Wednesday, January 20, 2010

End Date Bond ETF's -- A long time coming and a welcome addition

edit: I have a followup post to end date etf's here

Finally.  This is an ETF I've personally asked ETF complexes to create.  My prayers have finally been answered.  Ishares has come out with the first end date ETF series.

A quick explanation:  Until Ishares created the end date ETF's, all bond funds were perpetual.  If you purchased an etf with a target maturity the fund would always be purchasing and selling bonds within the target maturity band, credity quality criteria, etc.  If interest rates went up or down your fund value would go up and down accordingly but you'd never be sure how much your ETF would be worth in X number of years.

The end date ETF is different, the ETF is designed to expire at a specific date in the future.  From a financial planning perspective this is huge. Now you can build a 'bond ladder' with just a few purchases. With an end date ETF as the the expiration date approaches the volatility will decline as the duration decreases.

Buying muni bonds has always been a pain with huge spreads and taking lots of time to execute.  With the end date ETF's making adjustments will be very easy and quick and if you need to make minor changes in the future the spreads will be much tighter than buying and selling individual bonds.

One caveat, I would not buy them now. The premium to NAV is huge right now at more than 1.5%  The funds are also very small and the spreads are pretty wide.  Once the premium to NAV falls to fair value I will be a buyer of these funds for my clients and myself.

I can see why they created end date ETF's for the muni bond complex first as it is the most illiquid of the bond sectors. Hopefully they will be very successful and Ishares goes on to create end date ETF's for corporate, treasury, and TIP bonds.

Additional reading:
Investment News
Ishares.com end date 2017  ETF

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