Despite concerns over low yields and a brewing bond bubble,
many investors have plunged into fixed income ETFs. In fact, even
with the broad market concerns, over $43 billion in new capital
has gone into the broad bond ETF space since the start of
2012.
Most of this fresh cash has gone into a few choice products,
mostly in either the high yield market, broad fixed income world,
or the investment grade space. For example, over $11.66 billion
has gone into two products alone so far this year;
HYG
and
LQD
.
This suggests that investors are highly concentrating their
bond exposure into the most popular and well-known names in the
fixed income world, forgoing exposure to a number of more
specialized ETFs in this segment. This could be to investors'
detriment, as 2012 has been a year of innovation in the fixed
income world giving investors access to a variety of new segments
and more targeted exposure (read
ETFs That Will Haunt Your Portfolio
).
While a number of these new funds have expanded the global
bond exposure lineup, there are still a number that are
segmenting the American bond market in new and interesting
ways.
Given this, some investors who are big on bonds this year may
want to look beyond the ultra-popular funds and instead take a
closer inspection at some of the oft-forgotten funds in the bond
world that can potentially provide better-or at least more
targeted-exposure to the fixed income world (See
Go Local With Emerging Market Bond ETFs
).
For these bond investors, we have highlighted three of our
favorite new U.S.-focused bond ETFs below which have seen little
in inflows despite their potentially superior methodologies, or
more impressive segmenting abilities.
Either way, any of the following three funds could be worth a
closer look by investors seeking more fixed income exposure, but
are searching for more choices beyond the top tier of funds that
seems to get all the attention-and inflows-in today's uncertain
market environment:
Market Vectors Fallen Angel High Yield Bond ETF (
ANGL
)
This ETF, which debuted in April 2012, tracks the BofA Merrill
Lynch US Fallen Angel High Yield index, which is a benchmark of
U.S. issued bonds that were rated investment grade at issuance
but are now junk. This produces a fund that has just under 70
bonds in its portfolio with the vast majority rated at the 'BB'
level.
Van Eck believes that this technique of focusing on the
'fallen angels' could outperform traditional high yield
techniques as these firms tend to have better debt profiles and
more financing flexibility than their peers. Additionally, these
bonds have performed better with similar risk as other high yield
bonds,
according to their research
.
Additionally, the fund could be a nice yield destination as
well, as the ETF has a 30-Day SEC yield of 5.7%, while charging a
relatively low 40 basis points in fees. Still, the product has
little in AUM or volume, suggesting somewhat wide bid ask spreads
for those seeking to actively trade this intriguing, but often
overlooked bond ETF (see
the Truth About Low Volume ETFs
).
SPDR BofA Merrill Lynch Crossover Corporate Bond ETF (
XOVR
)
For investors seeking high yields but more safety, XOVR could
be an interesting pick as the fund tracks the BofA Merrill Lynch
US Diversified Crossover Corporate Index. This benchmark focuses
on securities that have an average rating of BBB1 to BB3, thus
targeting the high quality end of the junk market, and the low
quality end of the investment grade space.
State Street's research
suggests that this space may have less credit risk than most high
yield securities but with higher yields than investment grade
bonds, potentially making it a 'sweet spot' for investors in the
bond market. In some ways, this product looks to include both the
fallen angels of ANGL as well as junk securities that are slowing
trying to rise into the investment grade category (read
State Street Debuts Two Bond ETFs
).
With this approach, the ETF has a 30-Day SEC Yield of 3.5%
while charging investors an ultra-low 30 basis points a year in
fees. Like others on the list, the fund hasn't seen huge inflows
since its inception (June, 2012), as just $13 million is under
management, suggesting wider bid ask spreads once again.
Barclays CMBS Bond Fund (
CMBS
)
The last fund on this list has seen a little bit more interest
than the others, possibly due to the unique focus of CMBS. The
product targets the Barclays US CMBS (ERISA Only) Index, giving
the ETF exposure to the broad commercial mortgage-backed security
space.
Thus, this is currently the only fund on the market that
zeroes in on the commercial mortgage-backed security market,
giving investors an entirely new option to play the fixed income
world. This could be especially intriguing as
the CMBS default rate continues to fall
while borrowing costs are quite low, suggesting that this rate
could continue to slump as we approach 2013 (see
Are The Fundamental Bond ETFs Better Fixed Income
Picks
).
Even with the declining rates and possible Fed intervention
into the broad MBS market, the yield on CMBS is quite good,
coming in at 4.3% in 30 Day SEC terms. Investors should also note
that the fund is a low cost choice at 25 basis points a year in
fees, while volume and AUM are likely to produce modest spreads
for this fund, particularly when compared with other products on
this list.
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MKT VEC-FA HYB (ANGL): ETF Research Reports
ISHARS-BC CMBS (CMBS): ETF Research Reports
ISHARS-IBX HYCB (HYG): ETF Research Reports
ISHARES GS CPBD (LQD): ETF Research Reports
SPDR-BAML CR CB (XOVR): ETF Research Reports
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