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Ratings Matter For Bond ETFs, Too

February 15, 2017: 12:27 PM ET

Analyst ratings are not always perfect, but there are some indications that some research is getting it right when it comes to exchange traded funds.

That applies to fixed-income ETFs, too, one of the fastest-growing segments of the ETF space. On a global basis in January, bond ETFs saw inflows of $16.6 billion with $13.6 billion of that being allocated to US-listed bond ETFs. That was the best month of bond ETF inflows since February 2015.

Investors affinity for fixed-income ETFs in January came after they poured $92 billion into the asset class last year, a record for a single year. In a note out Tuesday, CFRA Research highlighted the 2016 performance of the bond ETFs the research firm rates Overweight. Following those ETFs proved rewarding.

“In 2016, the Overweight ranked fixed income ETFs had a 3.23 percent total return, ahead of the 2.65 percent of the aggregate index. While the Underweight ranked ETFs gained 3.78 percent, those ETFs have lagged over the longer-term. Our least favored ETFs lost 0.40 percent on a three-year annualized basis, underperforming the 2.96 percent total return for the index. In contrast, Overweight ETFs gained 3.45 percent,” said CFRA.

Related Link: Ratings Matter For Some ETFs

The performance of CFRA's Overweight bond ETFs topped the average return of 2.45 percent generated by the iShares Core U.S. Aggregate Bond ETF (NYSE: AGG) and the Vanguard Total Bond Market ETF (NYSE: BND) last year.

The iShares Core U.S. Aggregate Bond ETF (NYSE: ISTB) has an effective duration of less than three years, putting investors at the shorter end of the curve for a low fee of just 0.08 percent per year. ISTB has a 30-day SEC yield of 1.9 percent.

Investors looking for more yield without the duration risk of traditional junk bond ETFs can tap the PIMCO 0-5 Year High Yield Corporate Bond ETF (NYSE: HYS) and the SPDR Bloomberg Barclays Short Term High Yield Bond ETF (NYSE: SJNK).

SJNK has a modified adjusted duration of just 2.2 years with a tempting 30-day SEC yield of 5.2 percent.

“Investors who want to earn a higher yield, while taking on limited interest rate risk, have some strong, yet more expensive, ETFs to consider. Both SPDR Bloomberg Barclays Short Term High Yield (SJNK) and PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS) earn top rankings from CFRA due to their high 30-day SEC yields and moderate duration, which offset a negative input for credit risk. HYS has a higher expense ratio (0.55 percent vs. 0.40 percent) than SJNK, but has slightly less exposure to bonds rated CCC or lower. The 72-basis point performance difference in 2016 between these ETFs is a reminder that products that sound the same are often not the same,” noted CFRA.

HYS, ISTB and SJNK are rated Overweight by CFRA.

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