ETFs target single treasuries
F/m Investments, an ETF newcomer based in Washington DC, has launched America’s first bond ETFs that target just one single bond each.
The funds are very simple. They each own a single on-the-run bond in each tenor that they're targeting. They own just one thing: that bond. Every quarter when there is a new auction, they roll off that bond and into the new issuance.
The funds make monthly distributions, which is more frequent than the bonds they hold.
They charge 0.15%.
Bernie’s commentary – what’s the value-add?
The crucial question for these ETFs is whether they provide a real value-add. Institutional investors have easy access to treasuries via their banks--they won't touch these. Meanwhile, retail investors can access US treasuries too via discount brokers. Why do they need an ETF for this?
One possible value-add is yield curve precision. The multi-billion-dollar treasury ETFs from iShares and Vanguard target broad chunks of the curve. For example, iShares targets 7 – 10 year, 20+ year, etc. Vanguard targets short, intermediate, and long duration. So these funds could help people with really specific views on spreads.
Another value-add could be the frequency of distributions. The funds makes monthly distributions, whereas the bonds they hold pay coupons only semi-annually or quarterly. So they could be a useful income tool. (However, achieving this will result in cash drag as the distributions will be paid from withheld coupons).
A final possible value-add is spreads for retail investors. When buying treasuries on Fidelity, Schwab, Interactive Brokers as a retail punter you’re usually stitched up with wider spreads than you get with bond ETFs. Maybe these launches can work to narrow the difference.
Despite these benefits, my gut feel is these ETFs will struggle. Plenty of exchanges around the world – including those in Australia and China – have tried to make government bonds trade on exchange. Only to find that there’s just no market for exchange traded government bonds. Retail investors find them boring while intermediaries prefer the ETFs. Whether the US proves different we’ll have to wait and see.