iShares Issues 3 New Sector Bond Funds

Includes: AMPS, ENGN, MONY
by: Roger Nusbaum
There was a meaningful evolution in fixed income ETFs yesterday when iShares came out with three corporate bond ETFs that target sectors: Financials Sector Bond Fund (NYSEARCA:MONY), Utilities Sector Bond Fund (NYSEARCA:AMPS) and Industrials Sector Bond Fund (NYSEARCA:ENGN).

Buying bonds is not always easy to do for individual investors as a function of size and also the ability (time wise) to track many different individual issues held. The fixed income space in ETF land has become a lot deeper in the last year or so, with many foreign funds having come out, I think the concept of the BulletShares from Guggenheim is very useful and now we see the first sector ETFs for domestic corporates. I think the old Claymore (now Guggenheim) registered similar funds, but I am pretty sure they never came to fruition.

The ability to use corporate bond funds without financials is a huge step forward. We own individual issues as part of our fixed income mix but we also use some funds. Long time readers may recall I prefer a mix of both in building both the equity and fixed income sides of the portfolio and so the extent to which the fund side branches into new territory is useful.

The effective duration of ENGN is 7.3 years and the yield to maturity is 3.07%. For MONY the effective duration is 5.4 years and the YTM is 3.84% and for AMPS the effective duration is 8.55 years with a YTM of 3.44%. Those yields may or may not look attractive to you given that overnight money yields zero but don't forget that the way bond ETFs work, that will be the yield unless it isn't--which is to say that there can be no expectation of yield consistency as a function of changes in the market and changes in the share count of a fund even with accrued interest.

It might be possible to observe a range of probable payouts for funds like these, but obviously that won't come until it has at least a few payments under its belt. Bond funds have drawbacks, which is OK because individual issues have drawbacks too. The problems only arise when someone buy either type of product without understanding the drawbacks.

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