Even with the Federal Reserve having raised interest rates twice this year with plans for two more hikes before year-end, investors are flocking to fixed income exchange traded funds.
Low-cost ideas in the bond ETF arena include the SPDR Portfolio Aggregate Bond ETF (NYSEArca: SPAB), which charges just 0.04% per year, or $4 on a $10,000 investment. SPAB tracks the Bloomberg Barclays US Aggregate Bond Index and offers market-like exposure to the broad US investment grade space.
“Not only have fixed income ETF assets increased but so too has the investor base using these funds,” said State Street Global Advisors (SSgA) in a recent note. “Wealth management and institutional investors are projected to increase their use of fixed income ETFs over the next few years, according to reports from Cerulli1 and Greenwich Associates, adding to an expanding and evolving user base that includes individual investors and financial advisors.”
SPAB holds over 4,500 bonds and has an option-adjusted duration of just over six years. The fund has a 30-day SEC yield of 3.21%.
Why Investors Like Bond ETFs
Costs, liquidity and transparency are among the reasons more investors are embracing bond ETFs.
“US-listed fixed income ETFs have a median expense ratio of 0.28% versus mutual funds’ median ratio of 0.67%. While many ETFs are index-based, this lower cost profile carries over to actively managed ETFs that have a median expense ratio of 0.41% versus 0.63% for actively managed bond mutual fund strategies,” according to SSgA.
Robust liquidity and the secondary market are advantages for high-yield corporate bond ETFs, such as the SPDR Blmbg BarclaysST HY Bd ETF (NYSEArca: SJNK).
Related: Signals from the U.S. Yield Curve
SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds.
“ETFs’ robust secondary market means investors can tap into market liquidity more easily than with single-CUSIP bond holdings to reallocate portfolios quickly across asset classes or meet investor redemptions by selling an ETF position into the market without having to sell single-CUSIP bonds,” said SSgA.
For more on the bond market, visit our Fixed Income Channel.