ProShares has launched the first S&P 500 bond index ETF.
The S&P 500/MarketAxess Investment Grade Corporate Bond Index (SPXB) ETF is essentially a cheaper iteration of Ivy ProShares S&P 500 Bond Index Fund, whose expense ratio ranges from 34 to 65 basis points depending on the share class.
SPXB charges just 15 basis points, but that’s three times the expense ratio of the iShares Core U.S. Aggregate Bond ETF (AGG), a long-term investment-grade bond ETF that holds more than 6,700 bonds.
The ProShares S&P 500 bond ETF, also a long-term bond fund, can invest in up to 1,000 of the most liquid, high-quality U.S. investment-grade corporate bonds with maturities of 2-1/2 years or higher at issuance or a face value of at least $750 million.
Issues that meet the criteria are ranked by liquidity, as measured by their 60-day trading average volume reported by TRACE (Trade Reporting and Compliance Engine) data so that the most frequently traded, high-quality bonds can be chosen.
Jason Giordano, director, Fixed Income Product Management at S&P Dow Jones Indices tells ThinkAdvisor that he expects all new issues will probably make the cut.
SPXB currently has a weighted average maturity of about 10 years, a duration of about 7 years and a yield to maturity of 3.9%.
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Michael Sapir, the CEO of ProShares, tells ThinkAdvisor the new bond ETF should appeal to advisors and individual investors interested in moving from actively managed bond funds to an index ETF that invests in quality, liquid bonds from companies that investors are comfortable with. Indeed, among the ETF’s holdings are bonds from JPMorgan Chase, Apple, Microsoft and many other household names.
Sapir describes the new ETF as a buy and hold investment. Its value, however, will decline if long-term rates continue to rise. A 1% increase in rates, for example, would reduce its value by about 7%, given its duration.
Long-term interest rates have been climbing almost steadily since the beginning of the year. The 10-year Treasury note is currently yielding 2.95%, up from 2.40% at the end of 2017, but down slightly from a 3.02% close on April 25.