The fixed-income market is suddenly the hottest little corner of the exchange-traded fund industry. Dominated for years by Barclays Global Investors [BGI], the fixed-income ETF market got a lot more interesting this spring when Vanguard launched a new family of fixed-income ETFs that significantly undercut BGI on price. Spurred on by big asset flows, State Street Global Advisors (SSgA) filed papers to get into the game and newcomer Bear Stearns made news by proposing an actively managed money market-like ETF.
Now Ameristock Funds, the sister company of the group that launched the U.S. Oil Fund ETF (AMEX: USO), has taken things one step further by partnering with bond indexing giant Ron Ryan to launch five new Treasury ETFs onto the American Stock Exchange. The funds started trading on Monday, July 2.
The Ameristock/Ryan ETFs differ from most bond funds (and all competing bond ETFs) in that they target a specific Treasury duration rather than a range of Treasuries. For instance, the iShares Lehman 1-3 Year Treasury Bond ETF (NYSE: SHY) tracks an index holding a range of securities (45 to be exact) with durations between one and three years. In contrast, the Ameristock/Ryan 2 Year U.S. Treasury ETF (AMEX: GKB) tracks an index with just one security: the most recently auctioned 2-year Treasury note. Once a new note is auctioned, the benchmark rolls to that note wholesale.
Ron Ryan, the founder of the indexes (and the created of the original Lehman bond indexes), believes that this more focused exposure allows investors to tailor their bond holdings to a specific duration. Investors know exactly what they’re getting, rather than relying on the vagaries of bond issuance to push the duration of the fund between the one- and three-year limits.
The flipside, as mentioned, is that the indexes turnover completely after each new Treasury auction. To mitigate the massive turnover that would result, the ETFs will hold a mix of securities, including off-the-run Treasuries with similar maturities, with a goal of matching the performance of the benchmark index. Investors will have to closely monitor tracking error in the early days to see how this system works. (Some will say that it will be easy to beat the index, as newly auctioned Treasuries can trade at a slight premium to the market, meaning the index might lag a bit after each Treasury auction).
In addition to the 2-Year ETF, Ameristock/Ryan have launched the:
• Ameristock/Ryan 1 Year U.S. Treasury ETF (AMEX: GKA), which tracks an index with a 66.7% weight on the most recently auctioned 6-month Treasury bill and 33.3% weight on the most recently auctioned 2-year Treasury note.
• Ameristock/Ryan 5 Year U.S. Treasury ETF (AMEX: GKC), which tracks the most recently auctioned 5-year Treasury note.
• Ameristock/Ryan 10 Year U.S. Treasury ETF (AMEX: GKD), which tracks the most recently auctioned 10-year Treasusy note.
• Ameristock/Ryan 20 Year U.S. Treasury ETF (AMEX: GKE), which reflects an equal blend of the most recently auctioned 10- and 30-year Treasury notes.
The prospectus is available here.
The ETFs charge 0.15% in expenses, in line with competing funds from BGI and slightly more expensive than the 0.11% fee charged by Vanguard for its bond funds.
Editor: Updated and comprehensive: US Government Bond ETFs, Broad US Bond ETFs.