Long-term bonds have turned in an impressive year-to-date (YTD) 2016 performance, even in the face of rising interest rates. Investors in long-term bond exchange-traded funds (ETFs) have been enjoying positive returns far outpacing the Standard & Poor’s 500 Index. Much of the surge in bond prices can be attributed to their appeal as a safe haven during times of stock market volatility, of which there has been plenty thus far in 2016. ETFs investing in long-term investment-grade corporate bonds have gained 2.59% YTD. However, the real story has been ETFs investing in long-term government bonds, which have gained 7.35% YTD. Bond guru Jeffrey Gundlach correctly predicted a 2014 rally in Treasury bonds in anticipation of increasing interest rates, and he did so again late in 2015, even after the Federal Reserve Board hiked the rate. Gundlach believes the Federal Reserve Board’s willingness to increase rates further will keep a lid on stock prices, making Treasury bonds an attractive alternative investment.
There are no long-term bond ETFs in negative YTD 2016 territory, and the top performers are showing double-digit returns. The top half of the list is dominated by government bond ETFs, while the bottom half contains primarily corporate bond ETFs. For a clearer picture of how government bonds are outperforming corporate bonds, consider the top three Vanguard long-term bond ETFs. The Vanguard Long-Term Government Bond ETF (NYSEARCA: VGLT) shows that the Vanguard Government Bond Index is up 7.3% YTD, while the Vanguard Long-Term Corporate Bond ETF (NYSEARCA: VCLT) shows that the Vanguard Corporate Bond Index is up 5.7%. The Vanguard Long-Term Bond ETF (NYSEARCA: BLV), which invests in both investment-grade corporate bonds and government bonds, is up 7.2% YTD. It just so happens that its portfolio is currently invested 47% in government and government-related bonds and 43% in corporate bonds.
PIMCO 25+ Year Zero Coupon US Treasury ETF
Among the best performing long-term bond ETFs YTD in 2016 is the PIMCO 25+ Year Zero Coupon US Treasury ETF (NYSEARCA: ZROZ), which had all of its $246.11 million in assets under management (AUM) invested in Treasury Principal STRIPs, as of March 24, 2016. STRIPs, an abbreviation of separate trading of registered interest and principal securities, are a type of zero coupon bond that offer no-interest payments. Bondholders receive a single principal payment when the bond matures. The fund’s objective is to track the BofA Merrill Lynch Long US Treasury Principal STRIPS Index. The fund’s YTD return in 2016 is a remarkable 11.91%, and it has returned 15.77% over the last five years. Its expense ratio is a low 0.16%.
Vanguard Extended Duration Treasury ETF
The Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV) also invests primarily in Treasury STRIPS, except it tracks the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. The $504.67 million fund has a gain of 11.77% YTD in 2016, and its five-year return is 15.20%. Its expense ratio is a rock bottom 0.10%.
Market Vectors® AMT-Free Long Municipal Index ETF
Turning to the worst performing long-term bond ETFs YTD in 2016, the Market Vectors AMT-Free Long Municipal Index ETF (NYSEARCA: MLN) had $145.82 million in AUM invested primarily in publicly-traded tax-exempt bonds, as of March 24, 2016. The fund seeks to track the performance and yield of the Barclays AMT-Free Long Continuous Municipal Index, which consists of state-, local- and public agency-issued bonds. The fund has gained 1.41% YTD, and its five-year return is 7.56%.
iShares iBonds March 2023 Term Corporate
The iShares iBonds March 2023 Term Corporate (NYSEARCA: IBDD) is an ETF with 98.27% of its $68 million in AUM invested in investment grade corporate bonds maturing after March 31, 2022 and before April 1, 2023. The fund seeks to replicate the performance of the Barclays 2023 Maturity Corporate Index, which includes issues from financial, industrials and utilities companies. The two-year-old fund has returned 1.76% YTD in 2016.