When Buying Bond ETFs, Consider Credit Quality and Volatility

June 7, 2005 -- Though the list exchange-traded funds (ETFs) remains dominated by equity vehicles, investors seeking to purchased fixed-income ETFs have a menu of six products to select from.

These bond ETFs, all of which belong to the iShares family of Barclay Global Investors, totalled about $11.84 billion in assets at the end of April 2005, up from $8.52 billion at year-end 2004. The entire ETF industry has mushroomed into a $220-billion business.

Unlike regular bond index mutual funds, fixed-income ETFs can be bought and sold like stocks during the trading day. Each ETF is designed to closely match the price and yield performance, before fees and expenses, of a particular fixed-income benchmark. Since they are passively managed, bond ETFs also tend to carry low management fees.

However, as with any bond portfolio, investors should weigh the ETF's credit quality and volatility risks. Standard & Poor's evaluates bond ETFs and issues ratings on their credit quality and volatility, based on such criteria as interest rate risk, yield curve risk, credit risk, liquidity risk, as well as management assessment.

Standard & Poor's credit quality ratings reflect the level of protection the ETF provides against losses from credit defaults. The credit quality ratings scale ranges from triple-'Af' (extremely strong protection against losses from credit defaults) to triple-'Cf' (extremely vulnerable to losses from credit defaults).

Standard & Poor's volatility ratings, identified by the 'S' subscript, are based on current opinion of an ETF's sensitivity to changing market conditions, relative to a portfolio made up of government securities and denominated in the base currency of the ETF. The volatility ratings are based on a scale from 'S1' (lowest sensitivity) to 'S6' (highest sensitivity). Volatility ratings evaluate sensitivity to such factors as interest rate movements, credit risk, and liquidity.

STANDARD & POOR'S RATINGS ON BOND ETFs

Bond ETF

S&P Credit Quality Rating

S&P Volatility Rating

Total Net Assets (as of 6/1/05)

Expense Ratio (%)

YTD Return Through 6/2/05 (%)

iShares GS$ InvesTop Corporate Bond Fund (LQD)

BBB+f

S3

$2.57 billion

0.15

+2.55

iShares Lehman 1-3 Year Treasury Bond Fund (SHY)

AAAf

S1

$3.79 billion

0.15

+0.76

iShares Lehman 20+ Year Treasury Bond Fund (TLT)

AAAf

S5

$506.5 million

0.15

+10.37

iShares Lehman 7-10 Year Treasury Bond Fund (IEF)

AAAf

S3

$887.3 million

0.15

+3.95

iShares Lehman Aggregate Bond Fund (AGG)

AA-f

S2

$1.77 billion

0.20

+2.30

iShares Lehman TIPS Bond Fund (TIP)

AAAf

S3

$2.43 billion

0.20

+3.02

Contact Bob Keane with questions or comments at: .

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