I’m not afraid to roll up my sleeves and get my hands dirty when it comes to investing. 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 have hit 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.
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.
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 0.20% for the iShares Lehman Government/Credit Bond Fund (GBF) and 0.15% for 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 two or three 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 iBoxx $ High Yield Corporate Bond Fund (HYG). 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 higher-risk corporate notes 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.
You can use ETFs to get in on foreign bond markets, too. The SPDR Lehman International Treasury Bond ETF (BWX) seeks to replicate as closely as possible the price and yield performance of its benchmark index, the Lehman Brothers Global Treasury Ex-US Capped Index. This Index tracks the debt of investment grade countries outside of the US.
Meanwhile, the iShares JPMorgan USD Emerging Markets Bond Fund (EMB) allows you to target the bonds of higher-risk … but also higher-yield … countries. In early 2008, the ETF held debt issued by Russia, Colombia, Peru, and South Africa.
And even more products are continually coming out. They include the SPDR Lehman High Yield Bond ETF (JNK) and PowerShares High Yield Corporate Bond Portfolio (PHB).
I consider all of this a welcome change — the bond market used to be opaque and tough for the little guy to access without forking over hefty commissions. Now, that’s no longer true.
