A New Bond ETF and Looking Ahead to 2010

Includes: HAP, SPSB
by: Roger Nusbaum

First up is that SPDR came out with a 1-3 year corporate bond ETF that has ticker symbol SCPB. The fund is brand new and so very likely not fully deployed but there is a download of the holdings available. The number of issues in the fund is about 30 versus over 500 in the index so they have a little ways to go to look more like the index.

According to the fact sheet, the index, that's the index not the fund, has an average credit rating of A2/A3, the yield to worst is 2.69%, it has 46% in industrial companies, 45% in financials and 8% in utilities. One thing to point out is that if you download the holdings of the fund you will see a lot of coupons in the sixes and sevens but that will not be the yield. The 2.69% may or may not turn out to be correct but do not think the yield of the fund will be 6%, it won't be. At least not now.

That the fund has a lot in industrials is a positive, that it has a lot in financials is a negative. In the last year or so I have added similar exposure for client accounts as this fund in the industrial sector, tech sector and healthcare sector. PowerShares has filed for bond funds that go to the sector including the industrial sector. That one could be a great hold for people not looking to use individual issues for corporate bond exposure.

OK, jerk store time, but the Seeking Alpha Sector ETF panel on Thursday seemed like a bit of a dud to me. Kim Arther makes active sector decision in his practice so his inclusion makes sense. Matt Hougan from IndexUniverse dissects sector funds in some of his writing and contributed in this regard to the panel so his inclusion makes sense.

Tom Lydon is more of a technical analysis guy over fundamentals. As I understand how he does things, he could own a bunch of sector ETFs or none at any given moment. I am not critical of his approach in the least but it seems as though he is sector agnostic. If the chart is good then it can be a buy and if the chart is bad it can be a sell. That sounds agnostic to me so I'm not sure he was the best choice for this panel.

JD Steinhilber said he only uses broad based funds except for Market Vectors RVE Hard Assets Producers ETF (NYSEARCA:HAP). JD's approach is different than mine, obviously, which is fine, but why invite someone who doesn't use sector funds to talk about how to choose sector funds?

I'll sneak in something here that I have mentioned a couple of times that I believe is going to be very important. As important as sector selection (avoidance) has been for the last couple of years, I believe country selection (avoidance) will be just as important in the next few years.

I've participated in a couple of 2010 surveys and below are a couple of things that I'm leaning toward, resulting from a combo of contrarian thinking and fundamental opinion:

  • SPX down 10%
  • EAFE down a touch more (because of exposure to big Western Europe and Japan)
  • Emerging markets up 5%
  • Ten year US treasury to 4% (I have since concluded it will be higher than that)
  • Favored sectors telecom, healthcare, staples and utilities (selectively as rising rates are a negative for utilities)

So we'll see what happens.