The ‘bonds are back’ narrative dominated investor discourse last year despite the asset class looking shaky for much of 2023.
However, growing signs that central banks could reduce interest rates faster and sooner than expected turned the plotline into a reality late last year, pushing most bond ETFs into positive territory.
Fund selectors poured into all flavours of fixed income ETFs as a result – raking in a record $68.2bn of net new assets in 2023 – with November accounting for $7.1bn alone, according to data from ETFbook.
The Q4 rally for bonds helped the asset class save face in a year many had labelled the year of fixed income. With this in mind, ETF Stream analyses the best and worst performing fixed income ETFs in 2023.
Sterling corporates shine
UK two and 10-year UK gilt yields fell significantly in early November after the Bank of England raised hopes of interest rate cuts.
The moves had a significant knock-on effect for sterling-denominated corporate bonds which led the fixed income ETF performance charts for 2023.
Leading the way was the Lyxor iBoxx GBP Liquid Corporates Long Dated UCITS ETF (COUK), which jumped 16.5% throughout 2023.
It was a volatile year for COUK which returned just 0.6% since the turn of the year to 20 October.
This was similar for much of the other top-performing funds, the Invesco GBP Corporate Bond UCITS ETF (IGCB) and iShares Core GBP Corporate Bond UCITS ETF (SLXX) were also among the top performing, returning 16% and 15.6%, respectively.
Risk on bonds
Another area that performed particularly well over 2023 was euro-denominated high yield.
A better-than-expected macro outlook helped drive junk bonds over the year despite investors remaining wary of the asset class.
Highlighting this, the SPDR Bloomberg Euro High Yield Bond UCITS ETF (JNKE) spiked 15.9% last year.
This was further buoyed by the prospect of interest rate cuts by the European Central Bank (ECB), with investors currently betting on around a 145 basis point (bps) cut for 2024.
Elsewhere, a weakening US dollar throughout 2023 has also helped emerging market local debt.
The best-performing ETF in this area is the UBS ETF JP Morgan EM Multi-Factor Enhanced Local Currency Bond UCITS ETF (EMLO), with returns of 15.5%.
Tracking the JP Morgan Emerging Markets Multi-Factor Enhanced Local Currency Bond index, its short duration and momentum and carry factors have elevated EMLO above its non-sterling hedged EM local bond counterparts.
Short-duration ETFs were the play for most fund selectors last year, with many waiting for an opportunity to lengthen.
One of the best performing fixed income ETFs in 2023 were at the longer end of the duration curve for euro-denominated government bonds.
The iShares € Government Bond 10-15yr UCITS ETF (IBGZ) soared 14.9% last year, again driven by the prospect of the ECB cutting rates for 2024.
When it comes to looking at the worst-performing ETFs for the year, there were just a handful of underperformers.
Asia bonds dominated the worst-performing category, with unsurprisingly much of the pain being felt by ETFs tracking China bonds.
The worst-performing ETF of the year was the Tabula Haitong Asia ex-Japan High Yield Corporate USD Bond UCITS ETF (TAHY) which lost 9.8% over last year.
TAHY has been heavily stung by its 40% allocation to Chinese junk bonds as the market reels from its distressed property sector, which has driven up default rates.
The ETF showed signs of a turnaround late last year as the prospect of Fed interest rate cuts lifted high yield corporate bonds across the rest of Asia despite China still weighing heavily on performance.
The country’s beleaguered property sector also dragged down Chinese government bonds, with the KraneShares Bloomberg China Bond Inclusion UCITS ETF (KBND), the L&G China CNY Bond UCITS ETF (DRGG) and the Xtrackers Harvest China Government Bond UCITS ETF (CGB) returning 0.8%, 1.4% and 1.4%, respectively.
The only other fixed income ETF to post negative returns in 2023 was the UBS ETF Bloomberg Japan Treasury 1-3 Year Bond UCIS ETF (JT13), which fell 6.8%, as yields reacted to the Japanese government hoping to thread the needle on potential interest rate hikes.