Most bonds are returning zilch this year so far. But ETF investors willing to go off the beaten path are finding some solid returns pushing 13%.
So far this year, seven actively traded bond and fixed income ETFs, including Simplify Interest Rate Hedge, Aptus Defined Risk and Virtus InfraCap US Preferred Stock, returned 6% or more this year, says Morningstar Direct. That blows away the 0.07% return this year by the iShares Core US Aggregate Bond ETF, which serves as a benchmark for the entire U.S. bond market.
"There is some unique, recently strong performing fixed income strategies available in the ETF wrapper," said Todd Rosenbluth, head of research at Vetta Fi.
Cashing In On Bond-Market Worries
Interestingly, the bond ETF that's doing the best this year is one designed to capitalize on market stress and volatility.
The Simplify Internet Rate Hedge ETF returned 12.5% this year. But it pulls it off using an unusual strategy. The ETF with $137 million in assets owns interest-rate options designed to gain when there's interest-rate volatility. The ETF is built to help investors protect their portfolios from changes in long-term interest rates.
The ETF, which charges 0.5% annually, has worked out well in the past three years, too. It returned more than 25% annually in that time.
Another winning strategy is the $608 million-in-assets Aptus Defined Risk ETF. The fund returned nearly 9% this year. But this fund, too, takes an unusual two-part approach to generate income. More than 90% of the portfolio is invested in investment grade corporate bonds maturing in seven to eight years. The fund owns these bonds until maturity.
But the second part of the Aptus Defined Risk ETF is just as interesting. It owns call options on U.S. stocks. This part of the portfolio gives investors concentrated exposure to U.S. stocks. The ETF charges 0.78% annually.
Going For Global Gusto
Another winning strategy in bonds has been ETFs owning high-yield bonds issued by companies in emerging economies. That means investment everywhere from China to the Philippines.
The $374 million-in-assets VanEck Emerging Markets High Yield Bond ETF holds more than 500 bond positions to help lower risk. And it has returned more than 7% this year so far, even after a 0.4% annual fee. To limit risk, the ETF skips bonds maturing in more than 10 years. It also holds no more than 10% of its assets in a single country.
But these types of bonds are still a high-risk proposition. "Emerging market high yield ETFs are for the most risk-tolerant fixed income investors," Rosenbluth said. "The funds have been rewarding in the first half of 2024, but they involve two elements of risk. Traditional credit risk found with any high yield strategy but also the sovereign risk of less developed markets like Brazil, Colombia and Turkey."
Taking The Preferred Option
ETFs owning preferred stock are also working out well this year. The $899 million-in-assets Principal Spectrum Preferred Securities ETF and $1.7 billion Invesco Variable Rate Preferred ETF take this approach.
Both ETFs hold preferred stock, a unique asset that pays dividends usually higher than common shares. But unlike bonds, the preferred stock issuers may halt the payment. It's working well for now. Principal Spectrum Preferred Securities and Invesco Variable Rate Preferred both returned more than 6% this year.
Just make sure you know what you're buying with bond and income ETFs. "Investors should be reminded of the role fixed income often plays in a diversified portfolio," Rosenbluth said. "Fixed income can offer capital preservation and can reduce the volatility of owning equities. If a strategy seems too complicated it is not worthy of an investment."
Top Returning Actively Traded Bond And Income ETFs
| Name | Ticker | Market return YTD | Assets ($ millions) |
|---|---|---|---|
| Simplify Interest Rate Hedge | 12.50 | $137.2 | |
| Aptus Defined Risk | 8.97 | 608.5 | |
| Virtus InfraCap US Preferred Stock | 7.41 | 1,002.3 | |
| VanEck EM High Yield Bond | 7.02 | 373.9 | |
| Principal Spectrum Pref Secs Actv | 6.61 | 899.5 | |
| Invesco Variable Rate Preferred | 6.25 | 1,721.9 | |
| Panagram BBB-B Clo | 6.20 | 391.8 | |
| First Trust Preferred Sec & Inc | 5.87 | 5,290.9 | |
| Global X Variable Rate Preferred | 5.81 | 251 | |
| First Trust Instl Pref Secs and Inc | 5.81 | 1,287.1 |
