Single-bond exchanged traded funds may be the key to solving some frequent investing problems.
In August, F/m Investments, a $4 billion multi-boutique investment advisor, launched three single-bond ETFs: the US Treasury 10 Year ETF (UTEN), US Treasury 2 Year ETF (UTWO), and US Treasury 3 Month Bill ETF (TBIL).
They’re the first single-bond exchange-traded funds launched to date. Single-stock ETFs, which began hitting the market earlier this summer, offer traders exposure to the daily performance of one stock. They have been criticized for their greater volatility and for having few benefits for the investor.
However, Jared Dillian, senior editor at Mauldin Economics, argued in an August Bloomberg op-ed that single-bond ETFs “will be one of the more successful product launches of the year.”
These funds give investors a way to easily trade Treasury securities, which are notoriously complicated. Many hedge funds and investors tend to stay clear from bonds, which are associated with messy cash flows and institutional-sized lots, and focus on buying shares of trades on an exchange.
According to Alexander Morris, president and chief investment officer at F/m Investments, “bond math is hard.” He acknowledged it is off-putting to many to get a 1099 amid coupon and accretion payments. But he said the ETF route gives investors direct access to these bonds while being easier to trade.
“It’s easier to rebalance, there’s no commission in most places when you charge it,” Morris told Bob Pisani on CNBC’s “ETF Edge” on Monday. “The market makers have done a great job keeping the spreads tight, often tighter than most folks would get trading the bond itself.”
A solution to investing problems
Buying specific Treasury bonds or notes entails opening an account on TreasuryDirect and buying bonds from the federal Treasury Department at auction. Bond futures, an alternative to buying directly, come with associated margin issues and basis risk.
With these ETFs, “you’re getting access to the U.S. Treasury on-the-run 2 Year. It’s a cash bond, there’s no leverage, there’s no derivatives. It’s quite different than a single-stock ETF,” Morris said.
“In that sense, it’s simpler, it’s easier,” he added. “You get access to what you would buy if you were to go and purchase a 2 year Treasury on its own.”
On-the-run Treasurys are the most liquid and trade at slight premiums, which is why funds roll over every month. The on-the-run 10 Year underpins much of the global financial infrastructure, from mortgages to car loans.
F/m Investments charges 15 basis points for its single-bond ETFs, and the funds distribute dividends monthly. This gives holders a more frequent interest payment than actual U.S. Treasurys, and the ETF structure allows for additional benefits of convenience, liquidity, and tax efficiency. A basis point equals 0.01%
“We can plan with the market makers to get really good pricing when that happens, so you’re not worried about, ‘Are we a good trader?'” Morris said. “You’re worried more about are we planning appropriately, and the answer is, given the regularity of auctions, we can do that.”
Going forward
John Davi, CEO and chief investment officer at Astoria Portfolio Associates, said the “game has changed” in that clients should also consider going long on non-stock assets like bonds, especially with the 2 Year Treasury (US2Y) at 4.48%. He stressed the importance of diversification across bonds, such as expanding to municipals and corporate through Invesco BulletShares fixed income ETFs.
Single-bond ETFs may compete with multi-bond ETFs, in which investors often lock in low yields for potentially several years at different maturities — the iShares Core U.S. Aggregate Bond ETF (AGG) has more than 10,000 holdings. These fluctuations may not matter for long-term investors but are less ideal for day-to-day traders.
“If we go back to March 8, 2020, some of the spreads on multi-bond products got very large, and it wasn’t because the on-the-run Treasurys lost the liquidity or the Treasury market dried up,” Morris said. “It was that market makers also had to move a substantial number of bonds that were not particularly popular.”
Investors are also able to short these ETFs, meaning they can be used in complicated maneuvers with long and short equities or bond funds. The ETFs will target retail investors who have lacked access to the rate mechanisms of institutional investors, as well as advisors with very specific interests in being at a certain place on the yield curve.
Morris said F/m Investments may launch a 6 Month and a 12 Month ETF so investors can get access to the steeper parts of the curve. They may also launch at 30 Year for those interested in long bonds to add duration to portfolios. Though he noted this cannot extend to some foreign currency bonds like the U.K. gilt, which would instead be an exchange-traded note (ETN).