Bond ETF Alternatives After Interest Rates Rise
March 28th 2010 at 1:00am by Tom Lydon
Sooner or later, interest rates are going to go back up, and when they do, government bonds won’t be worth as much as they used to. A selection of bond related exchange traded funds (ETFs) now offer investors exposure to bonds that try to sidestep the capital depreciation that comes with rising interest rates.
Investors may now purchase bond ETFs that cover specific industries, like utilities, that perform relatively well when rates rise, and intrepid investors may consider taking on short ETFs that track Treasuries and other bonds, comments Olivier Ludwig for IndexUniverse. State Street Global Advisors has filed this month with the Securities and Exchange Commission (SEC) to launch the SPDR Barclays Capital Corporate Industrial Bond ETF and the SPDR Barclays Capital Corporate Utilities Bond ETF. [State Street Files For Bond ETFs.]
ETF providers like iShares have even launched muni bond ETFs with target maturity dates from 2012 to 2017, which allows investors to lock in rates and to redeem the full par value at maturity. Claymore Securities has filed with the SEC to launch 10 similar target-maturity funds focused on corporate debt with maturity dates from 2011 to 2020. Traditional bond funds don’t have maturity dates and investors could lose money on a bond investment if they have to draw on principal during a rate-hike cycle.
The Feds have tried to push interest rates as low as possible to encourage borrowing, which in turn fueled talks of a possible Treasurys bubble that skeptics say will burst when the Fed raises rates. As of March 22, the ProShares UltraShort 20+ Year Treasury ETF (NYSEArca: TBT) has attracted $4.53 billion in assets. The fund tries to gain twice the amount of any daily loss of the iShares Barclays Capital 20+ Year Treasury Bond Fund (NYSEArca: TLT).
The best-selling bond ETF of last year was the iShares Barclays TIPS Bond Fund (NYSEArca: TIP), which invests in Treasury Inflation-Protected Securities (TIPS). TIP adjusts the principal upward based on increases in the U.S. Consumer Price Index. The fund has more than $20 billion in total assets. [How TIPS Work.]
The spread between corporate bonds and Treasurys have contracted to about 2% as investors flocked back to corporate bonds to take advantage of prices they thought were bargains. The iShares iBoxx $ Investment Grade Corp Bond ETF (NYSEArca: LQD) gained 30% in the last 18 months and has more than $12 billion in assets. [Bond ETFs: When It's Time To Buy.]
For more information on bonds, visit our bond ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.