By Todd Rosenbluth, CFRA
In 2018, as investors positioned their portfolios for a series of Fed rate hikes, short-term bond funds offered by the three largest ETF asset managers generated modest gains and outperformed the nearly flat Bloomberg Barclays Aggregate index.
SPDR Portfolio Short Term Corporate Bond (SPSB), up 1.5% year to date through July 12, was slightly stronger than the iShares Short-Term Corporate Bond (IGSB) and Vanguard Short-Term Corporate (VCSH), which rose 1.3% and 0.9%, respectively. These funds were aided by their limited interest-rate sensitivity. Despite the nearly identical expense ratios – with a 0.06% expense ratio IGSB is one basis point cheaper than its peers – the performance difference stemmed more from SPSB incurring duration of approximately one year less than peers.
However, investor expectations that the Federal Reserve would cut interest rates in the second half of 2019 amid slowing global economic growth has had the inverse effect. The yield of the 10-year Treasury bond has shrunk to nearly 2% from 2.66% at the start of the year and long-term focused fixed income ETFs have benefitted from higher duration. Interest-rate sensitivity shifts from being a risk to a reward when rates are falling rather than rising.
Vanguard Long-Term Corporate Bond (VCLT) has the highest average duration of the trio of long-term products with 13.7 years. It’s no surprise that VCLT’s 14.6% return this year is slightly stronger than iShares Long-Term Corporate Bond (IGLB) and SPDR Portfolio Long Term Corporate Bond (SPLB), both equal to 14.2; the pair have fractionally less interest-rate sensitivity. Despite their strong returns in 2019, there’s approximately $6 billion in the three funds or 25% of what’s in VCSH alone. In 2018, these three long-term bond ETFs lost more than 7% as Fed hikes and expectations of higher rates proved more problematic.
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Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.