Eight years ago today, iShares made an immensely important contribution to the Exchange Traded Fund (ETF) revolution with the introduction of the iShares Barclays Aggregate Bond Fund (AGG).
Stock ETFs were an important evolution for investors, but in some respects, bond ETFs are more revolutionary because bond investors had new access to information, pricing and trading.
I started in the financial services in 1995 as an assistant bond trader. In those days, the internet wasn’t ubiquitous and we all subscribed to Bloomberg terminals (and still do), that provided information about individual bonds, but didn’t have information about the character of bond indexes from Lehman Brothers without additional fees.
When we traded bonds, we called multiple dealers (we couldn’t see their inventories online) and negotiated prices over the phone. We know that the bond prices were marked up, but we didn’t know by how much, so we had to be careful about what we were paying because we were going to turn them around and sell them to someone else at a higher price.
While the bond market is still a negotiated market, having bond ETFs trade throughout the day on exchanges gives bond traders a lot less wiggle room in their pricing, which is good for investors because more information means more competitive prices.
My current firm, a buy-side Registered Investment Advisor, doesn’t trade bonds, but we still buy them on the negotiated market. Now, however, we can exposure to unique sectors of the bond market through bond ETFs quickly without having to make multiple phone calls for each bond that we want to buy.
Perhaps most importantly, information about bond indexes has been largely democratized. We used to get periodic faxes from dealers with stale information about the yield, duration, and sector exposure of the Aggregate Index. Thanks to the proliferation of bond ETFs, we can get vast amounts of data about very narrow segments of the bond market in addition to the Aggregate Index.
iShares AGG brought competition to the bond market as well as other ETF providers wanted to get assets. Vanguard, State Street and Schwab all offer competing Aggregate index products and total costs have come down, even though AGG was inexpensive at the outset.
Since I assume that all Seeking Alpha readers are capitalists and recognize the benefits of competition, we all owe thanks to innovators at iShares. Matt Tucker is one of the people responsible for bringing bond ETFs to market and even though I don’t know him, I would encourage everyone to check out his Seeking Alpha blog posts.
Thank you iShares and Happy Birthday AGG!