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The year 2018 so far has been all about rising rate worries. The Fed enacted two rate hikes in the first half and offered a hawkish guidance for the whole year. The central bank is now planning a total of four rate hikes in 2018, which is contrary to its previous projections of total three rate increases for this year (read: ETF Strategies to Play the 7-Year High Benchmark Yield).
An upbeat U.S. economic recovery, a tight labor market and inflows of steady data from housing and retail market led the Fed’s bullish view about the economy. The Fed upgraded its forecast for 2018 real GDP growth from 2.7% in March to 2.8%. Unemployment was guided down to 3.6% from 3.8% for 2018 and PCE inflation expectations were upped from 1.9% to 2.1% for this year (read: Fed Turns Hawkish: ETF Areas to Win).
The U.S. Treasury bond yields have been on an uptrend since the start of the year with the benchmark yield hitting this year’s high of 3.11% in mid-May. An escalation in the global trade spat put a cap on the yield’s northbound ascent in June and kept the benchmark yield from crossing the 3% mark at the final month of the first half.
Meanwhile, the European Central Bank (ECB) has announced plans of exiting the QE policy by the end of this year. The ECB too appeared upbeat about the inflation momentum. The organization now forecasts annual HICP inflation of 1.7% for 2018 and 2019 (both up from 1.4% guided in March). Recovering oil prices and record employment are expected to push prices up in the coming years (read: Winning & Losing ETFs After ECB's Dovish Exit Plans From QE).
Such developments in the Euro zone could build up to the rising rate environment, but political instability has kept long-term bond yields at check across the pond. The gap between German two-to-10-year bond yields became the tightest in a year in early July.
No wonder, the first half of 2018 was not in favor of fixed-income investing as bond yields and price are inversely related. Against this backdrop, we highlight a few fixed-income ETF options that emerged winners in 1H.
Barclays Inverse US Treasury Aggregate ETN ) – Up 14.63%
This is an inverse bond ETF. The underlying Barclays Inverse US Treasury Futures Composite Index employs a strategy that tracks the sum of returns of periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts.
Higher inflationary expectations have made this inflation-oriented fund a winner. The underlying index — the Citi 30-Year TIPS (Treasury Rate-Hedged) Index — tracks the performance of long positions in the most-recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. It yields 2.99% annually and charges 30 bps in fees.
AdvisorShares Peritus High Yield ETF ) – Up 4.76%
Junk bonds or high-yield bonds have enjoyed a nice run, especially in June. Investors probably have started having faith in solid corporate earnings and an oil price rebound. A moderate net supply of junk bonds also contributed to gains in the space. So, when hawkish Fed comments pushed up bond yields, investors probably tapped high-yield bond ETFs providing benchmark-beating yields. HYLD yields 7.37% annually (as of Jul 2, 2018).
WisdomTree Negative Duration High Yield Bd ETF ) – Up 4.51%
Bond ETFs that have negative duration nullify the interest rate risks. Also, the fund HYND produces benchmark-beating yields (around 4.84% annually). This probably proved lucrative for investors.
Sit Rising Rate ETF ) – Up 3.70%
This ETF is a strategic interest rate-hedging tool that gives investors the opportunity to benefit from the rise in the interest rates. The portfolio targets a negative 10-year duration using futures and options on two, five and 10-year maturity Treasury futures contracts. It charges 43 bps in annual fees and expenses.
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Top-Performing Fixed-Income ETFs of 1H
The year 2018 so far has been all about rising rate worries. The Fed enacted two rate hikes in the first half and offered a hawkish guidance for the whole year. The central bank is now planning a total of four rate hikes in 2018, which is contrary to its previous projections of total three rate increases for this year (read: ETF Strategies to Play the 7-Year High Benchmark Yield).
An upbeat U.S. economic recovery, a tight labor market and inflows of steady data from housing and retail market led the Fed’s bullish view about the economy. The Fed upgraded its forecast for 2018 real GDP growth from 2.7% in March to 2.8%. Unemployment was guided down to 3.6% from 3.8% for 2018 and PCE inflation expectations were upped from 1.9% to 2.1% for this year (read: Fed Turns Hawkish: ETF Areas to Win).
The U.S. Treasury bond yields have been on an uptrend since the start of the year with the benchmark yield hitting this year’s high of 3.11% in mid-May. An escalation in the global trade spat put a cap on the yield’s northbound ascent in June and kept the benchmark yield from crossing the 3% mark at the final month of the first half.
Meanwhile, the European Central Bank (ECB) has announced plans of exiting the QE policy by the end of this year. The ECB too appeared upbeat about the inflation momentum. The organization now forecasts annual HICP inflation of 1.7% for 2018 and 2019 (both up from 1.4% guided in March). Recovering oil prices and record employment are expected to push prices up in the coming years (read: Winning & Losing ETFs After ECB's Dovish Exit Plans From QE).
Such developments in the Euro zone could build up to the rising rate environment, but political instability has kept long-term bond yields at check across the pond. The gap between German two-to-10-year bond yields became the tightest in a year in early July.
No wonder, the first half of 2018 was not in favor of fixed-income investing as bond yields and price are inversely related. Against this backdrop, we highlight a few fixed-income ETF options that emerged winners in 1H.
Barclays Inverse US Treasury Aggregate ETN ) – Up 14.63%
This is an inverse bond ETF. The underlying Barclays Inverse US Treasury Futures Composite Index employs a strategy that tracks the sum of returns of periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts.
ProShares Inflation Expectations (RINF - Free Report) ) – Up 4.87%
Higher inflationary expectations have made this inflation-oriented fund a winner. The underlying index — the Citi 30-Year TIPS (Treasury Rate-Hedged) Index — tracks the performance of long positions in the most-recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. It yields 2.99% annually and charges 30 bps in fees.
AdvisorShares Peritus High Yield ETF ) – Up 4.76%
Junk bonds or high-yield bonds have enjoyed a nice run, especially in June. Investors probably have started having faith in solid corporate earnings and an oil price rebound. A moderate net supply of junk bonds also contributed to gains in the space. So, when hawkish Fed comments pushed up bond yields, investors probably tapped high-yield bond ETFs providing benchmark-beating yields. HYLD yields 7.37% annually (as of Jul 2, 2018).
WisdomTree Negative Duration High Yield Bd ETF ) – Up 4.51%
Bond ETFs that have negative duration nullify the interest rate risks. Also, the fund HYND produces benchmark-beating yields (around 4.84% annually). This probably proved lucrative for investors.
Sit Rising Rate ETF ) – Up 3.70%
This ETF is a strategic interest rate-hedging tool that gives investors the opportunity to benefit from the rise in the interest rates. The portfolio targets a negative 10-year duration using futures and options on two, five and 10-year maturity Treasury futures contracts. It charges 43 bps in annual fees and expenses.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>