Richard Kang1

Vanguard Offers Four New Bond ETFs

AH: Agreed, the income earned from fixed income ETFs would hurt foreign investors more with the withholding tax. Most equity based ETFs are highly tax efficient so it's another argument against the bond ETFs ... and could be significant one depending on investor. I'll be interested to see if the new Vanguard bond ETFs rise to a decent level of AUM and even take some from BGI. Fixed income is one of the areas where BGI will have to consider pricing more carefully and soon. Maybe not their newer bond ETFs but certainly the original treasury ETFs and perhaps AGG and TIP.

I'm sticking to my guns on this one though. For most retail investors = Equity core and explore: ETFs core, stock selection satellite. Fixed income core and explore: Laddered bond portfolio core, fixed income ETFs as satellites.

Vanguard Offers Four New Bond ETFs

Like all ETFs or any sort of fund, not every offering is good for every investor. To me the biggest negatives about bond ETFs are the relatively high fees and the lack of diversification provided within the various components in the ETF. Vanguard's offerings significantly take away my first point but because of a lack of competition in this area, it's been a long time coming. Furthermore, in the current economic environment and resulting low total returns, the expenses in bond ETFs hurt even more. The diversification problem still exists however. You really have to agree that within the S&P 500 or other broad market indices, the benefit is that with so many different sectors as well as mix of value and growth oriented stocks, the benefits of diversification are self-evident. The same can not be said to the same degree with bond ETFs.

Of course, DJ and AB, your comments are correct although AB I'm not so sure about the benefits of bond indexing for many retail investors. It's also interesting that despite the fact that, as you say, there's been an "inabliity of the industry to generate significant alpha" in the bond fund space, we're starting to hear of fund offerings that focus on some active management in this area. This includes Sage Advisors working with Ryan ALM on a bond index plus program as well as the well publicized Bear Stearns filing with the SEC for an actively managed ETF. I agree that, at least on the mutual fund front, we have little evidence of alpha generation, but the industry seems to want to go for it in the ETF arena. With preferred share ETFs, dividend focused ETFs and other yield focused fund offerings, perhaps this is another example of the market attempting to provide more than the relatively poor returns found in bond markets in recent years. With the demographic shift (retirement of baby boomers), yield will continue to be a significant objective for many investors. I see it as a parallel to the search for alpha. Product offerings will continue in the ETF space to deal with demand.