For average investors, funds are essential because the bond market is a thicket, with literally millions of securities, in contrast to about 100,000 common stocks traded on global markets, according to Morningstar research manager Maciej Kowara.
The same variety in available bonds that confuses mom-and-pop investors helps active managers beat exchange-traded funds tracking benchmarks, like the Bloomberg Barclays U.S. Aggregate Bond Index about 65 percent of the time, according to Morningstar.
"It is much harder [for a small investor] to be successful in replicating active funds in the fixed-income space than in equities," Kowara said. "That is because of the sheer size and complexity of fixed-income markets and liquidity. Active managers may have the luxury of earning a liquidity premium by holding less-liquid bonds, since most bonds trade little or not at all."
Certainly, bonds collectively don't often beat stocks, especially when equities are doing at all well. The Bloomberg Barclays U.S. Aggregate index's total return has been a compound average of 4.1 percent the last five years, trailing the 18 percent of the Standard & Poor's 500-stock index, notes CFRA Research investment strategist Sam Stovall.
Vanguard founder and index guru Jack Bogle recently said stocks are a better deal than bonds, but he was talking in a U.S.-centric context.
Bonds' big issue has been that hard economic data this year has been weaker than sentiment indicators, whose post-election surge convinced markets that faster growth was near at hand.
Sentiment predicting a pickup in U.S. growth began to push rates higher, but the yield on the 10-year bond fell to an April low of 2.17 percent from about 2.6 percent in March. It has rebounded to around 2.4 percent, helped by the quarter-point rate increase the Fed pushed through this spring and comments by Fed governors hinting at more hikes to come this year.
The largest emerging-markets ETF is the iShares J.P. Morgan USD Emerging Markets Bond ETF EMB, sponsored by industry giant BlackRock. With $10 billion under management, it has risen 5.4 percent this year, placing it eighth among the 19 passive funds in the segment, according to ETF Database. Its top 10 holdings are split between government bonds from Eastern European nations, like Russia and Hungary, and South American sovereign issuers such as Uruguay and Peru.
The best performers have returned about 7 percent so far in 2017, highlighted by VanEck Vectors J.P. Morgan EM Local Currency Bond ETF, according to ETF Database. Its $3.3 billion in holdings are led by plays on Mexico, Brazil and Asian nations, such as Indonesia, Thailand and the Philippines, some of which have lower bond ratings.
— By Tim Mullaney, special to CNBC.com