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iShares To Expand Corporate Bond ETF Coverage

by Michael Johnston on October 12, 2009 | ETFs Mentioned: CLY • GBF • GLJ • GVI • LQD • PLK

San Francisco-based iShares, the established market leader in the bond ETF space, has filed for two additional ETFs that would expand its coverage of fixed income ETF opportunities. The two new proposed funds include:

iShares 10+ Year Credit Bond Fund (CLY)
iShares 10+ Year Government/Credit Bond Fund (GLJ)

Pacific Railroad Bond CLY will track the BofA Merrill Lynch 10+ Year U.S. Corporate & Yankees Index, a benchmark that includes debt issued by U.S. corporations as well as Yankee bonds. Yankee bonds refer to U.S. dollar-denominated debt issued by non-U.S. corporations and non-U.S. governments. Yankee bonds are regulated by the SEC and are rated by agencies like Standard & Poor’s and Moody’s, but still generally offer a risk premium over most U.S. bonds.

Long Overdue

As many investors learned the hard way during the recent recession, fixed income exposure is a critical component of any portfolio. Yet the bond ETF space remains relatively undeveloped. According to our ETF Screener, there are more than 620 equity ETFs, but only about 75 bond funds. Among these bond ETFs, only a handful offer any exposure to foreign bonds and the vast majority are dominated by holdings in Treasuries. Investors looking for exposure to investment grade corporate bonds are basically limited to LQD.

This imbalance is beginning to correct itself, as new bond ETF launches are increasing in frequency. Fixed income giant Pimco, a newcomer to the ETF industry, has already launched a handful of funds and accumulated significant assets. And Grail Advisors, also a relatively new entrant, recently filed for approval on actively-managed bond ETFs, a space pioneered by PowerShares with its Active Low Duration Portfolio (PLK). See our Guide to Fixed Income ETFs for a more thorough discussion on fixed income strategies available through ETFs.

GLJ will track an index designed to measure the performance of the long-term, investment-grade U.S. corporate and government bond markets. This ETF would join two existing iShares products, the Barclays Intermediate Government/Credit Bond Fund (GVI) and the Barclays Government/Credit Bond Fund (GBF) focusing on similar fixed income exposures but with different maturities. Securities with maturities between one and ten years make up about 98% and 82% of GVI and GBF, respectively.

Expense ratios for both proposed ETFs are 0.20%.

Disclosure: No positions at time of writing.