In perhaps a sign of things to come in the ETF industry, Vanguard has filed a registration statement with the SEC for seven new bond index funds, more than doubling the Valley Forge, Pennsylvania-based firm’s existing bond lineup. According to Index Universe, the proposed ETFs are:
- Vanguard Short-Term Government Bond Index Fund
- Vanguard Intermediate-Term Government Bond Index Fund
- Vanguard Long-Term Government Bond Index Fund
- Vanguard Short-Term Corporate Bond Index Fund
- Vanguard Intermediate-Term Corporate Bond Index Fund
- Vanguard Long-Term Corporate Bond Index Fund
- Vanguard Mortgage-Backed Securities Index Fund
The size of the bond ETF market currently pales in comparison to the equity market: recently there were about 600 equity ETFs available in our ETF screener compared to only about 70 fixed income funds. Such an imbalance leads me to believe that we are going to see a number of new bond ETFs hitting the market in coming months.
Crowded Market
The new Vanguard funds will charge an expense ratio of 0.15%, a selling poing that may help them eat into the market share that iShares bond funds have established (each of the proposed Vanguard funds will compete very closely with an existing iShares offering). In addition to iShares, bond fund giant Pimco is expected to significantly increase its presence in the bond ETF arena. Pimco’s first fund, the 1-3 Year U.S. Treasury Index Fund (TUZ), was launched in early June and has been very well received by investors (perhaps due to a microscopic expense ratio of only 9 basis points). In addition, Pimco has filed for six additional funds, including three Treasury ETFs that should track indexes similar to those underlying the new Vanguard Funds.
Actively-Managed Bond ETFs
One area in which Vanguard likely won’t compete (at least not if Jack Bogle has anything to say about it) is the actively-managed bond ETF space. But that isn’t going to prevent other issuers from jumping in. Pimco has already filed for approval on several actively-managed funds that could hit the market before the end of the year. Although other issuers might not have the same firepower (or star power) behind a line of actively-managed fixed income products, don’t be surprised if we see a few others dabble in actively-managed bond ETFs in the not-so-distant future.
Disclosure: No positions at time of writing.
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