For the first time in three years, some new fixed-income exchange-traded funds are hitting the market. Barclays Global Investors launched eight bond iShares on the New York Stock Exchange last week, bringing the total number available in the U.S. to 14. Barclays, a unit of Barclays Bank ( BCS) of the U.K, is the largest ETF provider in the U.S. and is the only one with bond funds on the market now, although others are believed to be planning new products. Exchange-traded funds are baskets of securities that trade throughout the day on an exchange. While there are plenty of ETFs that track stock and even commodity indices, bond ETFs are harder to design because fixed-income securities trade over the counter, making it more difficult to obtain prices. Barclays' six other bond ETFs have total assets of around $20 billion, compared with $420 billion for the entire ETF market. The eight new Barclays ETFs track bond indices designed by Lehman Brothers ( LEH). Three hold U.S. Treasury bonds: iShares Lehman Short Treasury Bond Fund ( SHV), iShares Lehman 3-7 Year Treasury Bond Fund ( IEI) and iShares Lehman 10-20 Year Treasury Bond Fund ( TLH). The remaining five hold a mixture of U.S. Treasury bonds, sovereign bonds of other nations, agency debt and investment grade corporate debt: iShares Lehman 1-3 Year Credit Bond Fund ( CSJ), iShares Lehman Intermediate Credit Bond Fund ( CIU), iShares Lehman Credit Bond Fund ( CFT), iShares Lehman Intermediate Government/Credit Bond Fund ( GVI) and iShares Lehman Government/Credit Bond Fund ( GBF). The expense ratios are 0.15% for the three Treasury funds and 0.20% for the five others. Matthew Tucker, iShares' head of Fixed Income Investment Solutions, says the new ETFs expand the company's range of bond ETFs in terms of maturities and types of issuers. Barclays already has a full lineup of iShares equity products and is looking to provide a similar lineup of fixed-income products, he says.
Thomas Mench, chairman and chief operating officer of money management firm Mench Financial, says, "I've been waiting for
these new ETFs for quite awhile," as they fill in several holes in the fixed-income arena left open by other ETFs. Mench says the original batch of Treasury-based ETFs provided exposure to certain segments of the Treasury yield curve, from one to three years, from seven to 10 years and 20 years and over. The new lineup of products provides exposure to Treasury bills and fills in the gaps between three and seven years and between 10 and 20 years, he says. "As a portfolio manager, I can pick and choose more readily what maturity structure I want," he adds. Mench is slightly less certain about the ETFs that hold a mix of sovereign and corporate debt, saying it will be important to see what the credit quality is of the underlying securities. "I need to do more due diligence (about) the maturity, structure and credit quality," he says. Barclays' Tucker says the firm's original six bond ETFs have attracted interest from both retail and institutional investors, and he expects the new suite of products will also. Barclays is currently awaiting regulatory approval on two other fixed-income products, one that provides exposure to the mortgage-backed securities market and another that tracks high-yield debt. Tucker says he's hopeful these two additional funds will launch in the next few months.
Ameristock Funds also has five fixed-income ETFs in registration with the SEC that are designed to track U.S. Treasury indices from Ryan ALM. Other companies believed to be developing bond ETFs include State Street's ( STT) Global Advisors unit, PowerShares Capital Management and Wisdom Tree. When it comes to bond ETFs, however, there may be a first-mover advantage. In 2002, not long after Barclays launched its first fixed-income ETF, New York investment firm ETF Advisors launched a group of Fixed-Income Trust Receipts, or FITRS, based on Ryan Labs' Treasury indices, but they were unable to attract enough money and were shuttered after a few months.