Best and Worst Bond ETFs of 2012

by on December 31, 2012 | ETFs Mentioned:

This was the year of bond ETF growth, with massive inflows into this asset class over the last few months. After the financial crisis, investors have flocked to this consistent and often high-yielding asset class. In the last month some have backed off as worries of the fiscal cliff spill over into investment practices, but this long-term market will still end this year with some of the highest cash inflow of the year [For updates on all new ETFs, sign up for the free ETFdb newsletter].

Below, we highlight a handful of country-specific ETFs that have surpassed all others since the beginning of 2012 (note that inverse and leveraged ETFs are excluded from this list):

Ticker ETF YTD Return
 ITLY PowerShares DB Italian Treasury Bond Futures ETF  32.0%
PCY PowerShares Emerging Markets Sovereign Debt Portfolio  14.6%
HYD Market Vectors High Yield Municipal Index ETF 10.4%
  1. PowerShares DB Italian Treasury Bond Futures ETF (ITLY, B-), Up 32.0%:  This top earner measures the performance of a long position in Italian debt, which has vastly improved since this time last year. Another region-specific ETF, Market Vectors LatAm Aggregate Bond ETF (BONO), has gained 11% this year alone, as the global economy starts to turn around.
  2. PowerShares Emerging Markets Sovereign Debt Portfolio  (PCY, B), Up 14.6%: This emerging market bond portfolio tracks the potential returns of liquid government bonds issued by approximately 22 emerging-market countries. USD Emerging Markets Bond Fund (EMB) also outperformed the market, returning 11.5% by the end of 2012.
  3. Market Vectors High Yield Municipal Index ETF (HYD, A), Up 10.4%: This ETF has a 25% weighting in investment-grade triple-B bonds and a 75% weighting in non-investment grade bonds [also see Total Bond Market ETFdb Portfolio].

Below are three  bond ETFs that missed out the most over the past year, and all of them focused on the U.S. Treasury:

Ticker ETF YTD Return
STPP US Treasury Steepener ETN -12.6%
EDV Extended Duration Treasury ETF -3.8%
TRSY Broad US Treasury Index Fund -1.8%
  1. US Treasury Steepener ETN (STPP, C), Down 12.6%: The biggest loser this year, this ETN employs a strategy that seeks to capture returns that are potentially available from either a “steepening” or “flattening” of the U.S. Treasury yield curve through a notional rolling investment in U.S. Treasury note futures contracts. Investing in U.S. Treasury bonds has been a poor strategy over the last few years, so it is no surprise that this ETN  has done so poorly [see Free Report: How To Pick The Right ETF Every Time].
  2. Extended Duration Treasury ETF (EDV, A-), Down 6.0%: This Vanguard ETF measures the investment return of Treasury STRIPS with maturities ranging from 20 to 30 years, and it has yet to recover from the financial downturn in the United States.
  3. Broad US Treasury Index Fund (TRSY, C+), Down 1.8%: By tracking the performance of the three most recently issued two-year, three- year, five-year, seven-year, 10-year and 30-year U.S. Treasury notes and bonds, this was the last of only three funds that had negative returns this year.

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Disclosure: No positions at time of writing.