iShares continued to expand its suite of exchange-traded products this week with the debut of seven new bond ETFs. The new offering includes the first products available to U.S. investors that offer sector-specific exposure to the corporate bond market. The new ETFs are:
- iShares Barclays U.S. Treasury Bond Fund (GOVT)
- iShares Aaa – A Rated Corporate Bond Fund (QLTA)
- iShares Barclays CMBS Bond Fund (CMBS)
- iShares Financials Sector Bond Fund (MONY)
- iShares Industrials Sector Bond Fund (ENGN)
- iShares Utilities Sector Bond Fund (AMPS)
- iShares Barclays GNMA Bond Fund (GNMA)
GOVT In Focus
GOVT will offer broad-based exposure to U.S. Treasuries, seeking to replicate a market cap-weighted index comprised of Treasuries with at least one year remaining to maturity. GOVT will be one of the cheapest ETFs in the Government Bonds ETFdb Category, charging an annual expense ratio of just 15 basis points. Most ETFs in that category target securities with a specific duration; GOVT will include everything from short-term to long-term bonds.
QLTA In Focus
QLTA will offer exposure to investment grade corporate bonds, becoming the first product in the Corporate Bonds ETFdb Category to focus on securities with a specific credit rating. As the name suggests, the underlying index consists of stocks rates Aaa – A based on the median rating assigned by the three primary ratings agencies. As such, QLTA will consist of the highest rated investment grade bonds; generally, any security rated BBB- or higher is considered to be investment grade [see also The Ten Commandments of Commodity Investing].
The iShares iBoxx Investment Grade Corporate Bond Fund (LQD), the most popular ETF option for broad based investment grade corporate bond exposure with about $19 billion in assets, allocates about 27% of its portfolio to bonds rated A- and another 30% to bonds rated BBB+ or lower. In other words, more than half of the LQD portfolio wouldn’t meet the standards for inclusion in QLTA.
CMBS In Focus
CMBS will offer exposure to commercial mortgage-backed securities, joining a handful of other products in the Mortgage Backed Securities ETFdb Category. What makes CMBS unique is the focus specifically on securities that are “ERISA eligible.” The Employee Retirement Income Security Act of 1974 (ERISA) establishes minimum standards for pension plans.
GNMA In Focus
GNMA targets mortgage-backed pass-through securities that ahve been issued by the Government National Mortgage Association (GNMA). The underlying index has an effective duration of just over three years, and a weighted average coupon of about 4.7%. The index consists primarily of mortgages with a maturity of greater than 25 years.
Sector Bond ETFs In Focus
iShares also launched the first three sector-specific corporate bond ETFs with MONY, ENGN, and AMPS; each of these products targets investment grade corporate bonds issued by companies in a specific sector of the U.S. economy. This level of granularity allows investors to fine tune fixed income exposure not only by duration but by sector breakdown as well.
As a point of reference, LQD makes its largest sector allocation to financials (about 36% of the underlying portfolio). Industrials make up only about 3% of that ETF, with utilities accounting for under 2% [see also Five ETFs For Doomsday Capitalism].
Disclosure: No positions at time of writing.
- ETF Insider: Bulls Charge Ahead
- ETF Insider: Is Euro Zone Optimism Here To Stay?
- ETFs: The $10 Billion Club
- Where The ETF Money Is Flowing (The Answer Might Surprise You)
- 10 Most Useful New ETFs Of 2011 (For Buy-And-Hold Investors)