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The first single-bond exchange-traded funds (ETFs) in the world have listed on the Nasdaq exchange in a development that could revolutionize how some traders access U.S. Treasuries.
The launches follow hot on the heels of the first single-stock ETFs in the U.S. and illustrate a growing trend for vehicles to target ever more specific exposures, eschewing the diversification at the heart of the traditional fund structure.
The three ETFs hold U.S. 10-year, two-year or three-month U.S. Treasury bonds and bills. They will always hold the latest issue of their respective tenor, known as the “on-the-run” bond, trading out of the previous issue as soon as a new security is released.
Issuer F/m Investments LLC, a US$4-billion Washington D.C.-based multi-boutique, cited ease of access, tax efficiency and access to shorting and, eventually, options, as advantages of holding the ETFs rather than the underlying U.S. Treasuries.
“We believe the [ETFs] will revolutionize the financial markets, making the most liquid securities accessible to everyone in a more simplified way,” says Alexander Morris, president and chief investment officer of F/m.
“This [concept] has a certain level of deep simplicity. Why was it missed? ... We couldn’t find any good answers to this, so we pushed the button.”
Mr. Morris says F/m was “responding to the needs of our clients” – investment advisors and institutional investors who don’t want to deal with custody and treasury issues.
However, he believed the ETFs would also find an audience in the retail market, given that most retail investment platforms such as Robinhood Markets Inc. do not allow people to buy individual bonds.
Further launches are likely, with F/m having filed to launch a family of 10 single bond ETFs, ranging in tenor from three months to 30 years.
F/m currently manages one ETF in its own name (F/m Investments Large Cap Focused Fund) and three under the name of Oakhurst Capital Management LLC, one of its affiliates. The new ETFs are a collaboration between two more of its affiliates, North Slope Capital Advisors and Genoa Asset Management LLC.
The ETFs launches “should be applauded as another next step in the democratization of finance,” says Kenneth Lamont, senior fund analyst for passive strategies at Morningstar Inc.
“For many years, fixed income investing was the preserve of institutional investors. The arrival of the ETF wrapper helped facilitate smaller ticket investors’ entry into international bond markets. These launches go one step further and allow investors to gain targeted exposure to different parts of the yield curve,” he says.
“These highly targeted building blocks allow investors to take a more nuanced view on rates. There is definitely a clear use case here, which can’t be said for all new products coming to market right now.”
Nate Geraci, president of The ETF Store, was also upbeat about the prospects for F/m’s offerings.
“The fixed income arena continues to offer fertile ground for ETF innovation and issuers are slicing and dicing this market into more precise exposures,” he says, citing the example of BondBloxx Investment Management Corp., which launched a family of sector-specific high-yield bond ETFs earlier this year.
“With rising [interest] rates a primary concern for many investors, the ability to control duration risk has taken on greater importance,” Mr. Geraci adds. “Given the market environment, I expect these ETFs to find some success and wouldn’t be surprised to see additional launches in this space.”
Todd Rosenbluth, head of research at VettaFi LLC, says although investors had “flocked to Treasury ETFs this year,” he feared that well-established asset managers such as BlackRock Inc. had a “significant advantage” over a new entrant such as F/m, given the huge size of their current Treasury ETF offerings and the importance of liquidity.
“Unlike the single-stock inverse ETF from AXS Investments that has experienced strong volume, these products will face entrenched ETF competition,” he adds.
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