Fixed Income ETFs

09/25/2002 12:00 am EST


Sheldon Jacobs

Author, Investing Without Wall Street, Five Essentials for Financial Freedom

ETFsexchange traded fundsare a popular vehicle allowing investors to buy a basket of stocks in a specific industry, sector, or market. A recent addition to this stable of investments is the fixed income ETF, which allows investors to buy baskets of bonds with various maturities. Sheldon Jacobs, a long-standing leader in the mutual fund advisory business and editor of The No-Load Fund Investor, explains these new products.

“Equity exchange traded funds (ETFs) have been gaining popularity. Now, Barclays Global Investors, the largest manager of indexed investment products in the world (with $790 billion in assets), has partnered with Lehman Brothers and Goldman Sachs to launch the first four bond exchange traded funds. All these ETFs trade on the American Stock Exchange. All have a low 0.15% expense ratio. They attracted $3 billion from investors in their first two weeks.”

iShares Lehman 1-3 Year Treasury Bond Fund (SHY AMEX) is an AAA rated fund with average maturity of 1.8 years. Yield data is not yet available but the fund has an average coupon of 5.1%. The index upon which the fund is based gained 6.9% for the year. The fund has $611 million in assets.”

iShares Lehman 7-10 Year Treasury Bond Fund (IEF AMEX) has an average maturity of 7.8 years and an average coupon of 5.8%. Year-to-date through July, its index has returned 7.6%. The fund has $700 million in assets.”

iShares Lehman 20+ Year Treasury Bond Fund (TLT AMEX) has an average maturity of 24.2 years and an average coupon of 6.4%. Its index has returned 6.9% for the year to date through July. Assets are $715 million.”

iShares GS $ InvesTop Corporate Bond Fund (LQD AMEX) is based on the Goldman Sachs InvesTop Index, a basket of 100 investment-grade highly liquid bonds, equally par weighted and rebalanced monthly. The fund has an A-rating from S&P and A2 from Moody’s. Weighted average maturity is 10.3 years. Average coupon is 6.5% at a recent price of $105.05. Year-to-date through July, its index has returned -1.6% and 6.4% annualized for three years. The fund’s largest holdings are DaimlerChrysler, Unilever, and Bank of America bonds. The fund has $1.4 billion in assets.”

“Like equity ETFs, these bond ETFs are tax-efficient. They provide low-cost diversification and are highly liquid. They can be used as a hedging vehicle, are marginable, shortable, and can be bought and sold intraday. Their only negative is that you need to pay a brokerage commission to buy them. Thus, they are not recommended for small sums.”

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