Bond trading can be a complicated affair even for the most die-hard quantitative market professionals. However, the introduction of single-bond exchange traded funds (ETFs) could possibly pave the way for more traders to enter the bond market via easier access.
According to CNBC, Jared Dillian, senior editor at Mauldin Economics, said the introduction of single-bond ETFs could make for an interesting product offering. “In fact, it could make them one of the more successful product launches of the year.”
As CNBC stated, institutional investors tend to stay clear of bonds because they can be esoteric in nature when it comes to trying to extract a profit. However, that could all change when taking bonds and repackaging them in an ETF format.
“It’s easier to rebalance, there’s no commission in most places when you charge it,” said Alexander Morris, president and chief investment officer at F/m Investments in an interview with CNBC. “The market makers have done a great job keeping the spreads tight, often tighter than most folks would get trading the bond itself.”
Specific funds to look at from F/m Investments include the US Treasury 10 Year ETF (UTEN), the US Treasury 2 Year ETF (UTWO), and the US Treasury 3 Month Bill ETF (TBIL). As the CNBC report noted, this trio of funds are “the first single-bond exchange-traded funds launched to date. Single-stock ETFs, which began hitting the market earlier this summer, offer traders exposure to the daily performance of one stock.”
“We can plan with the market makers to get really good pricing when that happens, so you’re not worried about, ‘Are we a good trader?’” Morris said. “You’re worried more about are we planning appropriately, and the answer is, given the regularity of auctions, we can do that.”
Also a Fixed Income Tool
Single-bond ETFs can also allow fixed income investors to reap the traditional benefits of individual bonds themselves. The fixed income component isn’t lost in these funds, allowing for traditional bond investors with a long-term buy-and-hold mentality to extract the yield benefits.
UTEN, UTWO, and TBIL offer monthly dividends. According to the products’ website, all three funds allow for “monthly dividend payments, more frequent than those of the underlying security.”
All three funds also come at a low price. The 0.15% expense ratio allows for cost efficiency, while still obtaining a monthly dividend to offset the cost.
For more news, information, and strategy, visit VettaFi.