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| BondsOnline.com: instant access to and extensive coverage of over 3.5 million stocks, bonds, indexes and other securities covering major and emerging markets and exchanges across the globe. |
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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Q&A With Matthew Patterson: Are Bond ETFs Broken? |
ETFdb - Jan. 26, 2011 - by MICHAEL JOHNSTON
Matthew Patterson is the Head of Investment Strategy at Accretive Asset Management LLC, a firm dedicated to developing products that help financial advisors better serve their clients. Accretive developed the indices underlying the BulletShares suite of target maturity date fixed income products offered by Guggenheim. Matt recently sat down with ETF Database to talk about some of the limitations of traditional fixed income ETFs, as well as some of the innovation in the space:
ETF Database (ETFdb): The bond market and the stock market in the U.S. are comparable in size, but at the end of 2010 the assets in equity ETFs more than tripled the assets in fixed income ETFs. Why do you think investors have been slow to embrace fixed income ETFs?
Matthew Patterson (MP): We can say with a fair degree of certainty that it is not because of ETF-specific reasons, because a similar pattern manifests itself in the mutual fund space. Generally speaking equity mutual fund assets outweigh fixed income mutual fund assets as well, so that is a pattern that is consistent across mutual funds and ETFs.
We observed when we were developing BulletShares indices that based on federal flow of funds data, there appeared to be a preference on the part of U.S. households to use individual bonds rather than funds and ETFs to gain exposure to fixed income markets. And as you noted this preference is in contrast to the equity markets where U.S. households seem to have a high level of comfort using mutual funds and ETFs. So we set out to find why this was by talking to as many financial advisors as we could. And what we learned is that financial advisors have some serious concerns with traditional bond mutual funds and ETFs.
Some of these concerns were unique to actively managed bond funds. For example, financial advisors expressed concern about the lack of transparency of actively managed bond mutual funds that are only required to disclose holdings four times a year and have strong incentives to boost stated yield by taking on more risk. Other concerns were more general, and related to the very structure of traditional bond mutual fund/ETFs. Many financial advisors spoke of using fixed income allocations to manage their clients’ future cash flow needs and they described traditional bond mutual funds and ETFs as exposure vehicles rather than tools for managing cash flows. What they said they liked about individual bonds is that individual bonds provide an income stream, as well as a return of principal–something that traditional bond mutual funds and ETFs don’t do. At the same time financial advisors expressed concern about the challenges of building diversified portfolios of individual bonds, specifically the significant levels of capital required to adequately diversify and the poor trade execution typically received.
ETFdb: Explain the difference in “yield experience” when investing in bond ETFs as compared to investing in individual bonds.
MP: When you buy an individual bond, you have a pretty good idea of what your yield on the investment is going to be. You still have reinvestment risk and default risk of course, but the stream of cash flows you are expected to receive from an individual bond is known in advance, which allows you to calculate an expected yield to maturity at the time of purchase. Even if interest rates dramatically rise and reduce the fair market value of the bond, an investor always has the option of holding the bond to maturity and receiving the benefit of what he originally bargained for.
In contrast, investors have no way of predicting in advance what their expected yield to maturity will be when they purchase a traditional bond mutual fund/ETF. The most obvious reason for this is that traditional bond mutual fund/ETFs have no maturity date. They are designed to operate in perpetuity, so the managers of these funds are constantly buying and selling bonds in order to maintain a constant duration and keep the fund fully invested. This has the perverse effect of maintaining a relatively high sensitivity to interest rate changes even as an investors’ need to liquidate an investment draws nearer. Consequently, investors can actually experience a dramatic decline or increase on the yield of the investment if interest rate moves cause significant changes to the NAV at which investors can liquidate their investment.
ETFdb: Let’s talk about tracking error. We know that a lot of fixed income ETFs have shown considerable tracking error relative to the underlying index that they seek to replicate. What are some of the causes of the tracking error in fixed income ETFs?
For the complete article.
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| Stuff to look at |
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Income Security Recommendation January 2013 Issue.
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