Aug. 16, 2002 — Though the launch of the first fixed-income exchange-traded funds (ETFs) in the U.S. might provide investors with an attractive new option, Standard & Poor’s cautions that investors in bond ETFs should consider the fund’s credit quality and volatility risks when choosing which funds to buy.
Fixed-income, or bond ETFs, are new in the market. Volatile equity markets have led many investors to increase their focus on the fixed-income portion of their portfolios. The current relative performance of bonds versus stocks, combined with the lower management fees assessed by ETFs, have given investors good reasons to consider investing in bond ETFs.
In the same way that investors should use impartial, outside evaluations to weigh the risks and rewards of any investment vehicle such as stocks or mutual funds, Standard & Poor’s advises that investors conduct thorough research before buying any bond ETF.
Like their stock-based ETF counterparts, bond ETFs can be bought and sold like stocks during the trading day, and because all currently traded bond ETFs are passively managed–designed to mirror the price and yield performance, before fees and expenses, of a particular benchmark–they generally charge lower management fees than actively managed mutual funds.
For example, the three iShares Lehman Treasury Bond Funds, managed by Barclays Global Investors Services, that currently have ratings from Standard & Poor’s seek results that correspond generally to the price and yield performance of the varying sectors of the U.S. Treasury market as defined by the corresponding Lehman Brothers Treasury indices.
The iShares GS $ InvesTop(TM)Corporate Bond Fund, also managed by Barclays and currently rated by Standard & Poor’s, seeks results that correspond generally to the price and yield performance of the U.S. investment-grade corporate bond market as defined by the Goldman Sachs Index.
Standard & Poor’s provides two types of evaluations for bond ETFs: credit quality ratings and volatility ratings. Credit quality ratings are current assessments of the overall credit quality of a fund’s portfolio. The ratings reflect the level of protection the fund provides against losses from credit defaults. The credit quality ratings scale ranges from ‘AAAf’ (extremely strong protection against losses from credit defaults) to ‘CCCf’ (extremely vulnerable to losses from credit defaults).
The ‘AAAf’ rating assigned by Standard & Poor’s to the iShares Lehman 1-3 Year Bond Fund, the iShares Lehman 7-10 Year Treasury Bond Fund, and the iShares Lehman 20+ Year Treasury Bond Fund signifies that the funds provide extremely strong protection against losses from credit defaults. The ‘A-f’ rating assigned to the iShares GS $ InvesTop Corporate Bond Fund signifies that the fund provides strong protection against losses from credit defaults.