SEC Clears the Way for Fixed-Income ETFs By John Spence May 29, 2002

In an open meeting, the Securities & Exchange Commission today gave the initial go-ahead to Barclays Global Investors to launch domestic fixed-income exchange-traded funds. Barring a hearing on the matter, in 25 days the SEC will issue orders granting BGI exemptions from the Investment Company Act of 1940 relating to ETFs.

According to BGI, the funds are scheduled for launch in late July. They are as follows:

• iShares 1-3 Year Treasury Index Fund
• iShares 7-10 Year Treasury Index Fund
• iShares 20+ Year Treasury Index Fund
• iShares Treasury Index Fund
• iShares Lehman Government/Credit Index Fund
• iShares Lehman Corporate Bond Fund
• iShares Goldman Sachs Corporate Bond Fund

Although today's announcement was highly anticipated by ETF fans, many industry observers have wondered if fixed-income ETFs can duplicate the exponential growth enjoyed by their existing equity counterparts. However, fixed-income ETFs do have some potential advantages over individual bonds and bond funds.

The most obvious benefit for retail investors is the lower expense ratio. Other benefits more appealing to those with a trading mindset include intraday pricing and portfolio transparency. Existing bond mutual funds can only be purchased at end of day prices.

A recent report by Lipper also noted that fixed-income ETFs would allow investors to short the bond market (ETFs trade like stocks) to hedge interest rate fluctuations without using the derivatives market or being faced with huge minimum account size as a barrier to entry.

The SEC and others have raised concerns over potential higher premiums and discounts in fixed-income ETFs because bonds trade differently than equities.

Fixed-income ETFs have been trading in Canada since 2000. BGI offers two iUnits ETFs based on 5- and 10-year Canadian government bonds.