These Are the Hottest Bond ETFs This Year—And for Good Reason
When most investors think about excitement in the markets, their minds turn to the bullish runs of technology stocks, IPO frenzies, or meme-driven rollercoasters. But in 2024, the spotlight has turned—at least in part—to the world of bonds. Specifically, bond exchange-traded funds (ETFs) are making noise as some of the most interesting performers this year, rewarding those with a keen eye for fixed income opportunities. Let’s take a close look at why bond ETFs are indispensable to a diversified portfolio, which ones are topping the charts in 2024, and what lessons savvy investors can glean as this dynamic landscape continues to shift.
The Indispensable Role of Bond ETFs in Diversified Portfolios
Bond ETFs are far more than just a “safe space” for cautious capital. Yes, bonds traditionally play a stabilising role, shielding portfolios from the wild volatility of stocks and offering a stream of predictable income. But in the modern investor’s toolkit, bond ETFs have become critical in several ways:
- Accessibility & Liquidity: Unlike individual bonds, often sold in large increments and sometimes thinly traded, bond ETFs let investors access broad fixed-income markets easily, with the ability to buy and sell shares throughout the trading day.
- Diversification: With a single fund, investors can instantly gain exposure to dozens, hundreds, or even thousands of underlying bonds, spanning sectors, credit qualities, and maturities. That diversification helps reduce the impact of any single issuer’s default or underperformance.
- Customizable Risk & Return: From ultra-safe government bonds to high-octane junk bonds, ETFs exist for nearly every risk appetite and income need.
- Transparency: Daily pricing and holdings disclosures provide investors with a clear understanding of risk and reward, a feature not always available with over-the-counter bond purchases.
Given the evolution of fixed-income markets—especially with interest rates and inflation in the spotlight—bond ETFs are more relevant than ever for balancing growth, safety, and income.
What’s Driving the Action in Bond ETFs This Year?
2024 has been a year of transition for fixed income. After central banks worldwide aggressively hiked rates in the fight against inflation over the past two years, there’s now growing optimism that rates have peaked. Inflation, while still a concern, has been moderating in several major economies, prompting investors to re-assess risk, reward, and opportunity in bonds.
Several themes are shaping the bond ETF rally:
- Expectations of Interest Rate Cuts: As inflation data weakens in the U.S. and other developed markets, investors are increasingly betting on rate cuts from the Federal Reserve (and peers in Europe and other regions). Falling interest rates typically push up the prices of existing bonds, especially those with longer durations.
- Corporate Credit Resilience: Despite fears of economic slowdown, default rates among investment-grade and even many high-yield bonds have remained low, boosting confidence in corporate bond ETFs.
- Global Diversification Play: With U.S. and international central banks at different stages of their policy cycles, diversifying across geographies has generated unique opportunities for bond investors.
Against this backdrop, let’s explore the bond ETFs that have not just survived but thrived this year.
1. iShares 20+ Year Treasury Bond ETF (TLT)
Key Features:
- Focus: U.S. Treasury bonds with maturities exceeding 20 years (long duration)
- Credit Quality: Highest (U.S. government-backed)
- Yield (as of June 2024): ~4.2%
- Duration: Approximately 17 years
2024 Performance Metrics:
- YTD Total Return: +6.8%
- Volatility (annualised): Around 12%
- Notable Trend: Surged during periods of rate-cut speculation and risk
