Ameristock, manager of the very successful ( AMSTX) Ameristock fund, is moving further into the exchange-traded fund space.Earlier this year, Ameristock made headlines by launching the U.S Oil ( USO) fund, the first ETF to track the commodity. Now, Ameristock has filed to roll out fixed-income ETFs based on Treasuries with different maturities. There will be five separate ETFs, with the funds based on Treasuries with one-year, two-year, five-year, 10-year and 20-year maturities. All of the funds are expected to have a 0.15% expense ratio. Barclays, the bank behind iShares ETFs, offers several bond ETFs. But instead of targeting a specific maturity, the iShares funds -- iShares Lehman 1-3 Year Treasury ( SHY), iShares Lehman 7-10 Year Treasury ( IEF) and the iShares Lehman 20+ year Treasury Bond ( TLT) -- target a range of time. Ameristock's new bond ETFs will be more of a benefit to people who trade actively, or to institutional managers, who now will have a fast and easy way to more narrowly manage duration, make short-term directional bets on interest rates, and quickly reallocate the makeup of their bond portfolios. Unfortunately, these funds may not be right for do-it-yourself investors looking for steady income. According to the Ameristock
If you buy a five-year Treasury note today, you will get a yield of 4.69%. You will get that 4.69% until your note matures. Between now and then, interest rates will go up, go down or stay the same. If an investor buys the five-year Treasury ETF, the income stream will vary along with the current yield quoted in the market. In late June, five-year Treasury notes yielded 5.15% to 5.20%. The investor who bought a five-year Treasury bond in June would get that 5.15% until maturity. But the investor who bought the five-year ETF, had it existed in June, would now be facing a much lower yield. Though there's always the chance the reverse situation will happen, giving the ETF a higher yield, an investor counting on a particular income stream will face perpetual uncertainty with these funds. In addition, the new ETFs will pay a dividend only once a year, which is rather quirky. Specifically, the wording in the prospectus reads: "Each fund pays out dividends to investors at least annually and may pay them on a more frequent basis." I spoke to Ameristock founder Nicholas Gerber, who said that for now the distributions will be once a year, but added that Ameristock would be sensitive to shareholder demand. He said these funds are targeted to retail investors, but I believe the plan for annual distributions -- instead of more frequent payouts -- will turn off a lot of people.
Bond funds in general offer exposure to specific parts of the bond market; using a fund merits consideration when it offers a better way to access the market. For example, convertible bonds, foreign bonds and high-yield bonds all have obstacles for retail investors, such as single-issue risk and liquidity. But Treasury funds may not hold an advantage over the actual bond. Single-issue risk and liquidity are not really problems with the Treasury market. Brokerage firms can easily accommodate very small orders, and usually there is no commission to trade Treasuries. And there is no realistic risk that you bought the wrong Treasury that ends up being cut in half on news of a potential default. Also, Treasuries can go down in value, but you will get your par value back at maturity. If you were to buy a Treasury fund of any sort at $50 per share, there is nothing that says it ever has to go back to that $50 price.