Handelsblatt used data from the ExtraETF comparison platform to compare almost 1,300 funds. The aim was to filter out the bond ETFs that were best suited to generating passive income in recent years. Five categories were examined.

Category 1: Government bonds

Bond ETFs generally do not have a fixed term, which means that price performance is important: for bond ETFs to make a profit, the prices of the bonds in the fund must rise or at least not fall so sharply that the price losses eat up the interest payments.

The iShares € Govt Bond 0-1yr UCITS ETF (Dist)" $IBGE (-0%) (ISIN: IE00B3FH7618) focuses exclusively on government bonds from euro member states with the highest credit ratings and a remaining term of one to twelve months. This reduces the price risk.

Because European government bonds are considered particularly safe, the interest rate is still comparatively low. The expected distribution yield for this year is only one percent.

Category 2: Corporate bonds (investment grade)

The result is better for the best ETF in the area of corporate bonds with a good credit rating. Investors who invested in the "iShares € Corp Bond Interest Rate Hedged ESG SRI UCITS ETF" at the start of 2020 $IRCP (+0.08%) (IE00B6X2VY59) at the start of 2020 currently stand at a return of just under 14%.

This is mainly due to the higher distributions: Because European corporate bonds, even with the best credit ratings, generally have a higher default risk than sovereigns, they have to pay investors higher interest rates. The expected distribution yield for this year is 3.4%, although the trend is negative due to falling interest rates. In 2024, the distribution yield was still 3.8%.

The ETF offers access to bonds from investment-grade companies. Interest-bearing securities from companies in the industrial, utilities and financial sectors are included. The securities included are filtered according to ESG criteria (environmental, social and governance). At the same time, the ETF is hedged against the underlying interest rate risk by buying futures contracts on German government bonds. This hedging reduces the return, but also ensures that the ETF is more stable overall.

As with government bonds, the prices of interest-bearing securities with short remaining maturities also fluctuate less with corporate bonds.

Category 3: Corporate bonds (high yield)

Investors receive the highest interest rates in the eurozone on bonds issued by companies with the highest default risk. Outside the investment sector, which is considered comparatively safe, these are known as high-yield bonds.

From the perspective of passive income alone, high-yield ETFs are therefore the most interesting: the payments here are the highest - but the risk of partial default is also greater.

In the case of the "iShares € High Yield Corp Bond UCITS ETF (Dist)" $IHYG (+0.07%) (IE00B66F4759), which offers access to the largest and most liquid euro-denominated corporate bonds with a rating below investment grade, for example, the expected distribution yield this year is 5.8 percent.

The total return from price and interest since 2020 is currently just under 15% despite the high payouts. The ETF is thus outperformed by the "Xtrackers EUR High Yield Corporate Bond UCITS ETF (Dist)" $XHYG (+0%) (LU1109942653), which achieved a total return of 15.2 percent.

Category 4: US government bonds

Due to the lower interest rates in Europe, US government bonds also look attractive. Ten-year bonds are currently yielding more than four percent. However, investors are taking a currency risk here. This year, for example, the dollar has lost eleven percent in value. As a result, there is a risk that even the high interest payments will not be able to compensate for the currency losses.

Instead, investors can invest in ETFs on US government bonds, which hedge against the currency risk via forward transactions. However, this creates three problems:

• Firstly, the hedge is relatively crude, so does not completely eliminate the currency risk
• Secondly, hedging costs money and therefore yields
• Thirdly, investors no longer benefit from positive currency effects

However, it is not only the peculiarities of currency-hedged ETFs that affect US government bond funds. Above all, high interest rates in the USA are weakening them. As interest rates are higher there than in Europe, prices also fell more sharply. The "Xtrackers US Treasuries UCITS ETF EUR-Hedged" $XUTE (-0.26%) (LU1399300455), for example, lost a good 21% in value compared to the start of 2020.

The "iShares $ Treasury Bond 1-3yr UCITS ETF (Dist)" $IBTS (+0.51%) (IE00B14X4S71), which invests in US government bonds with remaining maturities of one to three years, investors have achieved a total return of 8.5 percent since 2020. The price is down just six percent, meaning that these losses would have been more than compensated for by interest payments of a good 1,400 euros.

Category 5: Government bonds from emerging markets

Government bonds from emerging markets behave in a similar way to government bonds from industrialized nations as high-yield bonds do to investment-grade securities: their default risk is higher, so investors demand a higher yield. In addition, the same applies here as with US government bonds: Investors take a currency risk, which they can mitigate with currency-hedged ETFs.

If you look at the distributions alone, you will find the best results in the categories presented here: For example, anyone who invested EUR 10,000 in the "Xtrackers ESG USD Emerging Markets Bond Quality Weighted UCITS ETF (Dist) EUR-Hedged" at the start of 2020 has already been paid out more than EUR 2,700.

Similar to the high-yield bonds, however, the global rise in interest rates caused prices to collapse here too. As a result, only one of the ETFs that qualified for the ranking has achieved a positive total return since 2020: the "iShares J.P. Morgan $ EM Corp Bond UCITS ETF (Dist)" $EMCR (+0.4%) (IE00B6TLBW47).

The ETF offers access to dollar-denominated corporate bonds from emerging markets with all maturities. Although the price has fallen by 15 percent since 2020, investors have also regularly received distributions above the three percent mark. The expected distribution yield for this year is as high as 5.8%.

Including the forecast distributions for this year, these will have amounted to EUR 23.25 per share by the end of the year. With an initial investment of EUR 10,000, this would be a good EUR 2,500, resulting in a total return of just under ten percent. Even the unsecured ETFs cannot keep up with this. They achieve a maximum total return of just under seven percent.

Source text (excerpt) & graphic: Handelsblatt, 10.08.25

Interest rate ladder: Bond ETFs can provide investors with regular payouts