Barclays Global Investors gets SEC approval for fixed-income ETFs

Barclays Global Investors (BGI) has been approved to launch the first US fixed-income exchange-traded funds (ETFs), following approval at an open meeting of the US Securities and Exchange Commission on May 29. Seven BGI fixed-income US Treasury and corporate bond funds will join BGI's iShares equity exchange-traded fund family in late July.

BGI said the new fixed-income iShares will offer investors quick, cheap and tax-efficient diversified exposure to fixed-income markets, where the only route of exposure has been to buy swaps based on an index or the individual bonds comprising that index. Buying swaps on an index, such as the Lehman Aggregate, for example, leaves the investor with only the index provider to unwind the swap. Swaps are also bought for a specified term, and can be expensive to unwind with the providing dealer before maturity. Buying bonds individually to reconstruct indexes adds considerable operational expense.

Another advantage of the fixed-income exchange-traded funds is their ease in shorting the fixed-income market, claimed Pete Wilson, head of US fixed-income at BGI in San Francisco. Short positions could be taken by borrowing iShares or through use of iShare-based derivatives provided by the product's market-makers. BGI has only begun to seek market-maker interest in fixed-income iShares, but J Parsons, director of sales for iShares based in San Francisco, said the "usual suspects" – which he declined to name – are ready. "There are no holes in our coverage that I can see," Parsons claimed.

Because most of the corporate bond market trades over-the-counter, reliable pricing for a wide index could prove a challenge. BGI claimed it had circumvented this issue by using indexes comprised of highly liquid corporate issues that will effectively replicate the wider market. Re-weighting of the seven fixed-income iShares will be published every night, and 15 second price updates posted on market data service Bloomberg.

The BGI fixed income iShares are: a one- to three-year Treasury index fund, a seven- to 10-year Treasury index fund, a Treasury index fund, a 20-plus-year Treasury index fund, a Lehman Government/credit index fund, a Lehman corporate bond fund, and a Goldman Sachs corporate bond fund.