This year is shaping up to be historic for asset class performance. The Federal Reserve, and other central banks around the globe, dismissed high inflation as transitory and kicked off a policy tightening spree to curb red-hot inflation. Most asset classes finished deep in the red, battered by slowing global growth, the war in Ukraine, energy and food crises, and supply chain disruptions on top of inflation.

Fixed income securities and funds are set for their worst year in decades, with the closely watched 10-year Treasury now down 9.4% on the year. Bloomberg reported that this is the first time in 5 decades that both stock and bond markets fall in tandem, raising eyebrows over the efficacy of the 60-40 portfolio strategy. The sell-off in the bond market seems to be exacerbated by the shift in central banks' rate policy.  

Despite the bloodbath, few exchanges traded funds outperformed their peers in the fixed income markets.  

Below is a breakdown of three offerings among the top performing Fixed Income ETFs available to European investors – we chose these three for having assets under management above USD$50 million. 

iShares € Corp Bond ESG Paris-Aligned Climate UCITS ETF (CBUJ)

iShares € Corp Bond ESG Paris-Aligned Climate UCITS ETF (CBUJ) led the top performing Fixed Income ETFs, posting 1.50% monthly (for June 2022). It is a passively managed fund recently introduced to the market on June 9th, 2022. The fund trades in Euro (EUR) on Deutsche Börse Xetra under the ticker ‘CBUJ’. It aims to replicate the Bloomberg MSCI Euro Corporate Climate Paris Aligned ESG Select Index. The funds invest in a subset of fixed-rate fixed income securities seeking to align with the objectives of the Paris Agreement. CBUJ spreads its assets across 13 different countries, where France takes the lion’s share with 20.64%, followed by 15.44% in the United States and 13.42% in Germany. The fund’s assets are diversified on the sector level, whereas 30.58% of the total portfolio weight are investments in the Banking sector, 13.55% in Consumer Non-Cyclical, 8.17% in Communications, and 7.48% in Real Estate Investment Trusts. CBUJ invests in investment-grade issues having the highest concentration in BBB-rated fixed income securities. Moreover, this ETF help European investors in aligning their values with their investments as it follows a ‘Best-In-Class’ ESG investing strategy. In other terms, the fund invests in the best issuers from an ESG perspective (based on the ESG criteria of the Index). At the same time, the fund excludes companies involved in companies violating the UNGC principles, tobacco, conventional weapons, controversial weapons, nuclear weapons, civilian firearms, weapon systems, thermal coal, oil and gas, unconventional oil and gas and power generation. This ETF adopts the 13th Sustainable Development Goal ‘Climate Action’. Meanwhile, it is classified under Article 9 of the Sustainable Finance Disclosure Regulation (SFDR), following good governance practices and having sustainable investments as an objective. Unsurprisingly, CBUJ belongs to the ‘Net Zero 2050’ theme capturing the investment opportunity in the ‘Climate Change’ thematic trend. The fund boasts a 4.87-year effective duration and a 1.36% weighted average coupon. It currently manages USD$410 million of assets under management while costing 0.15% per annum to own. It follows a distributing dividend policy when it distributes generated income, if any, to its shareholders. 

iShares Swiss Domestic Government Bond 0-3 ETF (CSBGC3) 

iShares Swiss Domestic Government Bond 0-3 ETF (CSBGC3) started trading on July 2nd, 2009, on the SIX Swiss Exchange, denominated in Swiss Francs (CHF). It placed third on the top performing list, gaining 0.41% for June. CSBGC3 is domiciled in Switzerland and holds USD$188 million of assets under management. It is a passively managed fund seeking to provide investment results that closely correspond to the performance of the SBI® Domestic Government Mid Price 1M-3Y Total Return Index. The index comprises of Swiss government bonds with targeted exposure to the short end of the yield curve. The fund invests in fixed-rate and floating-rate issues with maturities less than five years. CSBGC3 holds almost half its assets in issuers with less than a year to maturity, while the remainder falls in the 1 to 2 years to maturity bracket. The fund’s composition reduces its effective duration to 1.17 years while delivering a weighted average coupon of 2.82%. CSBGC3 costs as much as CBUJ to own with a total expense ratio of 0.15% per annum while adopting a dividend distributing model.

Lyxor Smart Overnight Return - UCITS ETF (SMTC)

Lyxor Smart Overnight Return - UCITS ETF (SMTC) came in as the fifth top performing ETF in the fixed income universe. This Luxembourg-based ETF rose 0.11% over June while holding USD$401 million of assets under management. It was incepted on March 2nd, 2015. SMTC follows an actively managed investment strategy, so it does not seek to replicate any Index. In fact, it aims to achieve short-term returns higher than the benchmark rate Total Return Eonia Investable Index (calculated to t+3 sett) with extremely low volatility by investing in a diversified portfolio of financial instruments and repurchase agreements in an environment of strict risk and liquidity monitoring. The Eonia rate is an effective overnight interest rate computed as a weighted average of all overnight interbank assets transactions in the interbank market in Euros. SMTC is the cheapest amongst the three ETFs costing 0.09% per annum compared to 0.15% while following a capitalization dividend model where the fund reinvests generated income. 

Data for this article is as of June 30th, 2022.