There is no denying that 2014 has been a year to remember for fixed income exchange traded funds.
That much was on display in October when U.S. bond ETFs hauled in $17.7 billion in new assets, easily surpassing the monthly record set in February. On a global basis, bond ETFs have seen assets by $78.6 billion, or 22%, to $430 billion. [Bond ETFs Dominate October Inflows]
Add to that, BlackRock’s recently published 2014 U.S. Institutional ETF Usage Report highlighted bond ETFs as an area of increased ETF usage by institutional investors in 2015.
However, no bond ETFs can measure up to the PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) and the Vanguard Extended Duration Treasury ETF (NYSEArca: EDV) in terms of 2014 performance. ZROZ and EDV have posted an average year-to-date return of 46%. Put simply, ZROZ is the best-performing non-leveraged ETF of any type this year while just three ETFs, including ZROZ, have outpaced EDV.
With inflation expectations muted heading into 2015, EDV and ZROZ could be in for another strong year. EDV and ZROZ hold Treasuries where the coupon has been stripped out and those types of bonds are among the most vulnerable to inflation.