Following dovish commentary from the Federal Reserve Wednesday, 10-year Treasury yields finished the day lower by nearly 1%, extending the year-to-date decline to 22.3%.
That tumble has been a boon for an array of fixed income exchange traded, particularly those of the longer duration variety. The Vanguard Total Bond Market ETF (NYSEArca: BND) and the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) are two of this year’s top-10 asset-gathering ETFs with combined inflows of over $9.6 billion. [Core Bond ETF Building Blocks]
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) and the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) have impressed as well as, hauling in $1.57 billion and $1.74 billion in new assets, respectively.
Though to a lesser extent in dollar terms, Build America Bond ETFs have been sturdy in the asset-gathering department. More importantly, the PowerShares Build America Bond Portfolio (NYSEArca: BAB) and the SPDR Nuveen Barclays Build America Bond ETF (NYSEArca: BABS)are delivering the goods in terms of performance. [Build America Bond ETFs Contend With Rate Risk]
BABS, the smaller of the two ETFs, has surged 14.7% this year, a performance that is more than quadruple the returns offered by AGG and BND and more than double the returns of the S&P 500. The $693.2 million BAB has impressed as well with a 9.7% year-to-date gain. Despite a sharp intraday reversal Wednesday by U.S. stocks following the Fed minutes, just 17 ETFs hit new 52-week highs. BAB and BABS were two of those 17%. [Another Look at BAB ETFs]
Falling Treasury yields have helped because Build America Bond are not short duration fixed income fare. BAB’s effective duration is 8.63 years while the modified adjusted duration on BAB is 12.82 years, according to State Street data.
Assuming Treasury yields continue to fall, BAB and BABS will benefit, particularly because they are the most recognized names in this corner of the bond ETF market. PIMCO recently shuttered the PIMCO Build America Bond ETF (NYSEArca: BABZ).
Investors have been drawn to BAB and BABS this year. BABS, the State Street offering, has added $36.7 million in new assets since the start of the year. That is more than 42% of the ETF’s current assets under management tally. BAB, the PowerShares ETF, has gained $39.1 million in new assets, according to issuer data.
PowerShares Build America Bond Portfolio
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of AGG and TLT.