Fixed Income ETFs: "The Story of Deterioration"

ETFs, essentially a basket of stocks or bonds, an important trading vehicle for the markets. But when you look at ETFs in aggregate, they can also tell a very important story. And when we look at fixed income ETFs, the story over the last few years has been consistent. It's one of deterioration.

So if we look at the performance of fixed income ETFs over the last three years, the first one that stands out is the local emerging markets EMLC is the ETF. And you can see it's down 7% over the last three years. Now, this is when you want to invest in emerging markets in the local currency. So you have to feel good about both emerging markets and EM FX. That's clearly not the case. An exodus out of emerging markets over the last three years. And if we roll forward one year, then the picture remains the same and it builds upon itself.

So here's the local EM space at down 7%, Now you add to it emerging markets, but this time in the U S dollar. So even if you have the safe haven of the US dollar, emerging markets are still seeing an exodus over the last one year. And you can see that right here. You can add to that further, right here you can see the senior loans which we call BKLN is the ETF. This is the high yield bond space. So those who are willing to go for the risks and try out this product, it's entirely leveraged loans. This is what you do when you feel good about the markets and risk seeking. But you can see it's down 4%. And even the high yield bond market, HYG which many are familiar with. This is a broad representation of high yield liquid corporate bonds if you want to take the risk that comes with it. But again here, higher yield underperforming over the last one year on top of EM, which had been deteriorating subsequent to that.

So if we look at it year to date, in 2020... here's EM space, here's some of the high yield and ETFs we mentioned before. And we can add to that now things like the short term corporate bond market right here, which is also known as MINT. Now why this is interesting is that this is corporate bonds that mature within one year, so generally very safe. Yet year to date it has been underperforming. And what really stands out of course in year to date is municipal bonds. Municipal bonds are a highly attractive market for a lot of people because of the tax features, generally free from federal taxes and sometimes state and local taxes. And it's what is used to pay for infrastructure, bridge building, et cetera, et cetera. So it's a very attractive part of the bond market.

And yet here too, year to date, you can see it's also down. So from three years ago to one year to year to date, we've had consistent deterioration in the space as these fixed income ETFs continue to show. So it's important to remember that this deterioration in fixed income ETFs has been going on since before the pandemic. Now economically, financially, if the market's going to go back to sunshine and rainbows, we expect to see a lot more improvement in fixed income, ETF space across the spectrum. But until such time, the risks, big picture continue to be negative and continue to suggest further deterioration. And as such, we'll be watching closely.