The S&P 500 is among the most widely observed equity benchmarks in the world, and fixed-income investors can also make the S&P 500 their primary index as well through a relatively new bond ETF.
On the recent webcast (available On Demand for CE Credit), The First ETF Investing Exclusively in the Bonds of the Iconic S&P 500, Jason Giordano, Director of Fixed Income Product Management at S&P Dow Jones Indices, explained that the S&P 500 Bond Index, which tracks bonds issued by well known companies from the iconic S&P 500, provides exposure to companies with global revenue streams and demonstrated capacity to service debt payments – S&P 500 companies, in aggregate, have more than $1.4 trillion in cash reserves. The index also helps investors access fewer bonds to capture similar characteristics to the broad U.S. corporate bond market and towards higher-rated corporate creditors than the broader U.S. corporate bond market.
The corporate debt associated with S&P 500 members also provide greater liquidity as the issues tend to trade in larger volume with higher frequency. Companies of the S&P 500 were responsible for nearly 70% of the increase in outstanding corporate debt over the past decade.
“On average, 93% of bonds in the S&P 500 Bond Index trade every day. Comparatively, less than 40% of U.S. corporate bonds not in the S&P 500 Bond Index trade every day,” Giordano said.
The recently launched the ProShares S&P 500 Bond ETF (NYSEArca: SPXB), which tries to reflect the performance of the S&P 500/MarketAxess Investment Grade Corporate Bond Index, consists exclusively of investment grade bonds issued by companies in the S&P 500. The underlying index captures similar performance and characteristics of the broad U.S. investment grade corporate bond market, but it is skewed towards higher-rated corporate creditors than its competitors.
While the technology segment may take up the biggest slice of the S&P 500 equity pie, sector exposure for the S&P 500 Bond Index varies from that of the S&P 500. The largest differences fall in Financials, Information Technology and Telecommunication Services exposures.
Growing Demand for Fixed-Income Exposure
Bond ETFs, like SPXB, may also help satisfy the growing demand for fixed-income exposure among investors looking to the efficiency and ease-of-use through the ETF investment wrapper. Simeon Hyman, Head of Investment Strategy at ProShares, argued that despite the strong growth of ETFs, bond ETFs still remain in the early innings of adoption. Bond ETF assets under management still only represent 17% of the overall $3.5 trillion ETF market, whereas bond mutual funds represent 24% of the overall $17 trillion mutual fund marketplace.
“The popularity of Bond ETFs is growing rapidly and their use is becoming commonplace, but their market penetration still lags bond mutual funds, which means there’s significant room to grow,” Hyman said.