Usually, the best investments turn out to be those that were most frightening to make at the time. That proved to be the case in 2012, when the top bond ETF was none other than the PowerShares DB 3x Italian Treasury Bond Futures Exchange Traded Notes (ticker:ITLT), which returned 112.82%. The number-two ETF? PowerShares DB Italian Treasury Bond Futures Exchange Traded Notes (ITLY), which gained 32.81%. Coming into the year, investors were worried that Europe's smaller economies, such as Greece, Italy, and possibly Spain, would be forced to default on their debt. When the region's policymakers - together with the European Central Bank - acted aggressively to keep the crisis from worsening, investors responded by driving up prices in the previously depressed bond markets of these smaller countries. ITLT, which uses futures contracts to achieve three times the return (in either direction) of Italy's bond market, benefited in kind.
Does this mean you should invest in ITLT? Not exactly - the fund is extremely risky, and much of the good news is already reflected in Italy's market, where yields have dropped all the way down to 4.2%. However, it does show that the world of bond ETFs is now so broad that there are plenty of funds - however obscure - that may offer substantial return opportunities in any given year. In fact, 37 delivered returns of 10% or more in 2012.
To find out which ETFs finished with double digit returns, see my latest article: The Best and Worst Bond ETFs of 2012