ETF universe now includes U.S. bond indices: seven fixed income iShares trade on the American Stock Exchange - Exchange Traded Funds

Just when you were beginning to grasp the equity index funds that trade like a stock aspect of ETFs, the industry throws you a curve: bond index funds that trade like a stock. What will they think of next? Probably active ETFs, but that is another story. At the time this article went to print, Barclays Global Investors (BGI) was scheduled to launch four of seven bond ETFs on the American Stock Exchange on July 26, 2002. (In the interest of full and fair disclosure, which is becoming very trendy, I work for BGI.)

The four funds, which sport a thrifty MER of 0.15% or 15 basis points, are as follows:

iShares* Lehman 1-3 Year Treasury Bond Fund (AMEX: SHY)

iShares Lehman 7-10 Year Treasury Bond Fund (AMEX: IEF)

iShares Lehman 20+ Year Treasury Bond Fund (AMEX: TLT)

iShares GS $ InvesTop Corporate Bond Fund (AMEX: LQD)

The three Lehman iShares are designed to track the short-term, midterm and long-term U.S. government bond Indices by the same name, and are by far the most widely followed fixed income benchmarks in the U.S., if not the world. The corporate bond iShares holds 100 investment grade (BBB- or higher) bonds and is run by Goldman Sachs. The remaining three funds, the iShares Lehman Treasury Bond Fund, iShares Lehman Government/Credit Bond Fund, and the iShares Lehman Credit Bond Fund are expected to be available at a later date. All the ETFs hold U.S.-dollar denominated bonds and are traded and priced in that same currency. For more information, visit www.ishares.com.

All the reasons that are compelling tens of thousands of investors to embrace equity ETFs apply to their fixed income cousins. These include low cost, tax efficiency and precise holdings. This last point is really a novelty in the bond world, where the fair market value of bonds that trade on a secondary market have been difficult for individual investors to assess. You may recall (Money Digest, April 2002) that BGI also introduced the worlds first fixed income ETFs, the iG5 (TSX:XGV) and the iG10 (TSX:XGX) iUnits. The main difference between the two being that the iShares line up mimics indices, where as the iUnits hold single Government of Canada bond issues. While no other money manager currently offers fixed income ETFs, at least one provider in the U.S. is working on a series.

These are significant additions to the ETF universe and to a portfolio. Bond ETFs allow investors to conduct similar strategies with their fixed income allocation as is now common for their equity components. Core and explore, tax swaps and various trading strategies can now be easily conducted in a real time, tax efficient manner. There is one caveat to keep in mind when it comes to bond ETFs. Unlike individual bonds, bond ETFs do not have a fixed maturity date where you are guaranteed by the issuer to receive your principal back. Instead, you gain ongoing low cost exposure to a desired portion of the government or corporate yield curve. So, at any given point the index value and thus the ETF price will be determined by interest rate changes, yield curve movements and credit quality. The bottom line is that for your long term or tradable fixed income portion of your portfolio, 4 these innovations are tough to beat.

Howard Atkinson, CFA, CIMA, is author (with D. Green) of The New Investment Frontier: A Guide to Exchange Traded Funds for Canadians. He is also the National iUnits Marketing Manager at Barclays Global Investors Canada, Ltd. Phone 416-594-4404.

* iShares, prospectuses can he downloaded front www.ishares.com. Commissions, management fees and expenses may be associated with investing in iUnits. Please read the relevant prospectus before investing, The Funds are not guaranteed, their value changes frequently and past performance may not be repeated. BGIs ETFs, other than iUnits, are not qualified for distribution to the public in Canada as no prospectus has been filed for such funds with Canadian securities regulators.

COPYRIGHT 2002 Money Digest
COPYRIGHT 2002 Gale Group