Mutual Fund Commentary
YOUNG BUT POPULAR FIXED INCOME ETFS
In the coming days, S&P Capital IQ will be presenting at the biggest in-person ETF conference, Inside ETFs organized by etf.com. Our January 25, 2015 session, titled "ETFs 201: How to Choose the Best ETF in Every Asset Class", will look at some of the interesting ETFs trends identified by S&P Capital IQ. For those of you unable to make the trip to sunny Florida, we wanted to give you a glimpse into our planned remarks.
S&P Capital IQ has rankings and research on approximately 240 fixed income ETFs. The more popular products remain those that are five-plus-years old and that are well-diversified across bond maturities, such as Vanguard Total Bond Market Index (BND 84 Overweight) and iShares iBoxx Investment Grade Corporate Bond (LQD 122 Overweight ). However, 46% of the universe is ETFs that have less than three years of history. While mutual fund investors tend to wait till an offering has reached its three-year anniversary before they will review and possibly put money to work with a fund, ETF investors have not been as patient. We think this is because most ETFs are passively managed and seek to replicate a more easily understood index.
S&P Capital IQ's rankings on bond ETFs are driven by holdings-level analysis, such as credit ratings and duration, as well as the ETF's expense ratio and bid/ask spread. As such, we tend to begin ranking an ETF within three months of its launch.
While the yield on the 10-year Treasury bond moved sharply lower in late 2014 and continued to do so in January, S&P Capital IQ expects the Federal Reserve to begin raising interest rates in mid-2015. We think short-term focused ETFs would likely be less impacted than BND and LQD if yields moved similarly higher.
Among the more popular "young" ETFs is SPDR Barclays Short Term High Yield Bond (SJNK 29 Marketweight), which has approximately $4 billion in assets since its launch in March 2012. The appeal for SJNK, in our view, is that it sports a relatively high 30-day SEC yield of 6.0% yet has less interest rate sensitivity than other high yield ETFs with an average duration of 2.5 years. Bonds rated B or below from rating agencies that operate independent from S&P Capital IQ comprise 49% of the assets and provide a negative offset in our ranking. The ETF has a 0.40% expense ratio and a bid/ask spread of $0.01, quite tight to us considering the ETF is less than three years old.
Another short-term ETF that launched in the last three years is Guggenheim Investments BulletShares 2016 High Yield Corporate Bond (BSJG 26 Marketweight). BSJG launched in April 2012 and has $700 million in assets. BSJG has a 5.6% 30-day SEC yield and a 0.44% net expense ratio. Similar to SJNK, BSJG has an average duration of 2.7 years, but only invests in bonds that mature in 2016. In contrast, SJNK has more than half of its assets with maturities in three to five years according to SSGA's website. Investors that want to obtain precise exposure to manage risk will find particularly appealing the target maturity aspect of the Guggenheim series that has 14 products less than three years old and approximately $2.6 billion in assets. Relative to SJNK, BSJG has slightly more exposure to bonds rated BB, but it also has a negative credit risk consideration in our ranking methodology. This is offset by its tight $0.01 bid/ask spread.
As you can see, investors have not waited three years to gravitate to these short-term high yield bond ETFs. Indeed, if they did so, interest rates might have already moved sharply higher, limiting the appeal of these products.
If you are attending Inside ETFs, we hope you will attend either our Sunday session or stop by the S&P Capital IQ booth throughout the conference to learn more about our approach to ranking equity and fixed income ETFs. If not, please see our ETF reports on this platform.