When it comes to yard work, I love projects. I’m happy designing and shaping plant and flower islands … lining the edges with concrete or wood borders … and throwing down mulch and decorative stones.
Just this past weekend, my wife and I let the kids play in the backyard while we went to town building a plot in our back yard. It took hours to complete, and I could hardly walk the next day because my back and legs were killing me. But I love the end result, and we plan to start another project in a few weeks.
I’m not afraid to roll up my sleeves and get my hands dirty when it comes to investing, either. But once I’m done with my research, and I know what sector, stock, or market I want to buy, I want the actual buying process to be easy and cheap. I don’t want to pay big commissions, and I don’t want to open a brand new account if I can avoid it.
In other words, if there’s an easier way to get a job done, I’m all about embracing it. That’s why I’m so excited about the new bond exchange-traded funds that are hitting the market …
Eight New Bond ETFs Are Making
Fixed-Income Investing Much Easier
You already know that ETFs are revolutionizing the world of stock investing. I told you about some innovative products two months ago, and my colleague Sean Brodrick has been all over this issue, too.
But you may not realize that ETFs are changing the face of bond trading. There have been a handful of bond ETFs on the market, including the iShares Lehman 20+ Year Treasury Bond Fund (TLT) and the iShares Lehman 1-3 Year Treasury Bond Fund (SHY), both of which debuted in 2002.
Another ETF, called the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), has offered exposure to corporate debt for a few years, and an ETF holding Treasury Inflation-Protected Securities (TIPS) hit the market in late 2003.
But there wasn’t a way to narrow your focus by only investing in short-term corporate bonds. You couldn’t target specific parts of the Treasury market, like ultra-short term debt or bonds with maturities between 10 and 20 years. And you couldn’t buy both government and corporate debt in one ETF.
Indeed, the Investment Company Institute said that just six of the 333 ETFs listed on U.S. exchanges at the end of November 2006 tracked bond indices.
That has all changed with eight new iShares ETFs. They target specific parts of the bond market, allowing you to closely align your portfolio to a host of benchmark bond indices maintained by Lehman Brothers.
| New iShares Fixed Income ETFs: | |
| Name | Symbol |
| Short Treasury | SHV |
| 3-7 Year | IEI |
| 10-20 Year | TLH |
| Intermediate Gov./Cred. | GVI |
| Government/Credit | GBF |
| 1-3 Year Credit | CSJ |
| Intermediate Credit | CIU |
| Credit | CFT |
These ETFs carry extremely low expense ratios — just 0.15% for funds like the iShares Lehman Government/Credit Bond Fund (GBF) and the iShares Lehman Short Treasury Bond Fund (SHV). And as with any ETF, you can buy as many or as few shares as you want, and pay just the regular brokerage commission.
Let me give you a real-world example of how you can use the SHV to your advantage:
A lot of brokerage houses pay you very little interest on the cash you keep in your account. In many cases, you receive three or four percentage points below current market rates.
Well, why not opt out of those brokerage sweep accounts and park your money into the SHV instead? For a small commission and a miniscule annual fee, you’d be getting a much higher return. And since it’s an ETF that invests solely in liquid, safe, short-term Treasuries, you’re still pretty much sitting in cash.
Of course …
These ETFs Also Put More Advanced
Strategies within Your Reach
What if you’re more of a risk-taker? What if you want to try some of the advanced strategies that sophisticated bond traders use? You’re in luck …
For starters, you can now use these ETFs to “short” parts of the bond market. Selling short allows you to profit from a decline in an asset’s price. Basically, you borrow the asset and sell it, hoping to buy it back for less in the future. If everything works out, you pocket the difference as profit. Here’s an example …
Let’s say you think intermediate-term bond prices are going to fall. You could sell short the iShares Lehman 10-20 Year Treasury ETF (TLH). After all, its price would decline in that scenario.
These ETFs are also great for playing spreads, or the differences in yield between various bond categories. For instance …
Say you expect more and more companies to default on their loans, which would cause investors to sell off corporate bonds and move into less risky Treasuries.
You could buy the iShares Lehman 3-7 Year Treasury Bond Fund (IEI) and short the iShares Lehman Intermediate Credit Bond Fund (CIU). With this trade, it wouldn’t matter which direction overall interest rates moved. You’d profit as long as the spread, or difference, between yields on corporate and Treasury debt widened.
Again, this kind of stuff isn’t for the faint of heart. And these aren’t the specific moves that I’m currently recommending to my Safe Money Report subscribers. But they exemplify just how easy bond trading is becoming.
I consider it a welcome change — the bond market used to be opaque and tough for the little guy to access without forking over hefty commissions.
And even more products are in the pipeline! A high-yield (“junk bond”) fund is in registration. Foreign bond funds could follow soon. According to MarketWatch, Vanguard and Morningstar are also looking to expand in this area.
I’ll give you a heads up as new developments unfold. For now, you may want to give the latest crop of bond ETFs another look. The iShares fixed income website is a good place to start.
Until next time,
Mike
P.S. If you’re interested in my latest bond market and interest rate strategies, subscribe to the Safe Money Report now … it’ll only cost you $0.27 a day.
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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