Latest news, trends and ideas for investing with exchange traded funds | ETF Commentary

Ian Salisbury is reporting that a new study finds exchange traded funds missed the indexes they follow by a wider margin in 2009.

In the article ETFs Were Wider Off the Mark in 2009, Salisbury writes that the study suggests investors closely monitor how many stocks or bonds an ETF owns relative to its benchmark as a way to avoid funds that may be subject to higher than average tracking error.

Example funds reporting higher tracking error include the iShares MSCI Emerging Markets Index ETF (EEM), SPDR Barclays Capital High Yield Bond ETF (JNK) and the Vanguard Telecom Services ETF (VOX).

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Kiplinger’s Jeffrey Kosnett recently published a primer on investing with Exchange Traded Funds and included a list of 10 ETFs that you need to know.

The funds making Kosnett’s 10 “to know” list include:

SPDR S&P 500 (SPY)

SPDR Gold Shares (GLD)

SPDR Barclays Capital High Yield Bond ETF (JNK)

iShares S&P-Citigroup International Treasury Bond Fund (IGOV)

PowerShares QQQQ (QQQQ)

S&P Global Utilities Sector Index Fund (JXI)

iBoxx $ Investment Grade Corporate Bond Fund (LQD)

Dow Jones Select Dividend Index Fund (DVY)

SPDR DJ Global Titans (DGT)

Vanguard REIT ETF (VNQ)

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More and more investors have been moving money into Bond ETFs according to WSJ reporter John Spence.

In the article, Bond ETFs Draw a Surge of Funds, Spence reports that the two best selling fixed income ETFs in the iShares line-up are bond funds. In fact, the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) has seen net inflows of nearly $5 billion.

Junk bond ETFs have also done well including the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).

Spence also points out that inflation fears flamed by loose monetary policy and unprecedented government spending have investors putting money into Treasury Inflation Protected Securities or TIPS. For example, the iShares Barclays TIPS Bond Fund (TIP) has doubled in 2009.

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The New York Times Conrad De Aenlle published a story over the weekend on the current opportunity in corporate bonds.

In the article Corporate Bonds Offer Opportunity, Aenlle summarizes the view of some bond specialists who contend that prices are so low and yields so high that they are immune from anything short of disaster — and maybe even that, too.

Investment-grade corporate bonds, for example, yield close to 5 percentage points more than Treasuries. Just after the 2001 recession, the spread peaked at about 2.5 percentage points.

A standardized basket of high yield corporate bonds recently yielded 14 percentage points more than Treasuries, 4 percentage points more than in 2002 or during the 1991 recession.

Not all strategists see the current bond market in the same light. Aenlle notes that Martin J. Mauro, a strategist at Merrill Lynch, counsels investors to stick with Treasuries and debt issued by federal agencies.

The $9 billion Lehman Aggregate Bond Fund (AGG) holds investment grade U.S. Government bonds and investment grade corporate bonds and carries a 30-Day SEC Yield of 4.3%.

A very low cost option for bond market exposure is Vanguard’s Total Bond Market ETF (BND) which owns a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States and yields 4.7% and an annual expense ratio of 0.11%.

The SPDR Lehman High Yield Bond ETF (JNK) yields 16.8% and owns high-yield corporate bonds using the middle rating of Moody’s, S&P, and Fitch, respectively, and have $600 million or more outstanding face value.

See the ETF Directory at ETF MarketPro for a complete listing of Fixed Income ETFs.

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