Advisors tend to think of security-level diversification as one of the benefits of an ETF. While this is true, single-security Treasury bond ETFs can also provide the same advantages: ease of use, liquidity, and transparency.
When the first of these ETFs came to market, I was skeptical. But since launching its first suite of products in August 2022, F/m Investments has grown its asset base to $1.4 billion and expanded its lineup to 10 products. This week, VettaFi joined the company to help close the market at the NASDAQ MarketSite in New York.
“Beyond market metrics, investors and advisors alike regularly share with us the products have simplified portfolio management and improved their efficacy in Treasury bonds,” explained Alexander Morris, president and CIO of F/m Investments. “They also share new novel and innovative uses of the funds and have given us ideas for many more products.”
How Single-Treasury Bond ETFs Work
Multi-bond treasury ETFs, like the iShares 1-3 Year Treasury Bond ETF (SHY ), hold a mix of securities that can vary in maturity, coupon, and market reaction. However, the U.S. Benchmark Series, which was created by F/m Investments, holds only one type and maturity of bond at a time.
Yet the benchmark can replicate the maturity or duration of other funds and optimize for those metrics, coupons, or expected returns. Ladders of Treasury bonds made with U.S. Benchmark Series ETFs reset each rung, as opposed to resetting from the bottom to the top.
“Since the funds hold fewer securities and stay on the run, the day-to-day results of the fund and pricing match what investors ‘see on TV.’ In addition, the funds have traded with tight spreads. The underlying liquidity of the most liquid Treasuries comes through in the funds," added Morris.
Short-Term Treasury ETFs Are Popular but Not Alone
To date, investors have shown the strongest interest in the U.S. Benchmark Series ETFs at the shorter end of the curve, given rising interest rates over the last year. The US Treasury 3-Month Bill ETF (TBIL ) and the US Treasury 2 Year Note ETF (UTWO ) manage $860 million and $345 million in assets, respectively. Short-term single Treasury bond ETFs from peer provider BondBloxx have also been in demand recently.
The US Treasury 20 Year Bond ETF (UTWY ) is one of the newer funds in the U.S. Benchmark Series, launching on the NASDAQ at the end of March 2023.
“We think the fund could gain a following if the Federal Reserve is indeed pausing its rate-hiking program,” said Morris.
“This is the longest-dated issue offered by the Treasury Department, which is issued and thus rebalanced quarterly. It enables investors to add the most duration possible without taking on credit risk. Consequently, it tends to appeal to investors seeking profit from the change in bond prices,” he added.
While the uncertainty of the Federal Reserve’s next move means that some advisors will want to go further out on the curve with Treasury bonds than others, there’s a wide range of single-security bond ETFs to meet their needs.
For more news, information, and analysis, visit the Institutional Income Strategies Channel.