The Magic 6%: These 5 Bond ETFs Now Offer Stock-Like Returns As Treasury Yields Jump To Multi-Decade Highs

Zinger Key Points
  • Global bond market's tough 2022 extends into 2023 with soaring Treasury yields.
  • While nominal yields surge, positive "real rates" emerge amid lower inflation.

With escalating interest rates and inflationary pressures, the resiliency of bond investments is being put to the test. Investors find themselves watching helplessly as bond prices undergoe a relentless downward spiral, battered by the unrelenting blows of surging borrowing costs.

The tumultuous events of 2022 bear witness to this challenge, as the global bond market endured one of its most turbulent years on record. Hopes were high for a turnaround at the onset of 2023, yet reality proved otherwise. The bond market’s sell-off persisted with Treasury yields soaring to multi-decade highs.

The 10-year Treasury yield briefly hit 4.33% yield this week, surging to levels last seen in October 2022, and in 2007, while the duration-sensitive 30-year yield hit 4.42%, the highest since the summer of 2011.

Chart: US Treasury Yields Soared In August

These yields acted as a gravitational force, exerting influence over the broader bond market. As the world’s preeminent risk-free rate witnesses a surge, a chain reaction is set in motion, resulting in a universal uptick in bond yields that spares no issuer.

However, as with every trade-off, there’s a catch. Witnessing bond markets yielding close to or surpassing the 6% annual mark – not far from the Dow Jones Index‘s 6.6% annualized return over the past three decades – is sparking the interest of even those who once regarded bonds as a sacrificial lamb to the inflationary onslaught.

Indeed, while the Federal Reserve remains steadfast in its stance against short-term rate reductions, a downward trend in inflation has also taken shape over the past year. This, in turn, has given rise to positive “real rates” in the bond market – a configuration largely foreign to an era defined by ultra-accommodative monetary policies and rates that hovered perilously close to zero.

Read now: How to Buy Treasury Bonds

What Does The Yield To Maturity Mean For A Bond ETF?

In the universe of bond investing, the concept of yield to maturity (YTM) reigns supreme, representing the potential annualized return an investor may glean from holding a bond until its maturity date.

However, when applied to the intricate world of exchange-traded funds (ETFs) housing an array of bonds, caution must be exercised. While the YTM offers a glimpse into the potential return from holding an ETF until its underlying bonds reach maturity, the reality rarely involves such a straightforward definition, since bond ETFs do not commonly hold securities until maturity.

One should note that the YTM assumes reinvestment of coupon payments at the same yield, an assumption not always perfectly aligned with real-world scenarios.

Nonetheless, despite its intricacies, the YTM remains a valuable benchmark for assessing the comparative potential of various bond ETFs, offering investors an informative lens through which to evaluate potential returns.

5 Bond ETFs Delivering Over 6% Yield To Maturity

  1. iShares BBB Rated Corporate Bond ETF LQDB

Attractive yields are not exclusive to the realm of speculative securities. Enter American BBB-rated corporate bonds – the last frontier before crossing into high-yield territory. With the iShares BBB Rated Corporate Bond ETF, investors gain access to an index comprising BBB (or equivalent) fixed-rate U.S. dollar-denominated bonds issued by corporate entities, both domestic and international.

  • Average Yield to Maturity: 5.94% as of Aug. 17, 2023
  • Year-to-date Return: 1.43%
  • Expense Ratio: 0.15%

2. iShares 10+ Year Investment Grade Corporate Bond ETF IGLB

Venturing deeper into investment-grade territory, extending maturity to over a decade unveils yields of 6%. The iShares 10+ Year Investment Grade Corporate Bond ETF provides exposure to U.S. dollar-denominated investment-grade corporate bonds with maturities surpassing 10 years.

  • Average Yield to Maturity: 5.97% as of Aug. 17, 2023
  • Year-to-date Return: 0.17%
  • Expense Ratio: 0.04%

3. iShares iBoxx $ High Yield Corporate Bond ETF HYG

Descending further into the hierarchy, the “high yield” realm beckons, offering higher potential returns in tandem with elevated risk – adhering to investment’s age-old adage. The iShares iBoxx $ High Yield Corporate Bond ETF tracks an index comprising U.S. dollar-denominated high-yield corporate bonds.

  • Average Yield to Maturity: 8.53% as of Aug. 17, 2023
  • Year-to-date Return: 4.75%
  • Expense Ratio: 0.49%

4. BondBloxx CCC Rated USD High Yield Corporate Bond ETF XCCC

Venturing closer to the brink of default, the realms of CCC, CC, and C ratings herald the epitome of high-yield. Reflecting the poor credit quality of these enterprises, yields surge even higher.

The BondBloxx CCC Rated USD High Yield Corporate Bond ETF tracks bonds rated CCC1 through CCC3, forming an average based on major rating agencies. With risk at the forefront, issuer exposure is capped at 2% of the portfolio’s weight.

  • Average Yield to Maturity: 13.02% as of Aug. 17, 2023
  • Year-to-date Return: 2.98%
  • Expense Ratio: 0.40%

5. iShares J.P. Morgan USD Emerging Markets Bond ETF EMB

Shifting our gaze to the exotic world of emerging markets, the realm of dollar-denominated bonds currently unveils attractive yields.

The iShares J.P. Morgan USD Emerging Markets Bond ETF grants access to U.S. dollar-denominated bonds from emerging markets, presenting a yield exceeding 7.5% as of this article’s publication.

  • Average Yield to Maturity: 7.59% as of Aug. 17, 2023
  • Year-to-date Return: 2.34%
  • Expense Ratio: 0.39%

Read also: How to Buy Corporate Bonds

Photo: Shutterstock

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