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iShares Debuts Seven Targeted Bond ETFs

Eric Dutram

After taking it easy in the second half of 2011, iShares appears to be fighting back a number of surging issuers by launching a variety of new products to start the new year. In fact, the company has debuted over 25 funds in the time period, pushing its total offering well above the 250 fund mark. However, all of these funds look to be in the equity world, rounding out the company’s offering list in segments including commodity producers, European equities, and emerging market stocks. However, in the latest release, this looks to be changing as the company has revealed seven new, targeted bond ETFs for investors (see Top Three High Yield Junk Bond ETFs).

The new products segment the bond asset class in relatively unique ways, allowing investors to further target any corner of the bond world that they so choose. Additionally, it also helps the company to better compete in the fixed income world as a number of companies—specifically PIMCO, PowerShares, and Van Eck-- have seen decent inflows in months past in their fixed income lineups. Hopefully from iShares’ perspective, the new launches will allow the San Francisco-based firm to continue to dominate the bond ETF world as it currently does in the equity space.

With that being said, the new funds should also be welcomed news to investors as well, offering better segmentation in the fixed income corner of the exchange-traded world. For investors who are looking to further segment their bond holdings, or are curious as to how the new products could fit into a portfolio, we have highlighted some of the key details from the iShares launch below:

Utilities Sector Bond Fund (AMPS)

This fund tracks the Barclays Capital U.S. Utility Bond index, giving investors exposure to bonds from about 54 companies that are in the utilities space while charging 30 basis points a year in fees. With this focus, the level of risk may be lower than in comparable funds in other sectors, suggesting that it could be a good option for those seeking minimal volatility (read Utility ETFs: Slumping Sector In Rebounding Market).

In terms of industry focus, electric utilities make up close to 70% while natural gas utilities make up the remainder of the product. Meanwhile, the effective duration comes in at around 8.6 years for the underlying index as more than 57% of the holdings mature in less than 10 years. This gives the index an average yield to maturity of about 3.4%, a decent level but one that isn’t exactly an ultra-high payout either.

Industrials Sector Bond Fund (ENGN)

For investors searching for bonds of companies outside the financial and utilities sectors, a closer look at ENGN could be warranted. The product tracks an index of about 71 bonds, charging investors a low 30 basis points a year in fees. Sector exposure is tilted towards consumer staples (25%), communication (19.8%), and energy (12.5%) while the effective duration is just 7.3 years. Given this focus on lower duration securities, as well as more highly rated bonds, the product has a lower yield of 3.1%. Still, this is far higher than many Treasury bond funds in the space and the focus on industrial bonds could be ideal for some investors seeking more targeted exposure.

Financials Sector Bond Fund (MONY)

If investors are looking to gain access to the financial sector but are worried about the significant volatility in the equity space, MONY could be a less volatile way to go instead. The new fund targets about 65 bonds in total, charging investors 30 basis points a year in fees. Banking firms dominate the underlying index, comprising about 63% of the total, although insurance firms also make up a decent chunk at 19.8% (see Capital Markets ETF For 2012?).

Investors should also note that the fund is tilted towards securities in the A+ to A- range on the S&P scale, meaning that the fund is relatively safe but isn’t heavily exposed to top notch financials. Despite this and the index’s relatively low duration of 5.4 years, the yield to maturity is a respectable 3.8% for the benchmark of MONY.

Barclays U.S. Treasury Bond Fund (GOVT)

For a low cost way to play the U.S. Treasury bond market, GOVT could be a new way to go. The fund holds bonds from across the curve, charging investors just 15 basis points a year in fees for its services. While the product is definitely tilted towards short-term bonds—those maturing in one to five years make up 56% of the index while five to ten years makes up another 27%-- 25+ year bonds also make up about 10.7% as well.

Unfortunately, the fund may not be a great destination for yield, although it will probably be a good spot for safety. The underlying index has an average yield to maturity below 1% while the weighted average coupon is just 2.6% (read Three Bond ETFs For A Fixed Income Bear Market).

Barclays GNMA Bond Fund (GNMA)

To target mortgage-backed pass-through securities issued by the Government National Mortgage Association, investors could consider GNMA. The product holds just 13 securities in total and charges investors 32 basis points a year in fees, potentially giving investors quality access to the MBS segment. Interestingly, investors should note that many of the bonds do not mature for quite some time but the effective duration on the index is still quite low, coming in at just under 3.2 years. Still, the yield to maturity of the benchmark is 2.6%, a decent level considering the relatively short-term and low risk focus of the fund.

Barclays CMBS Bond Fund (CMBS)

If investors prefer the commercial side of the real estate market to residential, a closer look at CMBS could be warranted. The product tracks the Barclays Capital U.S. CMBS Index, following a benchmark of Erisa-eligible commercial mortgage-backed securities market. In total, the fund holds 25 securities while charging 25 basis points a year in fees. Investors should note that the holdings breakdown is decidedly short term as the vast majority of the underlying index matures in less than five years while all of the components mature in less than 10. However, given the slightly higher risk of this corner in the market, despite the AAA rating of many underlying securities, the benchmark still has a decent yield at 3.2%.

Aaa-A Rated Corporate Bond Fund (QLTA)

For investors who only want the cream of the crop in the corporate bond market, QLTA makes for an interesting choice. The product only focuses on highly rated securities, ensuring that return of capital will be achieved by virtually all the bonds in question. Additionally, the underlying index is tilted towards short-term securities, reducing interest rate risk as well, suggesting that the fund could be a good pick for those looking for slightly higher risks than Treasury bonds but not too much higher than those ultra-safe securities (see The Best Bond ETF You Have Never Heard Of).

However, investors must pay for this added safety with lower yields, as the underlying index in the fund pays out just over 2.9% in yield to maturity terms. While this level may be higher than government bond funds on this list, it is also far lower than many of the industry focused products which are more liberal in the credit quality profile of their holdings.

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