Market volatility appears to be driving investors towards bond exchange traded funds (ETFs) as providers launch new fixed-income products and bring down the prices of existing funds.
State Street has listed 11 new fixed-income ETFs on the London Stock Exchange offering exposure to US treasury, euro government and US corporate bonds across the yield curve. The range enables investors to select bonds maturing at different dates: longer-dated bonds for a higher income and shorter-dated ones at the lower end of the yield curve for lower interest rate risk and lower volatility.
It follows a move by Lyxor earlier this month to cut fees on its bond ETFs, slashing the total expense ratio (TER) for Gilt and Treasury ETFs to 0.07 per cent, and taking US and UK investment grade Corporate bond ETFs down from 0.15 to 0.09 per cent. State Street's new ETFs have TERs of 0.15 per cent or 0.20 per cent.
Innovation in bond ETFs has developed more slowly than among equity ETFs due to the comparative complexity of valuing and making a market for bonds. However, Antoine Lesne, head of ETF sales strategy at SPDR ETFs, said investors were increasingly turning to bond ETFs to reduce their risk or increase their income.
"The demand up until this week has been for safer assets such as UK gilts, US treasuries and European government bonds," he said. But he added that other investors were looking to European corporate bonds "for better yield than the euro market which is quite low at the moment".
Adam Laird, passive investment manager at Hargreaves Lansdown, said of Lyxor's move: "This tells me something about the development of the ETF market. High-risk Vietnam equity/Masala Bond ETFs haven't gone away, but ETFs can also be used by cautious portfolios. This is probably on many investors' minds at the moment when markets have been so choppy.
"The passive price war has driven lots of mainstream equity ETFs below a 0.10 per cent annual charge. Gilts haven't been a big seller for the past few years due to low yields and the danger of rising interest rates. But they remain a key investment for some. For example, low-risk bonds are key for pre-retirement investors. With yields still at rock bottom, low fee ETFs are a sensible choice."
State Street's new bond ETFs
| SPDR Barclays U.S. Corporate Bond UCITS ETF (USCB) |
|---|
| SPDR Barclays 3-10 Year US Corporate Bond UCITS ETF (IUCB) |
| SPDR Barclays 3-5 Year US Treasury Bond UCITS ETF (TRS5) |
| SPDR Barclays 5-7 Year US Treasury Bond UCITS ETF (TRS7) |
| SPDR Barclays 7-10 Year US Treasury Bond UCITS ETF (TRsX) |
| SPDR Barclays 10+ Year US Treasury Bond UCITS ETF (LUTR) |
| SPDR Barclays 3-7 Year Euro Corporate Bond UCITS ETF (EC37) |
| SPDR Barclays 7+ Year Euro Corporate Bond UCITS ETF (LEUC) |
| SPDR Barclays 5-7 Year Euro Government Bond UCITS ETF (EU57) |
| SPDR Barclays 7-10 Year Euro Government Bond UCITS ETF (EU7L) |
| SPDR Barclays 10+ Year Euro Government Bond UCITS ETF (LGOV) |
Source: State Street
