In Focus: Fixed income  

Single-bond ETFs finally bring US Treasury investing to everyone

Alexander Morris

Alexander Morris

Two history-making products made their debut in 1993: the ETF and the Beanie Baby. 

Those adorable plush toys garnered more press attention and were even viewed as a smart investment by some collectors, but a long-term investment in Spy – first trading on January 22 1993 – would have delivered a far better return. 

Three decades later, the $10tn (£8.7tn) ETF industry has established itself as driving force for orderliness and choice for investors around the globe.

Much of the popularity of the ETF can be attributed to its simplicity. Although the underlying securities can be complex, ETF tickers are bought or sold on an exchange with intra-day liquidity just like any basic equity.

Behind the scenes, the ETF issuer assumes the processing burden required to deliver the investment in such a tidy form. 

Bonds have a much longer history than ETFs – centuries versus decades – but the bond buyer’s experience has not changed much in modern times.

Bonds still trade over the counter with confusing price conventions, complicated math, a tangled clearing process, and at times prohibitively wide price spreads.

Unlike equities, the vast majority of bonds have a finite life, which means regular trading is required. US Treasury Bonds, despite their ubiquity, require quarterly, monthly, or even weekly calculation and trading to maintain the consistent risk behaviour one buys them for. 

Enter the ETF, the vehicle uniquely suited to address these issues. Indeed, fixed income ETFs have been simplifying bond investing since 2002.

A wide array of issuers provide access to all corners of the fixed income markets.

Curiously, however, none of those bond ETFs has offered access to the benchmark US Treasury rates that are widely quoted every day in the financial press – and that drive risk metrics around the globe, including the risk-free rate.

Outside a narrow set of professional fixed income traders, most investors have had no practical means of investing in specific US Treasuries.

Today a new family of ETFs enables all investors to achieve and maintain direct exposure to the on-the-run US 10-Year Treasury Note (UTEN), US 2-Year Treasury Note (UTWO), and 3-Month Treasury Bill (TBIL).

Each ETF invests in one security: a benchmark US Treasury.

When the Treasury department issues a new note or bill, the ETF follows suit. The value provided by the ETF wrapper in this case is clear and compelling, so that even professional bond traders and institutions can benefit from potentially tighter spreads.

These single-bond ETFs are quite different from the single-stock ETFs hitting the market this year.

While UTEN, UWO and TBIL provide straightforward, long-only access to US Treasuries, single-stock ETFs assess high fees and deploy complex derivatives to provide levered exposure to a stock investors could easily trade on their own.