Top Taxable Bond ETFs

The performance of taxable bond ETFs can be affected by interest rate changes or anticipated changes and shifting credit quality tolerances.

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Just as equity-focused exchange-traded funds (ETFs) can make big short-term moves, so can fixed-income focused ETFs. Changes in interest rates, speculation about where rates are headed and shifting tolerances for types of credit quality can all drive the performance of bond ETFs. Adding to their returns are the payment of distributions and changes in the value of their underlying holdings.

This month’s ETF First Cut seeks out taxable bond funds that have outperformed their peers over the past one-, three- and five-year periods. These are shorter periods than were used for identifying the top bond mutual funds in our Guide to Mutual Funds to account for the newer nature of ETFs. Many ETFs currently available have yet to reach their 10th anniversaries, including several passing this screen.

As the name implies, the funds making this month’s ETF First Cut can hold a variety of corporate and Treasury bond securities. Depending on their objectives, they may also hold municipal bonds, emerging market debt or preferred stock.

To cast a wide net, the minimum for total assets was set at $25 million. All passing ETFs at the time of publication easily exceeded this limit, with the smallest fund having $116 million in total assets. A minimum daily volume of 5,000 shares was also set, though again none of the passing ETFs came close to this floor.

ETFs with expense ratios above their category average were excluded. Higher-than-average expense ratios raise the bar for performance and increase the likelihood of a fund not being able to outperform in the future.

The 20 taxable bond ETFs with the most consistent category performance are shown here. They are ranked by three-year return in descending order. Many of these funds incurred a higher level of risk than their peers. More than half had either moderate or limited interest rate sensitivity. Credit quality varied, as is evidenced by the many categories represented.

Criteria for Screening on Top Taxable Bond ETFs
Field	Criteria
Global Asset Class	Fixed Income
Fund Group	Taxable Bond
1-Year (NAV) Category Rank	50% - 100%
3-Year (NAV) Category Rank	50% - 100%
5-Year (NAV) Category Rank	50% - 100%
Expense Ratio Category Rank	0% - 50%
Total Assets	> $25 million
Average Daily Trading Volume	> $5,000
Leveraged	No
Inverse	No

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