One of the biggest themes in the ETF universe in 2012 has been the impressive accumulation of assets by bond funds. Through the first 10 months of 2012, all bond ETFs, U.S-listed and those trading outside the U.S., raked in $114 billion in new assets.
U.S. funds did the bulk of the work, attracting $52.8 billion through the end of October, according to Funds America. That means bond funds are 2012's top asset gatherers among ETFs, putting the asset class well ahead of the almost $36.7 billion hauled in by U.S.-listed emerging markets ETFs.
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With fears of the fiscal cliff high and expectations from some market observers that 2013 could be another bumpy year for stocks, it is reasonable to expect bond ETFs as a group will remain proficient at gathering assets. These 10 bond ETFs could help investors weather potential storms while generating income in the year ahead. In no particular order...
PIMCO Total Return ETF (NYSE:BOND) Perhaps the worst thing that can be said of the PIMCO Total Return ETF, colloquially known as the "Bill Gross ETF," is that the fund's success is not surprising. Really, did anyone expect an ETF with the bond king's name attached to it to be a flop?
A flop BOND is not. Since its February 29 inception date, BOND has accumulated $3.83 billion in assets under management, making it the largest actively managed ETF by a wide margin. More important that superficial statistic is performance. BOND has delivered the goods there as well as the ETF has gained nearly 12 percent since its debut..
iShares Core Total U.S. Bond Market ETF (NYSE:AGG) The iShares Core Total U.S. Bond Market ETF, previously the iShares Barclays Aggregate Bond Fund, makes this list for fans of ETF competition. Not only does the fund offer investors a passively managed equivalent to BOND, it is locked in a serious battle with the Vanguard Total Bond Market ETF (NYSE:BND).
In fact, it is BND's paltry expense ratio of 0.1 percent that likely prompted AGG's own fee reduction to 0.08 percent. Whether or not Vanguard responds and cuts BND's fees next year remains to be seen. Also interesting will be whether or not investors embrace the low fees of AGG and BND over the allure of BOND's active management. The PIMCO offering charges 0.55 percent per year.
PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE:PCY) If surging bond ETF inflows represent a theme, then a sub-theme is soaring assets under management totals for emerging markets debt funds. That theme has been obvious throughout 2012 and the PowerShares Emerging Markets Sovereign Debt Portfolio has been a prime beneficiary.
Not only is PCY large with over $3 billion in AUM, it is a compelling option for income for investors for several reasons. First, is the 30-day SEC yield almost four percent. Second, is the monthly dividend. Third, most of PCY's holdings are rated investment grade, so investors are not taking on significant credit risk with this fund.
Market Vectors Emerging Markets Local Currency Bond ETF (NYSE:EMLC) Sticking with the theme of emerging markets bond ETFs, EMLC represents a fine option for the investor looking to gain exposure to non-dollar asset classes. EMLC and rival funds have shown investors improving credit quality and health balance sheets in the emerging world can translate to solid returns.
EMLC, the WisdomTree Emerging Markets Local Debt Fund (NYSE:ELD) and the iShares Emerging Markets Local Currency Bond Fund (NYSE:LEMB) have all traded noticeably higher in 2012. All three have been prodigious gainers of new assets. If 2013 turns out to be a risk on year, those trends should continue for these ETFs.
SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK) Just some folks writing off junk bond ETFs, JNK and rivals such as the iShares iBoxx $ High Yield Corporate Bond Fund (NYSE:HYG) look to be closing 2012 on a strong note and are flirting with 52-week highs. HYG and JNK are favorite tools for gauging risk appetite because some pros view these ETFs as trading in comparable fashion to stocks.
Savvy traders keep an eye on JNK because its tracking error relative to its index is looser (worse) than HYG's. That means in lieu of a heavily traded inverse junk bond ETF (there is one, though it is thinly traded), traders that want to short junk bonds often short JNK.
Market Vectors International High Yield Bond ETF (NYSE:IHY) If there is superficial problem with HYG and JNK it is that those are the only high-yield bond ETFs the mainstream financial press pays attention to. The derivative problem is that by using HYG and JNK as the indicators for the broader junk bond ETF world, compelling funds go ignored.
The Market Vectors International High Yield Bond ETF is one such fund. When folks were crowing about outflows from HYG and JNK, they were also ignoring one of 2012's better asset-gathering stories. IHY debuted in April and now has almost $202 million in AUM. IHY has also gained more than eight percent since its debut. Anything close to those AUM and performance numbers in 2013 would make for a very successful sophomore year.
Vanguard Short-Term Inflation-Protected Securities Index ETF (NYSE:VTIP) Speaking of ETFs to watch in their sophomore seasons, VTIP merits consideration. The fund debuted in October as Vanguard's first foray into the short-term TIPS market. Since there are scores of TIPS ETFs out there, VTIP encroached on someone else's territory. The iShares Barclays 0-5 Year TIPS Bond Fund (NYSE:STIP) is one example. Again, this tussle could come down to fees. VTIP charges 0.1% per year, just half of what STIP charges.
Market Vectors High-Yield Muni ETF (NYSE:HYD) Municipal bonds defied conventional wisdom in 2012. Early in the year, there was plenty of chatter regarding an increased number of municipal defaults. That chatter proved accurate and there is no getting around the fact that plenty of states, including large ones such as California and Illinois, are not in the best fiscal health.
Investors shrugged off those concerns to send muni bond ETFs soaring. Moreover, investors have shown little reluctance about embracing high-yield muni fare. HYD has performed like a high-beta stock, jumping nearly 18 percent to this point in 2012 while crossing the $1 billion in AUM level.
HYD and its brethren face some important issues in 2013. First, will the tax treatment of muni bonds change for the worse as politicians seek to generate much-needed revenue? Second, for how long will investors keep ignoring municipal defaults as they hunt for yield?
WisdomTree Emerging Markets Corporate Bond Fund (NASDAQ:EMCB) In a year when BOND, and rightfully so, has commanded most of the positive headlines relating to new bond ETFs, it has been hard for other funds to standout. However, the WisdomTree Emerging Markets Corporate Bond Fund has been a standout in its own. Bringing in almost $96 million in just 10 months of trading says as much.
Until recently, emerging markets corporate debt has not been the first destination investors think about when evaluating ex-U.S. bond options. There are signs that is starting to change amid increased issuance of these bonds and high premiums investors are forced to pay on emerging markets sovereign issues.
For those that think EMCB's concept is too narrow or opaque, think again. The ETF has, in a way, been validated by the appearance of not one, but two competitors.
PowerShares Senior Loan Portfolio (NYSE:BKLN) The PowerShares Senior Loan Portfolio, the first ETF to bring senior loans to the masses, has enjoyed an excellent 2012. BKLN is up 9.2 percent and while that lags the performance of HYG and JNK, it is worth noting BKLN's volatility is substantially lower than those rival high-yield funds.
BKLN's success has been a direct result of investors searching for yield and that success if proven by the fund's rapid accumulation of assets. In July, BKLN had $583 million in AUM, but that number jumped to $880 million by late September and then over $1 billion by early October. As of December 7, BKLN was home to more than $1.4 billion in AUM.
As a high-yield fund, BKLN is a worthwhile risk appetite gauge and that validates it as a bond ETF to watch in 2013. What will also be interesting is that 2013 will be BKLN's first full trading year with a year competitor. The Pyxis/iBoxx Senior Loan ETF (NYSE:SNLN) debuted in early November.
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