When building a fixed income portfolio, investors have essentially two options: buy a fund that holds a basket of various IOUs or buy the individual bonds themselves. However, whereas owning a basket of individual stocks is a pretty straightforward and easy proposition, buying individual bonds is a bit trickier. And thanks to various factors impacting buying individual bonds, most investors choose the fund route and give up some individual bonds’ benefits.
But with some innovation, they may not have to. Individual bond ETFs are now here and proving to be a wonderful portfolio tool.
All in all, the suite of bond ETFs from F/m Investments can be a game changer and has plenty of potential for larger investors, their advisors, and portfolios.
Don’t forget to check our Fixed Income Channel to learn more about generating income in the current market conditions.
Buying Bonds Is Hard
Truth be told, buying individual bonds is a bit of a complicated matter. Unlike stocks, which feature plenty of volume, the ability to buy fractional shares, and the ability to trade on major exchanges, bonds are a bit different.
When a firm or local government decides they want to raise debt, they call up an investment bank that floats the bonds to investors. They purchase the bonds and tend to hold them. Trading of bonds occurs in the so-called over-the-counter exchanges (OTC). Often trades are very large, negotiated between parties, and have wide price/spreads.
The same could be said for U.S. Treasury securities. Individual investors can create a Treasury Direct account and buy bonds or participate in the Treasuries’ various auctions. While featuring more liquidity than corporate or municipal debt, Treasuries still trade in the OTC marketplaces and often feature large lot sizes.
The end result is that many individual investors—even those with larger portfolios—are stuck buying bond funds. Funds do provide diversification. But they also expose investors to various interest rate risks. When you own an individual bond and hold it to maturity, you get your principal back. Not so with a bond fund that is constantly rolling over its debt.
Enter F/m Investments’ Single Bond ETFs
F/m Investments’ latest suite of single bond ETFs could be the revolutionary answer. Debuting in August 2022, these funds hold a single bond CUSIP as their only asset and will roll-over to the newly issued bond as soon as the next one is released. That’s a huge deal for investors both big and small.
For starters, the funds are ETFs and allow for tradability and ease of use. Listed on the NASDAQ, the funds eliminate the OTC and negotiation that often comes with bond trades. Secondly, as ETFs, the new funds eliminate capital gains as the creation/redemption mechanism and in-kind transfers allows the managers to pass these gains on to the ETF. As for income potential, the ETFs pay monthly just like any other bond fund. That’s huge considering most individual bonds pay just semi-monthly.
The next win for investors in F/m Investments’ new funds is that they can eliminate some of the interest rate risk of holding broader bond funds. As we said, bond funds are tied to their mandates or indexes. As such, they are required to hold and roll-over their holdings to match their maturities and asset type. As the Fed raises interest rates, older bonds fall in price to match newer issues with higher yields. For funds, this can lock in losses, particularly in index funds. And while active management can help, managers are still tied to their mandates of what bonds they can and cannot hold—“go anywhere funds” aside.
Using Them in Your Portfolio
Right now, F/m Investments has nine ETFs in its single bond suite, covering the U.S. Treasury market. This includes a fund on the short end of the spectrum—*US Treasury 3 Month Bill ETF* (TBIL)—all the way to long-dated bonds with the US Treasury 30 Year Bond ETF (UTHY). Given the current Fed tightening cycle, the shorter-ended funds are proving to be popular with investors.
Given their use, all the funds within the F/m Investments suite could prove to be very popular over time and inspire some copycat issuers.
Using them in a portfolio is a snap as well. Just like you would any regular bond ETF, the new single bond funds can be used to shorten or lengthen duration in a portfolio, be used to generate income, or reduce holding risk. The difference is that investors get the benefit of holding an individual bond.
For more sophisticated retail and institutional investors, the single bond ETFs can be used as trading elements, reducing costs and reliance on futures/options trading. Without margin costs and use of debt, they can be used to build more cost-efficient portfolios and reduce friction when buying/selling. For example, the US Treasury 6 Month Bill ETF (XBIL) features decent volumes and low bid/ask spreads and deviation of NAV.
To summarize, here are some of F/m Investments’ new single bond ETFs to explore.
| Name | Ticker | Type | Expense Ratio | AUM | YTD Return |
| US Treasury 2 Year Note ETF | UTWO | Index ETF | 0.15% | $145 mn | 2.1% |
| US Treasury 12 Month Bill ETF | OBIL | Index ETF | 0.15% | $5.5 mn | 1.6% |
| US Treasury 3 Month Bill ETF | TBIL | Index ETF | 0.15% | $172 mn | 1.19% |
The Bottom Line
F/m Investments may have a hit on its hand as evident by TBIL’s assets growing to more than $730 million in a short amount of time. As more investors familiarize themselves with these products, the suite should grow in size. With the benefits being vast, single bond ETFs could be a wonderful portfolio innovation.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
