The introduction of fixed-income exchange traded funds gives advisors a better way to manage diversified portfolios that include bonds.
ETFs are index funds that are bought and sold like stocks on national exchanges. They hold baskets of securities that allow investors to diversify broadly by paying one transaction fee and a management fee that is as low as that levied by the lowest-cost mutual fund holding a similar portfolio. Barclays Global Investors (BGI) was already popular with advisors because of its series of 66 passively managed iShares equity index funds. On July 26, Barclays launched four new fixed-income ETFs, including a corporate bond fund. It’s the first fixed-income ETF ever, and it offers strong benefits to advisors.
The bond market is a dealer market dominated by huge institutional investors, which makes it a lot more work for an advisor to buy a bond than a stock. Since advisors need smaller bond purchases and more sales support than institutional investors, the independent advisor market is not served by the biggest bond dealers, and getting good prices and service can be difficult.
NASD rules permit a bond dealer to mark up the price on a bond by as much as 5%, which means advisors usually have to call around to several dealers to get the best quotes when buying or selling a bond. That’s far more difficult than checking a stock price on an exchange.
“Right now, we’re in a market with the three-year bond yield at about 3%, and a 5% markup means you give up 2 1/2 years of interest,” explains Lee Kranefuss, CEO of the individual investor ETF business at BGI. All of the bond desks you call might mark up a bond by that much or some could be cheaper, but you have to do the research to ensure you get the best pricing. “In contrast, with the bond ETF, the fair value of the portfolio crosses the ticker every 15 seconds.”
Kranefuss says the fair market value or net asset value of the bond ETFs is available online and based on institutional prices for the underlying portfolios, so that you can see how closely the price of the ETF is trading to the NAV. “This is one of the few instance where an advisor can access the same product and pricing as a large pension fund, hedge fund, or mutual fund,” he says.