Some Newer Bond ETFs Flourish
On a day when U.S. equities are soaring, bonds may not be the first thing on many investors' minds. Even with that in mind, it is worth noting that some newer bond ETFs have rapidly accumulated assets under management, even as stocks have soared.
Typically, a "new" ETF is a year old or less, but in a new research note, S&P Capital IQ looks at a broad swath of successful bond ETFs that have come to market over the past three years.
"Indeed, 41 of the 181 fixed income ETFs for which we have such data have over $1 billion in assets, helped by the strong demand in 2012 for income-generating ideas," said S&P Capital IQ in the note. "In 2012 alone, fixed income ETFs received approximately $53 billion in new money and these products now have nearly $250 billion in assets."
The research firm notes that there are seven bond ETFs that debuted over the past three years that currently have at least $1 billion in AUM. S&P sees that resulting from three factors: Who is the asset manager and index provider behind the product? The ETF's costs and does the ETF help to fill a need for investors better than alternatives?
The PIMCO Total Return ETF (NYSE: BOND) stands as an obvious example of newer bond ETF that delivers on at least two of those factors for investors. BOND has the advantage of being known as the "Bill Gross ETF" or the ETF equivalent of the massive PIMCO Total Return Fund, the world's largest mutual fund.
Not even 14 months old, BOND has accumulated more than $5 billion in AUM and its expense ratio of 0.55 percent is fair among actively managed ETFs. Many analysts and members of the press have doted over BOND, anointing it as the savior of the actively managed ETF space. To be sure, BOND has delivered the goods in terms of AUM, returns and low-cost access to Bill Gross.
However, all the fawning over bond obfuscates the fact that there are some other noteworthy actively managed ETFs on the market today.
Chief among them is the WisdomTree Emerging Markets Local Debt Fund (NYSE: ELD), which was also highlighted in the S&P note. Something that folks often forget about the WisdomTree Emerging Markets Local Debt Fund is that this was the first actively managed ETF to surpass $1 billion in AUM. Today, ELD has over $1.9 billion in assets. With an expense ratio of 0.55 percent and an effective duration of 4.83 years, ELD has gained prominence as investors have looked for ways to get exposure to strong government balance sheets in the emerging world.
ELD's country weights include Brazil, Chile, Colombia, Mexico, Peru, Poland, Turkey, South Africa, Russia, Malaysia, Indonesia, Philippines, Thailand, China and South Korea.
Flying under the radar is the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (NYSE: TDTT), which charges just 0.2 percent per year. TDTT debuted in September 2011 and has already hauled in over $1.5 billion in assets. TDTT "gives investors access to the inflation-hedging qualities of TIPS and seeks to provide targeted duration exposure through changing interest rate and economic cycles," according to FlexShares.
Another ETF that S&P mentioned that also debuted in 2011 is the iShares Floating Rate Note Fund (NYSE: FLOT). FLOT also charges 0.2 percent and has also amassed over $1.5 billion in assets.
Investors looking for shorter duration high-yield corporate bonds have at least two options that S&P mentioned. The PIMCO 0-5 Year High Yield Corporate Bond Index (NYSE: HYS), which will turn two in June, has a juicy distribution yield of 4.87 percent and an effective duration of 1.85 years. HYS charges 0.55 percent and has more than $1.9 billion in assets.
HYS has a rival in the form of the SPDR Barclays Short Term High Yield Bond ETF (NYSE: SJNK). Barely more than a year old, SJNK dispels the notion that investors have been pulling money out of high-yield bonds as the ETF has hauled in $1.2 billion in assets. SJNK has a modified adjusted duration of 2.06 years and fees of 0.4 percent.
S&P also noted the PowerShares Senior Loan Portfolio (NYSE: BKLN), which debuted in March 2011 as the first senior loan ETF. BKLN's success has triggered the introduction of at least two copycat ETFs. With a distribution yield of 4.56 percent, BKLN's yield to maturity of 5.58 percent. The ETF is the top asset-gatherer in the PowerShares lineup this year, having pulled in $1.88 billion in new cash, according to issuer data. BKLN now has over $3.4 billion in assets.
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