & New Zealand Debt Fund (AUNZ, A-), Down 9.9%
Offering exposure to Australian and New Zealand debt securities, this fund has suffered a significant hit this year after the Reserve Bank of Australia cut its rate to a record low.
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Disclosure: No positions at time of writing.