Brexit Fuels A Global Rally In Bond ETFs

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Includes: PCY, TLT
by: Zacks Funds

Brexit fears have begun to haunt the markets yet again. The British pound has sunk to a new 31-year low thanks to speculation regarding rate cuts by the Bank of England apart from concerns relating to the impact of Britain leaving the economic bloc.

Meanwhile, the 10-year UK gilt also touched a record low after Bank of England's Financial Stability Report signaled a challenging outlook and service sector data turned out to be lackluster. In fact, due to the flight to safety, yields are at record low levels across the globe. Germany, France, Switzerland and Australia have all seen new lows in yields for their 10-year benchmarks this month. Japan remains in the negative zone.

The bond market space is on a tear and has emerged as the preferred choice in an economic climate marked by high levels of volatility. As per US ETF Flash Flows report from State Street Global Advisors, fixed income ETFs attracted $8.3 billion during the month of June. This brought year-to-date inflows to nearly $50 billion, almost double of what we saw this time last year.

Given the encouraging trends, let's take a look at some of the most popular bond ETFs that have been performing well over the last four weeks, any of which could be interesting picks (see: all Total Bond Market ETFs here).

iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT)

The U.S. government bonds tracking the long end of the yield curve often have a safe haven status. The flight-to-safety on Brexit has pushed these bonds higher. As such, the ultra-popular long-term Treasury ETF - TLT - which tracks the ICE U.S. Treasury 20+ Year Bond Index has been in the spotlight. It has AUM of over $8.1 billion and average daily volume of more than 8.7 million shares. Expense ratio comes in at 0.15%. Holding 32 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.54 years and effective duration of 18.26 years. The fund gained 7.6% over the past four weeks.

PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA:PCY)

Emerging market bond ETFs are also getting a lot of attention amid renewed concerns over global economic growth, Brexit from the European Union and a roller-coaster ride of oil prices. Given the turmoil in the global markets and low yield all over the world, income-starved investors are chasing better returns.

This 85-security ETF includes bonds issued in approximately 22 emerging-market countries and tracks the DB Emerging Market USD Liquid Balanced Index. The fund has an asset base of $3.5 billion and charges 50 bps in fees. The fund's effective duration is 8.85 years while its years to maturity are 8.79. Around half of the bonds are rated BBB or higher. The product yields 5.13% annually and has added 3.4% in the last four weeks (as of June 6, 2016).

Other popular bond ETFs which have been performing well over the last four weeks include iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA:LQD) -up 2.7%, Vanguard Total Bond Market (NYSEARCA:BND) - up 1.7% and iShares Core Total U.S. Bond Market ETF (NYSEARCA:AGG) - up 1.5%.

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