This Week’s ETF Launches: The First Bond ETF Focused on the S&P 500

This week, it becomes a benchmark for bonds as well, thanks to a new fund launched by ProShares. Plus, USCF adds another commodities-focused product to its lineup that’s designed to help investors avoid tax headaches.

Here are this week’s new fund launches:

For a list of all new ETF launches, take a look at our ETF Launch Center.

It seems like such a simple and straightforward concept, but, believe it or not, it’s a strategy that hasn’t been implemented until now. The ProShares S&P 500 Bond ETF (SPXB B) seeks to select the most liquid investment-grade bonds from companies in the S&P 500. Of the entire universe of bonds issued by these companies, the index selects up to 1,000 of the most liquid bonds that must be issued by companies that are members of the S&P 500, be rated investment-grade, be issued in the United States, have a remaining maturity of at least one year, have a maturity upon issuance of at least 2 ½ years and have a minimum par value of $750 million. The 1,000 bonds with the greatest liquidity are included in the index and are weighted by market value.

As you might expect, the fund is filled with some of the biggest bond issuers around, including Verizon (VZ), Apple (AAPL), General Electric (GE), AT&T and Goldman Sachs. It’s also weighted quite heavily toward financial and industrial companies. According to the fund’s fact sheet, the index has a weighted average maturity of 11.5 years and an effective duration of 7.7 years. Those numbers put this bond fund in the riskier category, which could be a problem for investors if interest rates continue to rise as expected. The fund’s index currently sports a yield of 3.73%.

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Commodities make a greater portfolio diversification tool since they traditionally have low correlations with other assets. The problem is that many exchange-traded products associated with commodities are structured as partnerships, not ETFs. That can turn into a real headache at tax time since investors get a K-1 form instead of a traditional 1099. The ETF industry, however, has responded by offering commodities funds that provide exposure to the sector without the annoying K-1 form.

The USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI ) is technically an actively managed fund and seeks to provide exposure to the commodities markets that corresponds to the SummerHaven Dynamic Commodity Index Total Return. This is the same index that another USCF fund, the United States Commodity Index Fund (USCI B), tracks as well. The main difference is that USCI comes with the K-1 form, whereas SDCI does not.

The fund’s underlying index is comprised of the futures contracts of 14 different commodities, weighted equally, from a universe of 27 eligible commodities in total. The potential list of commodities includes crude oil, natural gas, gold, silver, copper, tin, soybeans, sugar, cotton, coffee and live cattle among others. The index is constructed on the theory that commodities in lower supply tend to outperform those that are in higher supply. It looks at the degrees of backwardation, contango and momentum to identify which commodities make for better potential investments at a given time. The seven commodities with the highest degree of backwardation, the condition where futures prices are below current spot prices, make the cut, followed by the seven remaining commodities with the greatest price momentum. The index is reconstituted and rebalanced monthly.

It will be interesting to see how much the link to the S&P 500 index will mean for SPXB. There are numerous funds targeting investment-grade bonds and long-term bonds, but the focus on bonds issued specifically by companies within the S&P 500 should help investors feel more comfortable knowing that they are buying notes from the biggest and most successful companies in the world. For SDCI, moving toward commodity funds that issue 1099s over K-1s is a trend that has been growing lately. Along with USCF, companies, such as GraniteShares, ETF Securities and ProShares, have already launched their own “K-1 Free” ETFs to make life a little easier for investors, a trend which can reasonably be expected to continue.

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