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Bond ETFs Grow More Specialized

NEW YORK (TheStreet) -- Most ETF investors know that the first equity fund was the S&P 500 SPDR (SPY), which of course tracks a very broad index. Subsequent equity funds then got narrower to cover sectors, foreign countries, themes and possibly the ridiculous; there was a short-lived ophthalmology ETF from the now defunct Health Shares.

Bond ETFs are following a similar trajectory. The earlier funds have been generic, covering the U.S. Treasury market like the iShares Barclays 20+ year Treasury Bond Fund (TLT); very broad covering the entire market like the iShares Barclays Aggregate Bond Fund (AGG); or broadly covering the corporate bond market like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD).

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In the last couple of years bond ETFs have become more specialized, with foreign funds having proliferated. The next phase of specialization is rolling out with sector bond funds. PowerShares filed for a suite of sector bond funds several years ago but did not end up bringing them to the market but now iShares has.

The iShares Financial Sector Bond Fund (MONY) targets ground zero of the financial crisis with large positions in Citigroup (C), Bank of America (BAC) and JP Morgan (JPM). Traditional investment banks like Morgan Stanley (MS) and Goldman Sachs (GS) are also in the fund.

MONY's average credit rating is BBB+, the effective duration is 5.32 years and the SEC yield is reported at 3.0%. With that five-year duration, the fund does not take undue interest-rate risk should rates go up, but obviously the big risk here is credit risk.

If the financial crisis from 2008 really was the worst in 80 years then it is plausible that more shoes could drop for banks and other financial institutions. Conditions in Europe are continuing to deteriorate and to the extent U.S. banks are exposed, or believed to be exposed, there could be more trouble ahead. Would they be bailed out again? If you believe they would not get another bailout then this fund becomes relatively unattractive.

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iShares has also come out with the Utilities Sector Bond Fund (AMPS) which should take far less credit risk than MONY, but with an effective duration of 8.23 years it will take more interest-rate risk. The SEC yield for AMPS is reported at 3.16%, which seems a little low when compared to the much shorter duration for MONY.

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