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iShares Rolls Out 1st-Ever Sector Bond ETFs

Cinthia Murphy


iShares, the world’s largest ETF provider, rolled out today seven fixed-income ETFs, including three first-of-their-kind corporate bond sector funds, beating Invesco PowerShares and State Street Global Advisors to the punch.

The iShares Financial Sector Bond Fund (NYSEArca:MONY - News), the iShares Industrials Sector Bond Fund (NYSEArca:ENGN - News) and the iShares Utilities Sector Bond Fund (NYSEArca:AMPS - News) each cost 0.30 percent a year in fees, and are the market’s first funds to parse the corporate debt sectors.

Today’s rollout also includes the iShares Aaa-A Rated Corporate Bond Fund (NYSEArca:QLTA - News), the first-ever ETF to tease out the most highly rated corporate bonds. The multifund launch also features funds focused on the commercial mortgage-backed securities market, U.S. Treasurys and debt issued by Ginnie Mae.

Regarding the corporate bond sector funds, both PowerShares and SSgA’s SPDR Trust have nearly identical funds in registration, the main difference being their benchmarks. The PowerShares funds are to be anchored by Merrill Lynch indexes, while the SPDR funds are tied to Barclays Capital, the same index provider behind the iShares ETFs launched today.

While it’s unclear how iShares was able to get its funds through the pipeline so quickly— PowerShares first filed its paperwork with U.S. regulators in December 2009, while the SPDR funds got into the registration pipeline in March 2010—it’s clear that providers are racing to open up new niches of fixed income, an asset class known before the advent of the ETF for its lack of liquidity.

Fixed-Income Frontier

Indeed, bond ETFs have been traditionally broader in scope and only now have begun to become more granular, as fund providers work through the challenges of offering a liquid fixed-income portfolio that closely tracks its benchmark, as IndexUniverse Analyst Gene Koyfman recently pointed out in a blog.

Several ETF providers, including PowerShares and the SPDR Trust, already offer broad corporate investment-grade debt portfolios such as the PowerShares Fundamental Investment Grade Corporate Bond Portfolio (NYSEArca:PICB - News) or the SPDR Barclays Capital Short Term Corporate Bond (NYSEArca:SCPB - News) and its long-term counterpart, “LWC.”

As noted, iShares also rolled out the iShares Aaa-A Rated Corporate Bond Fund, a broader corporate debt portfolio that zeroes in on U.S. corporate bonds with the highest credit ratings.

That fund includes only bonds with at least one year to maturity and at least $500 million of outstanding face value, with as much as 15 percent of the portfolio being tied to non-U.S. issues. It has an annual expense ratio of 0.15 percent.



Other Corporate, Treasury Debt Fare

The San Francisco-based ETF giant also rolled out the iShares Barclays CMBS Bond Fund (NYSEArca:CMBS - News), a fund that taps into investment-grade commercial mortgage-backed securities, which are in essence securities that represent interests in “pools” of commercial mortgages. It costs 0.25 percent.

CMBS also beat to market a similar ETF SSgA has had in the works since 2010. Commercial mortgage-backed securities could be a prospective segment as retail improves, and the demand for property related to business expansion picks up.

Rounding up the launch are two ETFs focused on government debt.

First, there is the iShares Barclays U.S. Treasury Bond Fund (NYSEArca:GOVT - News). The ETF invests in Treasurys with at least one year to maturity, and that have a minimum of $250 million of outstanding face value. The Treasurys also need to be fixed-rate and nonconvertible.

The fund, which costs 0.15 percent, will join more than 40 Treasury-focused ETFs on the market today, including six funds by iShares that tap into various maturities within the yield curve.

Today’s rollout also includes the iShares Barclays GNMA Bond Fund (NasdaqGM:GNMA - News), the only one of the seven that iShares is listing on Nasdaq rather than Arca, the New York Stock Exchange’s electronic trading platform. iShares has been diversifying its primary listings recently to include more funds on Nasdaq as well as BATS, the No. 3 U.S. stock exchange that launched a primary listings business.

GNMA’s underlying index measures the performance of mortgage-backed pass-through securities issued by the Government National Mortgage Association, also known as Ginnie Mae. The fund will focus on bonds with 30- or 15-year maturities, according to regulatory paperwork iShares filed recently.

GNMA comes with an annual expense ratio of 0.32 percent.


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