An ETF Where Risks Are Being Taken to Generate Yield

CFRA also looks at the interest rate sensitivity of all bond ETFs it ranks. ISTB’s ranking is helped by its below-average duration of 2.7 years. This compares favorably to many other investment-grade bond ETFs, including iShares Core Aggregate Bond ETF (AGG) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) with average durations of 5.5 and 8.2 years. Despite rate hikes by the Federal Reserve in 2017, bond yields have not risen rapidly, and following the recent FOMC meeting, CFRA’s Investment Policy Committee meeting noted the odds for another rate hike in 2017 are reduced.

However, risks for higher yields in the future remain. For investors focused more on capital preservation and stable income over capital appreciation, such risks can be meaningful. ISTB has a 30-day SEC yield of 2.0%, which is lower than AGG and LQD, reflecting more muted interest rate risk.

On Demand Webcast: Why Commodity ETFs Should Be Part of Your Diversified Portfolio

While the four inaugural bond ETFs continue to charge 15 basis points, still considerably cheaper than most active bond mutual funds, many younger products have launched with lower fees. Indeed, 44 bond ETFs charge a gross fee of 10 basis or less; indeed, ISTB costs just 8 basis points. In contrast, the average mutual fund in Lipper’s short investment grade bond peer group costs 75 basis points on average.

ISTB currently has no negative inputs at this point. For investors seeking a short-term bond ETF, we think ISTB is a strong candidate for a diversified portfolio.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.