The Federal Reserve's interest rate hikes have taken a toll on some of the biggest bond market ETFs available to investors.

Bond yields, which move inversely to prices, have surged since the Federal Reserve began raising interest rates in March of last year. Given that bond ETFs closely track bond prices, many have fallen steeply as yields have surged.

The iShares Core U.S. Aggregate Bond Market ETF (AGG), one of the biggest bond market funds with over $92 billion in assets, has fallen almost 12% since the Fed started raising rates. AGG tracks the Bloomberg Aggregate Bond Index, a proxy for the entire U.S. bond market. Vanguard's Total Bond Market ETF (BND), a similar all-encompassing bond market fund, has shed an almost identical amount.

Some of the most battered ETFs have been those invested in long-duration Treasury bonds, or Treasurys with the longest term to maturity. The iShares 20+ Year Treasury Bond ETF (TLT), which invests exclusively in the longest-dated Treasurys, has shed more than 30% since the Fed started hiking interest rates.

Losses have been smaller for ETFs investing in shorter-duration Treasurys. The iShares 7-10 U.S. Treasury Bond ETF (IEF), which invests in medium-duration Treasury notes, has fallen roughly 15%. The iShares' 1-3 Year Treasury Bond ETF (SHY) has fallen just under 4%—the smallest decline among major bond ETFs.

ETFs focused on corporate bonds have also struggled. The SPDR Portfolio Corporate Bond ETF (SPBO) has shed 13% since March of last year. High-yield bond ETFs, which track the least creditworthy and most indebted companies, have outperformed their investment-grade counterparts, with the Bloomberg High-Yield Bond ETF (JNK) down a little over 11%.

Higher refinancing rates may be contributing to high yield's outperformance, according to law firm and consultant White & Case. Refinancing accounted for 62% of activity in the roughly $50 billion high yield market in this year's first half, up from only 37% last year. Amid robust inflows, average yields on high-yield bonds fell to 8.3% in the second quarter from 9.8% two quarters before.

Bond ETFs are exchange-traded funds (ETFs) that invest exclusively in bonds. They're similar to traditional stock ETFs in that they hold a portfolio of diverse securities but trade as any individual stock would. While many of the biggest bond ETFs invest heavily in Treasurys, investors can get exposure to wide swaths of the bond market, including corporate, municipal, and government bonds.

The Outlook for Bond ETFs

At Wednesday's FOMC press conference, Fed Chair Jerome Powell said the central bank remains committed to a monetary policy stance that is "sufficiently restrictive to bringing inflation down to our 2 percent goal over time," with the median policymaker expecting a 5.6% federal funds rate by the end of the year.

While rising interest rates could also take a toll on the economy, there exists a silver lining. The yield spread between near-risk-free U.S. Treasurys and those of high-yield corporate bonds—one of the riskiest fixed-income securities available to investors—has narrowed so far in 2023.