After the high volatility witnessed in the aftermath of the financial downturn and, again, in the summer last year, advisors and investors are looking for more ways to manage risk. Consequently, bond exchange traded funds have garnered a huge following, and now fund providers are expanding their lineups to include increased opportunities for diversification.
We have seen huge inflows into generic or broad bond ETFs, like the iShares Barclays 20+ year Treasury Bond Fund (NYSEArca: TLT), iShares Barclays Aggregate Bond Fund (NYSEArca: AGG) and iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD).
More recently, fund providers have begun issuing specialized or niche bond ETF products, writes Roger Nusbaum for TheStreet. For instance, PowerShares previously filed for a suite of sector bond funds, which have not come to market, but iShares has picked up the ball.
In February, the iShares Financials Sector Bond Fund (NYSEArca: MONY), iShares Industrials Sector Bond Fund (NYSEArca: ENGN) and iShares Utilities Sector Bond Fund (NYSEArca: AMPS) began trading. [iShares Launches Sector Bond ETFs]
MONY includes large positions in Citigroup (NYSE: C), Bank of America (NYSE: BAC) and JP Morgan (NYSE: JPM), along with traditional investment banks like Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS). The fund has an average credit rating of BBB+ and an effective duration of 5.32 years. MONy has a SEC yield of 3.0%.
AMPS has an effective duration of 8.23 years and a SEC yield of 3.16%. The average credit rating is also BBB+.
ENGN has an effective duration of 7.08 years and a SEC yield of 2.87%, with an average credit rating of BBB+. The bond ETF acts more like an ex-financials corporate bond fund, including companies like AT&T (NYSE: T), Pepsico (NYSE: PEP), Oracle (NasdaqGS: ORCL), Caterpillar (NYSE: CAT) and Dow Chemical (NYSE: DOW).
Nusbaum notes that in a rising rates environment, these sector bond ETFs should not drop as much as long-term Treasury bonds or ETFs like TLT. However, the sector bonds will be more volatile than short-term bond ETFs like the iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY).
For more information on bond funds, visit our bond ETFs category.
Max Chen contributed to this article.