Bond exchange-traded funds (ETFs), unlike stock ETFs, are fixed-income funds that enable investors to earn a regular income from interest payments. Many bond ETFs focus on municipal, corporate, government, and international debt. Others track benchmarks such as the Bloomberg U.S. Aggregate Bond Index. Investors may also purchase bond ETFs that have specific ranges of maturity dates.
Learn which bond ETFs are among the best funds for rising interest rates and thus worth considering in the market conditions of 2022.
- The bonds market, as measured by the Bloomberg U.S. Aggregate Bond Index, has underperformed the broader market.
- The bond exchange-traded funds (ETFs) with the best one-year trailing total return are XMPT, FMHI, and ANGL.
- The top holdings of these ETFs are, respectively, the Nuveen AMT-Free Municipal Credit Income Fund of Benef Interest (NVG), the Buckeye Ohio Tobacco Settlement 5% due on June 1, 2055, and the Kraft Heinz Foods Co. 4.375% corporate bonds due on June 1, 2046.
Best Bond Funds for Rising Interest Rates
The bond market’s outlook in 2022 is changing due to recent and anticipated actions by the Federal Reserve (Fed), the U.S. central bank, as it attempts to control inflation. There are two significant pieces of this strategy:
- The Fed is forcing through an aggressive series of increases in lending rates to cool prices.
- It ended its pandemic-era bond-buying program in Spring 2022. This latest version of quantitative easing meant buying bonds on the open market in order to keep money flowing through the market during the COVID-19 pandemic.
There are 315 bond ETFs that trade in the United States, excluding inverse ETFs, leveraged ETFs, and ETFs with fewer than $50 million in assets under management (AUM).
The overall bond market return, as measured by the Bloomberg U.S. Aggregate Bond Index, has underperformed the broader market over the past 12 months, with a total return of -3.9% compared to the S&P 500’s total return of 28.0% as of Dec. 16, 2021. The best performing bond ETF, based on performance over the past year, is the VanEck CEF Muni Income ETF (XMPT).
The top three bond ETS to consider for 2022 are:
- VanEck CEF Muni Income ETF (XMPT)
- First Trust Municipal High Income ETF (FMHI)
- VanEck Fallen Angel High Yield Bond ETF (ANGL)
Below, we’ll look at each of these bond ETFs and evaluate why they might be smart investments for 2022. All numbers below are as of Dec. 19, 2021.
1. The VanEck CEF Muni Income ETF (XMPT)
- Performance Over One-Year: 9.2%
- Expense Ratio: 2.32%
- Annual Dividend Yield: 4.13%
- Three-Month Average Daily Volume: 41,738
- Assets Under Management: $214.6 million
- Inception Date: July 12, 2011
- Issuer: VanEck
XMPT enables investors to access the municipal bond market by replicating as closely as possible the price and performance of the S-Network Municipal Bond Closed-End Fund Index. The benchmark tracks the performance of the U.S.-listed closed-end funds that buy securities in the U.S.-dollar-denominated tax-exempt market. Despite investing in closed-end funds, its approach provides great diversity of exposure in fixed-income securities of varying durations. The ETF offers the potential of a high level of tax-exempt income, and it may generate yields higher than most other fixed-income investments.
The fund’s top three holdings are three different bond funds: the Nuveen AMT-Free Municipal Credit Income Fund of Benef Interest (NVG), the Nuveen Quality Municipal Income Fund of Benef Interest (NAD), and the Nuveen AMT-Free Quality Municipal Income Fund of Benef Interest (NEA).
2. The First Trust Municipal High Income ETF (FMHI)
- Performance Over One-Year: 7.9%
- Expense Ratio: 0.55%
- Annual Dividend Yield: 2.91%
- Three-Month Average Daily Volume: 47,814
- Assets Under Management: $378.9 million
- Inception Date: Nov. 1, 2017
- Issuer: First Trust
The First Trust Municipal High Income ETF is an actively managed fund that primarily aims to provide federally tax-exempt income to investors. The fund keeps a minimum of 80% of its net assets in municipal debt securities whose interest proceeds are exempt from regular federal income taxes. FMHI’s largest exposure is in debt securities that have a maturity of 15 to 19.99 years.
The fund’s top three holdings are Buckeye Ohio Tobacco Settlement 5% due on June 1, 2055; Black Desert PUB Infrastructure Dist UTAH 4% due on March 1, 2051; and Canyon Pines Metropolitan District Co SPL IMPT Dist 1 3.75% due on Dec. 1, 2040.
3. The VanEck Fallen Angel High Yield Bond ETF (ANGL)
- Performance Over One-Year: 7.0%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 4.43%
- Three-Month Average Daily Volume: 1,701,880
- Assets Under Management: $5.2 billion
- Inception Date: April 10, 2012
- Issuer: VanEck
The VanEck Fallen Angel High Yield Bond ETF tracks the price and performance of the ICE U.S. Fallen Angel High Yield 10% Constrained Index. The fund comprises below-investment-grade corporate bonds that were originally issued as investment-grade corporate bonds. At least 80% of ANGL’s assets are invested in securities that make up the fund’s benchmark index.
The fund provides fixed-income securities exposure to debt in the United States, Italy, the United Kingdom, Germany, France, Canada, and elsewhere. Top holdings include Kraft Heinz Foods Co. (KHC) 4.375% corporate bonds due on June 1, 2046; Sprint Capital Corp. 6.875% corporate bonds due on Nov. 15, 2028; and Sprint Capital 8.75% corporate bonds due on March 15, 2032.
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