When interest rates rise, bond investors tend to get itchy, because the values of their fixed-rate bond holdings are suddenly worth relatively less than the yields on newly-issued bond instruments.
Conversely, when interest rates fall, existing fixed-rate bonds become more attractive, leading to an increase in demand and sending bond prices higher. Newly issued bonds have lower interest rates, which, in part, leads to the dynamic of higher bond prices and lower bond yields.
With the coronavirus pandemic, the global economy fell into a recession in 2020, which led to central banks such as the Federal Reserve to employ measures to support the markets and cut interest rates. Persistent anxiety and uncertainty in the financial markets prompted investors to move their money into safe-haven assets, such as bonds including U.S. Treasuries. As a result, bond prices in 2020 rose dramatically while bond yields fell to historic lows.
For investors who want access to bond Investments, fortunately, there are bond exchange traded funds (ETFs), which are funds that contain a basket of debt instruments that include both long and short-duration bonds. These bond ETFs also employ other products to boost returns, including interest rate swaps, convertible securities, floating rate bonds, and other alternative plays. Below are five of the top bond ETFs to consider for 2021.
All figures are current as of November 05, 2020
- When interest rates rise, existing holdings of fixed-rate bondholders offer lower yields than new issuances.
- Conversely, when interest rates fall, existing fixed-rate bonds become attractive, which spurs demand and sends bond prices higher.
- Fixed income investing can be accomplished through bond ETFs to help investors earn a steady return in a complex market.
Direxion Daily 20+ Year Treasury Bull (TMF) & Bear (TMV) 3X Shares
Direxion, a top manager of leveraged strategies, offers top performance in the bond category. By taking a three-times leveraged position on the 20-year Treasury, the fund strives to achieve high returns by replicating the performance of the ICE U.S. Treasury 20+ Year Bond Index. Instruments used to achieve its objective include the iShares 20+ Year Treasury Bond ETF, iShares 20+ Year Treasury Bond ETF SWAPs, and cash.
- Price: $38.14
- Average volume: 516,000
- Assets under management: $284 million
- Yield: .39%
- YTD return: 48%
- Expense ratio: 1.09%
The iShares Convertible Bond (ICVT)
The iShares Convertible Bond ETF offers investors a convertible bond strategy that seeks to track the holdings and return of the Bloomberg Barclays U.S. Convertible Cash Pay Bond > $250MM Index. The securities in the index can be converted to cash or equity, which consequently makes their trading price less sensitive to interest rate changes.
The fund aims to keep a minimum of 90% of its assets in securities from the underlying index but also invests in futures, options, and swaps. Top holdings in the fund include Tesla Inc., Snap Inc., Southwest Airlines, and Dish Network Corporation.
- Price: $86.06
- Average volume: 79,000
- Assets under management: $867 million
- Yield: 1.32%
- YTD return: 34.44%
- Expense ratio: 0.20%
The FlexShares Credit-Scored U.S. Long Corporate Bond Index Fund (LKOR)
The FlexShares Credit-Scored U.S. Long Corporate Bond Index Fund offers investors a customized bond portfolio that seeks to track the holdings and return of the Northern Trust Credit-Scored U.S. Long Corporate Bond Index, which uses a proprietary scoring method to select investment-grade bonds with a maturity of 10 years or more, that are issued by companies with at least $500 million in outstanding principal.
From that universe, the fund chooses debt securities based on factors like company management efficiency, profitability, and market solvency. Top holdings include Verizon Communications Inc., Wells Fargo & Company, Goldman Sachs Group, Inc., Union Pacific Corporation, The Home Depot, Inc., and Visa Inc.
- Price: $63.72
- Average volume: 7,452
- Assets under management: $46 million
- Yield: 3.16%
- YTD return: 12.31%
- Expense ratio: 0.22%
The SPDR Portfolio Long Term Corporate Bond ETF (SPLB)
The SPDR Portfolio Long Term Corporate Bond ETF is issued by State Street SPDR and offers investors an investment option indexed to the Bloomberg Barclays Long U.S. Corporate Index, which includes long term investment-grade corporate bonds, and a high concentration in the industrials sector. More than 80% of the fund comprises bonds with a duration of at least 15 years. Top holdings include GE Capital International Funding Company Unlimited Company, AT&T, CVS Health Corp, Verizon Communications, and Microsoft Corporation.
- Price: $32.44
- Average volume: 426,000
- Assets under management: $985 million
- Yield: 3.19%
- YTD return: 10%
- Expense ratio: 0.07%
The VanEck Vectors Investment Grade Floating Rate ETF (FLTR)
The VanEck Vectors Investment Grade Floating Rate ETF offers conservative investors a floating rate bond portfolio with steady returns. Using an index replication strategy, the fund seeks to match the holdings and return of the MVIS U.S. Investment Grade Floating Rate Index, which includes investment-grade floating-rate bonds from corporate issuers. Top holdings include Goldman Sachs, Morgan Stanley, Citigroup, Verizon Communications, and Wells Fargo.
- Price: $25.20
- Average volume: 26,809
- Assets under management: $440 million
- Yield: 1.79%
- YTD return: .97%
- Expense ratio: 0.14%
While bond ETFs can effectively mitigate general risk, the underlying investments can specifically suffer from credit risk, call risk, inflation risk, and liquidity risk.
The Bottom Line
Fixed income investing can become infinitely more complex when interest rates are fluctuating. Bond ETFs offer strategies to help fixed-income investors remain in positive territory, in these uncertain and volatile markets.