Can You Trust Bond ETFs?
Source: http://www.indexuniverse.com/blog/4645-bond-etfs.html?Itemid=3&utm_source=straightstocks.com&utm_medium=sidebar&utm_campaign=rssPosted on Monday, October 13th, 2008 | In Exchange Traded Funds
Murray Coleman’s article paints an ugly picture of how fixed-income ETFs are functioning right now.
Murray Coleman’s article paints an ugly picture of how fixed-income ETFs are functioning right now.
Murray focuses on premiums and discounts in the fixed-income space, which is a huge story: fixed-income ETFs are trading at wild variance with their underlying indexes.
There are a variety of reasons why. The fixed-income market is so frozen right now that some bond price indexes are carrying stale data. At the same time, some ETFs are using “fair value” pricing to value their illiquid holdings, which introduces a layer of discretion into how each fund’s assets are priced.
To be honest: It’s hard to know exactly where these things should be trading. And that, to me, is a big problem.
The whole idea of investing in ETFs is that they give you clean access to various asset classes. You set your asset allocation—X% in stocks, Y% in bonds, Z% in commodities—and ETFs give you fair exposure to those markets.
Right now, they are not doing that.
Consider the three junk bond ETFs: the iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG), SPDR Lehman High Yield Bond ETF (AMEX: JNK) and PowerShares High Yield Corporate Bond Portfolio (AMEX: PHB). All three funds track high yield corporate bonds, holding portfolios of 50, 112 and 52 high yield bonds, respectively. You’d think their returns would be similar.
But let’s say you bought shares in each fund at the close of trading on October 3rd. Since then, through 3:30pm ET on October 13, HYG is down about 8.5%, while JNK and PBM are down 17%. That’s an 8.5% swing in 10 days.
It’s worse if you look intraday. At one point last Friday, HYG was down about 15%, JNK was down about 20% and PHB was down nearly 30%.
Of the three funds, HYG appears to be trading the best. On an intraday basis it has been trading fairly smoothly, while the other two ETFs have vacillated wildly.
But a 15% difference? Intraday?
Buyer beware.
Last 5 posts by Matt Hougan
- Long-Term Treasury Shorts? - July 16th, 2009
- Home Prices In 2014? Dead Flat From Here - June 30th, 2009
- Papering Over The Problem - June 16th, 2009
- What's Wrong With ETFs - June 15th, 2009
- A (Popular) ETF Down 97%??? - June 4th, 2009
Exchange Traded Funds, Murray Coleman, PowerShares High Yield Corporate Bond Portfolio, SPDR Lehman High Yield Bond ETF
 About Matt Hougan (http://www.indexuniverse.com/sections/blog.html)
Matt Hougan is senior editor of the Journal of Indexes, editor of IndexUniverse.com and a contributing writer for the Exchange-Traded Funds Report and Financial Advisor magazine. Prior to joining JoI, Matt directed the internal communications effort at Genzyme Corporation, and worked as a biotech analyst and journalist for the award-winning financial Web site MetaMarkets.com. Hougan, a 1998 graduate of Bowdoin College, lives on the coast of Maine. |
No recommendations, either expressed or implied, are being made to buy, sell, hold or short any of the mentioned stocks. No legal, tax or accounting advice is expressed or implied. Always contact your attorney, CPA, or tax advisor before acting on any legal or tax issues. StraightStocks.com is not responsible for the content, products, or services of any of the advertisers on this site. StraightStocks.com receives compensation from advertisers on this blog. Services and products referred to herein are trademarks, registered trademarks, servicemarks, and/or registered servicemarks of their respective trademark or servicemark owners.