In this piece, we will take a look at the ten best performing bond ETFs in 2023. If you want to skip our introduction to the bond market then take a look at 5 Best Performing Bond ETFs in 2023.
The bond market is one of the biggest financial markets in the world and one that also often plays a crucial role in politics. It was pushed to the limelight of global affairs a year back from now after former British Prime Minister Lizz Truss took over charge of the government. At the time, the British economy was facing one of its worst crises in history due to high fuel, energy, and food inflation that came from the Russian invasion of Ukraine. Britain is one of the most heavily debt financed nations in the world, and its bond interest is paid through tax revenues. In order to stimulate growth, the Truss administration announced a plan to reduce taxes, raise more debt, and provide businesses with incentives.
This created chaos in the bond market as investors became worried about the ability of the government to fund its existing bond debts and as a result, British bond yields soared to nearly 5% for 30 year bonds. A bond's yield is the coupon interest payment divided by its price, and a higher reading is indicative of instability in the market since it shows a price drop. The high yields also affected the value of the Pound, which slumped to a record low to nearly touch parity with the U.S. dollar.
The result of all this was the resignation of Ms. Truss as prime minister, making her one of shortest term premiers in Britain's history. A bond market turmoil led to the resignation of the leader of one of the world's largest economies. Naturally, this shows just how big the global bond market is. Quantifying its size, data compiled by the World Economic Forum, the global bond market was worth more than $100 trillion as of Q3 2022. For comparison, consider the fact that the five largest stock exchanges in the world had a combined market capitalization of roughly $60 trillion during January 2023 and the scope of the bond market becomes clear.
In fact, bonds and equities are two of the biggest sources of funding for firms with bonds being the only one of these that are used by governments to finance their growth, budget deficits, or other operations. For firms, debt is often used for its tax exemption advantages, to keep ownership structures intact, develop good credit, and cheaply finance long term growth. On the other hand, too many loans can affect a firm's credit rating and lead to funding difficulties later on. For investors, the primary advantage of debt financing is that firms are obligated to pay back their debt in case of liquidation while equity owners do not have this luxury. Of course, from the investor perspective, equity financing also has its advantages, the biggest of which is perhaps the growth in value if the stock is traded in public or private markets. So while stock holders are able to enjoy share price appreciation in case a firm's management executes well, bond holders have to stay content with regular interest payments as their return.
While bond investors profit from either directly providing capital or by buying and selling bonds, others can also profit from the market. One way to do this is through an exchange traded fund (ETF). An ETF is an investment vehicle that allocates capital to different financial instruments and assets such as stocks, bonds, and commodities. For bond ETFs, the vehicle owns bonds and its shares are traded on a stock market. Naturally, the price of the bond ETF reflects changes in sentiment and performance for the entity that is using the bond to meet their funding or financing environment. An indication of the inability to make interest or principal payments causes a downturn in the ETF while the opposite makes investors more confident about their funds and their future.
The bond market is quite important these days due to a shift in the global financial and economic environment over the course of the past year and a half. Bond yields are sensitive to interest rates, and they fall as the rates increase. This is because while a bond's yield can vary, its interest or coupon payments remain fixed since they are based on a principal amount and the prevailing interest rate at the time the security was issued. Central banks have been on an interest rate hike spree as of late, and as a result, the bond market has seen significant outflows also influenced by a deteriorating global economic condition. Data from Reuters shows that during the first three quarters of 2022, more than $100 billion in capital flew away from bond markets - an occurrence that was particularly painful for developing countries. The fund outflow came right when the developing world was facing record inflation fueled by high oil prices due to the Russian invasion of Ukraine and a stronger dollar as investors flocked to the greenback for safety and high interest rates. The bond market rout further depressed their currencies and made government financing difficult right at the time it was badly needed. Some of these countries have still not recovered from the 2022 shock, and several are working with the International Monetary Fund (IMF) for fiscal stability.
Putting all of this together, it's clear that the bond market is equally, if not more, important to global stability as the stock market. Today, we'll take a look at some of the best performing bond ETFs in 2023, with the top ones being BondBloxx CCC Rated USD High Yield Corporate Bond ETF (NYSE:XCCC), Janus Henderson B-BBB CLO ETF (BATS:JBBB), and Direxion Daily 20+ Year Treasury Bear 3X Shares (NYSE:TMV).
10 Best Performing Bond ETFs in 2023
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Our Methodology
To compile our list of the best bond ETFs in 2023, we first made a list of the 20 largest funds. Then, those with the greatest share price appreciation year to date were selected and are listed below.
10 Best Performing Bond ETFs in 2023
10. ProShares High YieldInterest Rate Hedged (BATS:HYHG)
Year To Date Share Price Gains: 9.60%
ProShares High YieldInterest Rate Hedged (BATS:HYHG) is an ETF that enables investors to protect themselves from rising treasury interest rates. The fund has net assets of $120 million and it was set up in 2013. The share price has gained close to 10% year to date, and the fund divides its investments into long and short positions. It takes long positions in high yield corporate bonds and short positions in Treasury bonds. All bonds are denominated in the U.S. dollar.
Just like Janus Henderson B-BBB CLO ETF (BATS:JBBB), BondBloxx CCC Rated USD High Yield Corporate Bond ETF (NYSE:XCCC), and Direxion Daily 20+ Year Treasury Bear 3X Shares (NYSE:TMV), ProShares High YieldInterest Rate Hedged (BATS:HYHG) is one of the best performing bond ETFs in 2023.
9. PGIM Floating Rate Income ETF (NYSE:PFRL)
Year To Date Share Price Gains: 9.60%
PGIM Floating Rate Income ETF (NYSE:PFRL) is an ETF part of the PGIM fund family. The fund invests primarily in loans, and the ETF has stakes in the debt of some of the most well known companies in the stock market such as Uber Technologies, Inc. (NYSE:UBER) and American Airlines Group Inc. (NASDAQ:AAL). It has a yield of 7.66% and is one of the youngest fund on our list since it was set up in 2022.
8. Pacer Pacific Asset Floating Rate High Income ETF (NYSE:FLRT)
Year To Date Share Price Gains: 10.09%
Pacer Pacific Asset Floating Rate High Income ETF (NYSE:FLRT) invests with the aim of protecting investors against interest rate hikes - making its 10.09% in year to date share price gains understandable in today's environment where most investors are uncertain about the duration of the Federal Reserve's high interest rates or if data will allow the central bank to pursue more hikes. It has net assets worth $139 million and the top ten investments account for 17% of the portfolio.
7. ProShares UltraShort 20+ Year Treasury (NYSE:TBT)
Year To Date Share Price Gains: 10.48%
ProShares UltraShort 20+ Year Treasury (NYSE:TBT) is another fund part of the ProShares fund family. It is one of the largest funds on our list so far, due to its net assets of $495 million. As the name suggests, the ProShares UltraShort 20+ Year Treasury (NYSE:TBT) invests in long dated U.S. Treasury bonds, but it is an inverse fund that seeks to profit when a 20 year treasury index is dropping in value. Naturally, its daily returns have soared in September, as the underlying index fell due to worries that the Federal Reserve might have room for more interest rate hikes.
6. ProShares UltraPro Short 20+ Year Treasury (NYSE:TTT)
Year To Date Share Price Gains: 10.62%
ProShares UltraPro Short 20+ Year Treasury (NYSE:TTT) is a much smaller version of the ProShares UltraPro Short 20+ Year Treasury (NYSE:TBT) ETF. While the former has $495 million in net assets, this ETF has $66 million. Its portfolio is concentrated primarily in U.S. Treasury bonds dated between 2048 and 2052.
BondBloxx CCC Rated USD High Yield Corporate Bond ETF (NYSE:XCCC), ProShares UltraPro Short 20+ Year Treasury (NYSE:TTT), Janus Henderson B-BBB CLO ETF (BATS:JBBB), and Direxion Daily 20+ Year Treasury Bear 3X Shares (NYSE:TMV) are some of the best performing bond ETFs in 2023.