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U.S. Treasury exchange traded funds enjoyed large gains in 2011 as investors fretted over deflation and the Eurozone debt crisis. However, corporate bonds could lead the way this year in fixed-income ETFs if investors regain their appetite for risk.

ETFs tracking corporate bonds include iShares iBoxx Investment Grade Corporate Bond ETF (NYSEArca: LQD), iShares 1-3 Year Credit Bond (NYSEArca: CSJ) and Vanguard Short-Term Corporate Bond ETF (NasdaqGM: VCSH).

Total assets under management for U.S. fixed-income ETFs gained about $41.3 billion, or a 29% growth increase for 2011, according to BlackRock data.

Due to the slow economic growth in the U.S. and heightened volatility, investors searched for defensive sectors and safe havens. Investors that took a buy-and-hold strategy to Treasury bond ETFs were rewarded in 2011. Market timers that had exited bonds prematurely were penalized on speculation that yields were on the rise.

As the Eurozone debt crisis is rages on, investors are scared and will continue to seek the safe-haven appeal of the bond market with the benefit of some yield. Investors have taken to funds such as the iShares Barclays TIPS Bond Fund (NYSEArca: TIP), which focuses on Treasury Inflation Protected Securities, and has risen 8.4% in 2011, reports Deborah Levine for MarketWatch.

What’s more, “asset managers and pension plans are using Treasury ETFs to gain exposure to rates” in 2011, reports the iShares blog.

Although Treasury bonds outperformed in 2011, investors that can handle more risk are looking to the corporate bond market for higher yields in 2012. MarketWatch reports that companies have been selling debt at historically low borrowing costs and investors have been satisfied with their ability to reduce costs and raise cash.

“We’re trying to stay pretty cautious and close to the vest, just not in flight-to-quality Treasuries because there are risks there regarding to U.S. fiscal imbalances and the dysfunctional political system,” Jason Brady, at Thornburg Investment Management, said.

Corporate bonds of all maturities gave back about 7.2% in 2011, according to Bank of America Merrill Lynch reports. The gap in yield between corporate bonds and Treasuries is 2.58%or 258 basis points, according to Merrill Lynch data. It went higher over the Summer as the Eurozone debt crisis weighed on markets. The average is around 190 points, reports Levine on MarketWatch.

The iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) invests in corporate “junk” bonds.

Tisha Guerrero contributed to this article.

Disclosure: None

Source: ETF Focus: Corporate Bonds