Despite concerns over low yields and a brewing bond bubble, many
investors have plunged into fixed income ETFs. In fact, even with
the broad market concerns, over $43 billion in new capital has gone
into the broad bond ETF space since the start of 2012.
Most of this fresh cash has gone into a few choice products,
mostly in either the high yield market, broad fixed income world,
or the investment grade space. For example, over $11.66 billion has
gone into two products alone so far this year; HYG and LQD.
This suggests that investors are highly concentrating their bond
exposure into the most popular and well-known names in the fixed
income world, forgoing exposure to a number of more specialized
ETFs in this segment. This could be to investors’ detriment, as
2012 has been a year of innovation in the fixed income world giving
investors access to a variety of new segments and more targeted
exposure (read ETFs That Will Haunt Your Portfolio).
While a number of these new funds have expanded the global bond
exposure lineup, there are still a number that are segmenting the
American bond market in new and interesting ways.
Given this, some investors who are big on bonds this year may
want to look beyond the ultra-popular funds and instead take a
closer inspection at some of the oft-forgotten funds in the bond
world that can potentially provide better—or at least more
targeted—exposure to the fixed income world (See Go Local With
Emerging Market Bond ETFs).
For these bond investors, we have highlighted three of our
favorite new U.S.-focused bond ETFs below which have seen little in
inflows despite their potentially superior methodologies, or more
impressive segmenting abilities.
Either way, any of the following three funds could be worth a
closer look by investors seeking more fixed income exposure, but
are searching for more choices beyond the top tier of funds that
seems to get all the attention—and inflows—in today’s uncertain
market environment:
Market Vectors Fallen Angel High Yield Bond ETF
(ANGL)
This ETF, which debuted in April 2012, tracks the BofA Merrill
Lynch US Fallen Angel High Yield index, which is a benchmark of
U.S. issued bonds that were rated investment grade at issuance but
are now junk. This produces a fund that has just under 70 bonds in
its portfolio with the vast majority rated at the ‘BB’ level.
Van Eck believes that this technique of focusing on the ‘fallen
angels’ could outperform traditional high yield techniques as these
firms tend to have better debt profiles and more financing
flexibility than their peers. Additionally, these bonds have
performed better with similar risk as other high yield bonds,
according to their research.
Additionally, the fund could be a nice yield destination as
well, as the ETF has a 30-Day SEC yield of 5.7%, while charging a
relatively low 40 basis points in fees. Still, the product has
little in AUM or volume, suggesting somewhat wide bid ask spreads
for those seeking to actively trade this intriguing, but often
overlooked bond ETF (see the Truth About Low Volume ETFs).
SPDR BofA Merrill Lynch Crossover Corporate Bond ETF
(XOVR)
For investors seeking high yields but more safety, XOVR could be
an interesting pick as the fund tracks the BofA Merrill Lynch US
Diversified Crossover Corporate Index. This benchmark focuses on
securities that have an average rating of BBB1 to BB3, thus
targeting the high quality end of the junk market, and the low
quality end of the investment grade space.
State Street’s research suggests that this space may have less
credit risk than most high yield securities but with higher yields
than investment grade bonds, potentially making it a ‘sweet spot’
for investors in the bond market. In some ways, this product looks
to include both the fallen angels of ANGL as well as junk
securities that are slowing trying to rise into the investment
grade category (read State Street Debuts Two Bond ETFs).
With this approach, the ETF has a 30-Day SEC Yield of 3.5% while
charging investors an ultra-low 30 basis points a year in fees.
Like others on the list, the fund hasn’t seen huge inflows since
its inception (June, 2012), as just $13 million is under
management, suggesting wider bid ask spreads once again.
Barclays CMBS Bond Fund (CMBS)
The last fund on this list has seen a little bit more interest
than the others, possibly due to the unique focus of CMBS. The
product targets the Barclays US CMBS (ERISA Only) Index, giving the
ETF exposure to the broad commercial mortgage-backed security
space.
Thus, this is currently the only fund on the market that zeroes
in on the commercial mortgage-backed security market, giving
investors an entirely new option to play the fixed income world.
This could be especially intriguing as the CMBS default rate
continues to fall while borrowing costs are quite low, suggesting
that this rate could continue to slump as we approach 2013 (see Are
The Fundamental Bond ETFs Better Fixed Income Picks).
Even with the declining rates and possible Fed intervention into
the broad MBS market, the yield on CMBS is quite good, coming in at
4.3% in 30 Day SEC terms. Investors should also note that the fund
is a low cost choice at 25 basis points a year in fees, while
volume and AUM are likely to produce modest spreads for this fund,
particularly when compared with other products on this list.
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MKT VEC-FA HYB (ANGL): ETF Research Reports
ISHARS-BC CMBS (CMBS): ETF Research Reports
ISHARS-IBX HYCB (HYG): ETF Research Reports
ISHARES GS CPBD (LQD): ETF Research Reports
SPDR-BAML CR CB (XOVR): ETF Research Reports
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