|
Bond ETFs: At Last
Marilyn Cohen, Forbes Magazine,
01.07.08
You can't have missed the profusion of exchange-traded funds
the past few years. You can now buy a basket of stocks representing
just about any broad index or industry group, and get it in
bullish or bearish (short-sale) versions. Bonds and preferred
stocks have mostly missed the ETF revolution--until very recently,
that is.
Several of the newly minted bond ETFs have me humming the
Etta James blues song, "At Last." Yes, at last,
we have bond ETFs that can add diversification, value and
maybe a little zing to your portfolio.
The largest and most prolific ETF issuers are Barclays
(nyse: BCS - news - people ) Global Investors, State Street
Global Advisors, PowerShares and Vanguard. All but Vanguard
have recently launched ETFs for municipal bonds, both nationwide
and state-specific for New York and California. The one-state
funds make sense for the unfortunates who live in either of
those tax-grabbing locales.
Expense ratios are low for bond ETFs, between 0.2% and 0.3%
of assets per year. Compare that to the average 1.1% for open-end
muni mutual funds or 1.2% for closed-ends. As with equity
ETFs, the bond ones are traded throughout the day and can
be used in short sales. They all track indexes. They rarely
trade at noticeable premiums or discounts to their net asset
value, a big issue with actively managed closed-end funds.
The Barclays entry, iShares S&P National Municipal
Bond (101, MUB) follows the performance of the Standard
& Poor's Municipal Bond Index, which has minimum maturities
of a month. State Street's SPDR Lehman Municipal Bond
(22, TFI) has the Lehman Brothers
(nyse: LEH - news - people ) Municipal Index, covering those
with terms of at least one year. PowerShares Insured
National Muni Bond (25, PZA) uses the Merrill
Lynch (nyse: MER - news - people ) Insured Municipal
Index--as the name implies, consisting solely of insured bonds
(the Lehman index, for instance, has only 46% of its bonds
insured).
Since these are so new, you might want to wait a quarter
or two before diving in. Study their income distribution,
bid/ask spreads, trading volumes and total returns. Also check
out how well they track their benchmarks. The iShares offering
contains 54 munis while the full s&p index has 3,069.
Note: Vanguard has yet to be heard from. When this discounter
gets around to offering a muni ETF, you can count on a bare-bones
expense ratio.
Now for a mea culpa: My one preferred stock recommendation
in 2007 could not have been worse if I tried: Countrywide
7% Preferred (14, CFC B). This was going for $24
when I suggested it in the July 23 issue. Dump it. So rather
than try to cherry-pick preferred shares for yield, I'd rather
go with a financial ETF.
If you want to target the financial sector on the theory
that it has seen the worst of its subprime writeoffs ( see
related column, p. 117), here's an ETF for you. The PowerShares
Financial Preferred (21, PGF) fund tracks the Wachovia
(nyse: WB - news - people ) Hybrid & Preferred Securities
Index, a market-cap-weighted index of straight preferreds
from 30 financial companies. At present the ETF yields 6.8%
with an annual expense of just 0.7%. Payouts are qualified
dividend income, meaning they're federally taxed at a 15%
maximum rate (through 2010).
If you buy now, you are getting the benefit of a buyer's
market for bank preferreds. Banks are issuing high-paying
preferreds in order to shore up their capital and satisfy
regulatory requirements. In November Freddie Mac
(nyse: FRE - news - people ) issued an 8.375% preferred; last
January an equivalent Freddie preferred yielded 5.57%. You
might want to wait on the PowerShares ETF, though. An upcoming
spate of high-yielding preferred issues may depress share
prices. There should be good buying opportunities in the first
quarter of 2008.
If you are adventurous, try the PowerShares Emerging
Markets Sovereign Debt (26, PCY) ETF, issued in October.
Sure, emerging markets are volatile and sometimes unpredictable,
but that's where the growth is. The bonds in this basket are
sovereign debts, presumably safer than these countries' corporate
bonds. This dollar-denominated ETF tracks the Deutsche
Bank (nyse: DB - news - people ) Emerging Markets
U.S. Dollar Balanced Index. The largest holdings include government
debt from South Africa, Uruguay, Ukraine, Peru, Poland and
Hungry. The expense ratio is 0.5%, a third the average for
open-end emerging markets debt funds.
The ETF market will only get bigger and better in its rang
Marilyn Cohen is president of Envision Capital
Management, Inc., a Los Angeles fixed-income money manager.
Visit her home page at www.forbes.com/cohen.
Back to Top
|
