Due to Zero Interest Rates – Bonds ETFs Sometimes Bring Decent Returns

Bonds have moved into the background with the long- running equity market following the recent financial crisis . But the wind is spinning and interest rates are slowly starting to rise again.

Even though yields may be lower, safe bonds stabilize the deposit. That risk and return can be seen in the context of an overall portfolio, since the portfolio theory of Harry Markowitz .

Bond ETFs in demand like never before

When searching for matching papers in a huge supply is troublesome, bond ETFs are an easy alternative – with the lowest possible fees and risk diversification across multiple bonds traded in an index tracked by the particular bond ETF. The principle is the same as index funds on equities, except that it is based on a bond index.

The large number of securities already creates a broad spread of risk in a fund. Therefore, it does not bother if there are some higher-risk, higher-yielding stocks that improve overall performance. Especially global bonds can score ETFs here. After all, interest rates are much higher in many countries than in Germany. Especially bonds from emerging markets have been able to score for some time.

Although a currency risk is accepted in this case, credit ratings have risen across the board with the continued robust global economy and lower indebtedness. The same applies to corporate bonds. Credit default rates fell to 1.5% last year, well below the historical average of 3.7%. The result was noticeably higher price gains, which were noticeable above all in the lower ranking.

What has probably passed many stock-oriented investors: Borrowing ETFs are getting more popular than they have been for a long time. The inflows of funds in 2017 temporarily exceeded those of equity ETFs. They now account for around 15% of total ETF assets worldwide. The trend is clearly towards emerging market and corporate bonds.

Emerging markets and corporate bonds in focus

One notable example is the performance of the ETF iShares Core Euro Corporate Bond. The ETF, which uses paper from European companies with good to very good credit ratings in industry, utilities and finance, has brought on average almost 6% per year since its launch in 2009. No comparison to the 5-year government bond, which yields 0%.

The iShares JPMorgan USD Emerging Markets Bond ETF brings a 4.45% payout yield. The fund contains bonds issued by various emerging markets on a dollar basis. A good 40% have a credit rating of BB or lower. In the overall risk distribution, the higher-yielding securities provide better overall performance.

Somewhat more is provided by emerging market bond ETFs. Whether the more confusing currency risk is worthwhile, should be considered. With slightly higher risk, but in euro terms, ETFs on high-yield bonds of European companies with lower credit ratings have achieved a performance of more than 6% over the year as a whole.

In a suitable mix, bond ETFs can be quite impressive. Impressive is their low cost ratio between 0.16% and 0.5%. Probably the biggest advantage: there are fund shares in a bond ETF from just € 50, while for some bonds sometimes a minimum of € 1,000 are not enough.