9 New Bond ETFs In February

Seeking Alpha

By Ron Rowland:

Nine new bond ETFs came to market in February, including the first sector bond ETFs and leveraged TIPS spread funds. Seven of the nine came from BlackRock’s iShares brand. The 2/16/12 launches included bond sectors, high quality corporates, mortgage-backed securities, and even an aggregate Treasury fund.

ProShares introduced a +3x/-3x pair of 10-year TIPS spread ETFs on 2/9/12.

1) iShares Financials Sector Bond Fund (NYSEArca:MONY - News) has 65 holdings, an expense ratio of 0.30%, and tracks investment-grade corporate bonds in the Finance sector (MONY overview). The underlying index presently has 1,053 holdings, a 3.8% yield to maturity, and an effective duration of 5.4 years.

2) iShares Industrials Sector Bond Fund (NYSEArca:ENGN - News) has 71 holdings at an expense ratio of 0.30%. ENGN covers investment-grade corporate bonds in the Industrial sector (ENGN overview). The underlying index has 2,203 holdings, a yield to maturity of 3.1%, and an effective duration of 7.3 years.

3) iShares Utilities Sector Bond Fund (NYSEArca:AMPS - News) includes 54 holdings with an expense ratio of 0.30%. The ETF seeks to track investment-grade corporate bonds from the Utility sector (AMPS overview). The underlying index has 749 holdings, a yield to maturity of 3.4%, and an effective duration of 8.5 years.

Analysis/Opinion: These three ETFs are the first sector bond funds on the market. Unlike the traditional 10-sector classification systems used for equities, corporate bonds are typically pigeon-holed into just three sectors. The Finance and Utility bond sectors are much like their equity counterparts, with the “Industrial” tag encompassing nearly everything else.

4) iShares Barclays U.S. Treasury Bond Fund (NYSEArca:GOVT - News) has 23 holdings with an expense ratio of 0.15%. As the name suggests, GOVT represents the aggregate U.S. Treasury market (GOVT overview). The underlying index has 210 holdings, a yield to maturity of 0.94%, and an effective duration of 5.8 years.

5) iShares Aaa – A Rated Corporate Bond Fund (NYSEArca:QLTA - News) has 70 holdings with an expense ratio of 0.15% tracking the highest rated U.S. corporate bonds (QLTA overview). The underlying index has 1,300 holdings, a yield to maturity of 2.9%, and an effective duration of 6.5 years.

6) iShares Barclays CMBS Bond Fund (NYSEArca:CMBS - News) has 25 holdings with an expense ratio of 0.25%. This ETF specializes in the ERISA-eligible commercial mortgage-backed securities market (CMBS overview). The underlying index has 1,087 holdings, a yield to maturity of 3.2%, and an effective duration of 3.3 years.

7) iShares Barclays GNMA Bond Fund (NasdaqGM:GNMA - News) has 13 holdings with an expense ratio of 0.32% tracking mortgage-backed pass-through securities issued by GNMA (GNMA overview). The underlying index has 131 holdings, a yield to maturity of 2.6%, and an effective duration of 3.2 years.

Analysis/Opinion: iShares already offers numerous Treasury ETFs but for some reason had no Treasury composite fund until now. Corporate bond funds are traditionally classified as either investment-grade or high-yield (“junk”). Now with QLTA, we get the first fund providing exposure to upper crust of quality. Bond ETF offerings are becoming more and more specialized. The mortgage-backed security market has been somewhat under-represented in the ETF space. CMBS and GNMA will help rectify that.

8) ProShares UltraPro 10 Year TIPS/TSY Spread (NYSEArca:UINF - News) holds swaps and U.S. Treasury securities with an expense ratio of 0.75% tracking 300% (+3x) the daily performance of the Dow Jones Credit Suisse 10-Year Inflation Breakeven Index (UINF overview). The underlying index is constructed to rise when inflation expectations are increasing. Essentially it tracks the difference in returns of 10-year TIPS bonds and a duration-adjusted position in the closest maturity Treasury to the TIPS.

9) ProShares UltraPro Short 10 Year TIPS/TSY Spread (NYSEArca:SINF - News) holds swaps and U.S. Treasury securities with an expense ratio of 0.75% tracking 300% the inverse (-3x) daily performance of the Dow Jones Credit Suisse 10-Year Inflation Breakeven Index (SINF overview).

Analysis/Opinion: These are the third inflation-expectation product pair released in the past few months. The first were the INFL/DEFL pair from PowerShares. These unleveraged ETNs measure the spread at three different maturities with 5-year securities nominally weighted at 50%, 10-year at 40%, and 30-year at 10%. The ProShares RINF/FINF pair , released in January, target the 30-year spread and will likely be more volatile than the PowerShares offering. The new UINF/SINF pair are 3x leveraged, making them the most sensitive to changes in inflation expectations.

Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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