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.