Don’t Forget Bonds! Here are the Best Fixed-Income Plays of 2017

Bonds. Sometimes I feel like they’re the Rodney Dangerfield of the investing world. They don’t get no respect.

But the truth is, they’re a crucial component to your investment portfolio. And just like with stocks, several fixed-income plays have delivered very strong performance this year.

So, let’s take a look at the “Bond Market All Stars” to see who led the performance race, and why. Here’s a Best Bond ETFs in 2017 Screener I created using the tools available to Weiss Ratings Platinum subscribers (You can read about the valuable benefits that come with a membership, and get signed up, by clicking here).

The Screener lists all ETFs with at least 80% of their assets in bonds and a Weiss Rating of at least “C-” (HOLD). I purposefully eliminated the leveraged products backed by firms like Direxion and ProShares to make it a fair comparison, and sorted the list in descending order by year-to-date total returns.

Data Date: 12/19/2017

Topping the list is the iShares International High Yield Bond ETF (HYXU, Rated “C”), with YTD gains of 17.6%. That’s fantastic for an ETF that focuses on bonds, seeing as they historically deliver lower profits than stocks. The $97 million ETF invests in foreign, high-yield bonds. They recently included bonds issued by cable, media, banking, and technology firms based in the U.K., Italy, Japan, and France, among other countries.

Next up are the Vanguard Extended Duration Treasury Index Fund ETF Shares (EDV, Rated “C”) and the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ, Rated “C”). They recently sported YTD gains of 15% and 14%.

These two ETFs invest in so-called zero-coupon U.S. Treasuries. As the name suggests, these securities don’t make traditional interest payments. Instead, they’re sold at a deep price discount up front, and they gradually rise in value as their maturity dates approach. That means you’re earning a phantom yield, or return, over time – just without those periodic cash interest payments.

The thing about funds that invest in zeros is that they have very high “durations,” a key measure of interest rate risk. The higher their duration, the greater their price sensitivity to changes in rates.

That means ETFs like ZROZ and EDV can lose you a ton of money when long-term rates rise, or make you a lot of money when long-term rates fall. Since long-term rates have been falling this year, even as the Federal Reserve has been driving up short-term rates, both funds are near the top of the performance scale for 2017.

Rounding out the top positions are ETFs that invest in foreign bonds, including the SPDR Bloomberg Barclays International Corporate Bond ETF (IBND, Rated “C”) and the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC, Rated “C”). They each generated gains of around 13%, largely because the U.S. dollar spent most of 2017 declining. When foreign currencies climb against the dollar, it drives up the value (in dollar terms) of foreign bonds denominated in those currencies. That gives U.S.-based investors a currency-related performance “kicker.”

What does 2018 hold for these and other bond investments? Only time will tell. But with the economy likely to remain strong, I wouldn’t be surprised to see riskier, high-yield bonds continue to perform well. I’m less enthused about long-term Treasuries, because I think most of their price gains are behind them.

But I’m most bullish of all on higher-yielding, dividend-paying stocks. I’ve been recommending a bunch of them in my High Yield Investing service, and they’re delivering some very nice performance. If you want my specific BUY and SELL recommendations, make sure you check out the service by clicking here.

Finally, I wanted to take this opportunity to wish you and your family a wonderful holiday season!

Until next time,

Mike