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Market-Beating Fixed Income ETFs of Q2

Sanghamitra Saha
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Second-quarter 2019 has all been about renewed U.S.-China trade tensions and dovish comments from big central banks, including the Fed and ECB. May was a month of staggering success for fixed-income securities.

Trade tensions were rife as the Trump administration intensified its battle against China and Mexico. Trump lifted tariffs on $200 billion worth of Chinese goods from 10% to 25%, while China enacted a retaliatory move — a tariff hike on $60 billion worth of American goods to 25% starting Jun 1. Trump is considering additional tariffs on an incremental $325 billion of Chinese imports.

At May-end, Trump announced tariffs on all goods imported from Mexico in order to put a check on illegal immigration. Though things settled with Mexico later on, issues with China are yet to be resolved. Sensing U.S. tariffs could undermine growth prospects, the Fed has offered dovish cues in its latest meeting. Not only the Fed, the ECB harped on the same tune (read: ECB Considers Further Stimulus: ETFs to Top & Flop).

This has brought down bond yields materially. Yield on benchmark 10-year U.S. treasury yield slipped to 2.05% on Jun 26 from 2.66% recorded at the start of the year, with the lowest half-yearly yield of 2% recorded on Jun 25. Parts of the yield curve inverted this year on cues of recessionary fears. Notably, 10-year yields plunged to the lowest level since October 2017 in May.

In the latest June meeting, federal funds rate projections for 2019 were kept intact at 2.4% but lowered to 2.1% from 2.6% for 2020 and to 2.4% from 2.6% for 2021. Over the longer term, the rate was projected at 2.9%, the same was cut to 2.5% from 2.8% projected in March (read: ETF Winners & Losers Post Fed Meet).

Investors should note that markets started pricing in a substantial chance of Fed rate cuts long ago. As of Jun 26, according to CME FedWatch tool, there is a 60% chance of a 50-bp rate cut in the Sep 18 meeting, followed by a 23.4% probability of 25-bp rate cut and 16.6% likelihood of a 75-bp rate cut. 

Since bond yields and prices are inversely-related, slumps in yields bode well for bond prices. Then there was flare-up in geopolitical crisis, which in turn brightened the appeal for safe-haven treasury ETFs. Against this backdrop, we highlight a few fixed-income ETFs that beat the broader market in 2019 and also led the bond ETF world (read: Intensifying Trade Woes Trigger Rally in Treasury ETFs).

Outperforming ETFs

iPath US Treasury 5-year Bull ETN DFVL — Up 19.5%

The Barclays 5Y US Treasury Futures Targeted Exposure Index is designed to fall in response to an increase in the 5-year Treasury note yields and to rise in response to a fall in 5-year Treasury note yields. The product charges 75 bps in fees.

iPath US Treasury 2-year Bull ETN DTUL — Up 18.4%

The Barclays 2Y US Treasury Futures Targeted Exposure Index is designed to drop in response to a rise in the 2-year Treasury note yields and to climb in response to a fall in 2-year Treasury note yields. It also charges 75 bps in fees.

PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund ZROZ — Up 6.6%

This ETF follows the BofA Merrill Lynch Long Treasury Principal STRIPS Index. The principal STRIPS comprising the Underlying Index must have 25 years or more remaining term to final maturity and must be stripped from U.S. Treasury bonds having at least $1 billion in outstanding face value.

Vanguard Extended Duration Treasury Index Fund ETF Shares EDV – Up 6.3%

The underlying Bloomberg Barclays US Treasury STRIPS 20-30 Year Equal Par Bond Index includes zero-coupon U.S. Treasury securities, which are backed by the full faith and credit of the U.S. government, with maturities ranging from 20 to 30 years. The product charges 7 bps in fees (read: Go for Safe-Haven ETFs Amid Rising Geopolitical Risks).

iShares 10+ Year Investment Grade Corporate Bond ETF LLQD – Up 5.4%

The Markit iBoxx USD Liquid Investment Grade Long Index comprises U.S. dollar-denominated, investment-grade corporate bonds with remaining maturities greater than 10 years. The fund charges 6 bps in fees.

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